Does it get you where you wanna go … with a warranty (and indemnity)? **

Previous posts have considered various aspects of warranties and indemnities (as usual, if you would like access to these and can not locate them easily please contact me).

Generally, the scope of recovery and damages that may be obtained will be greater where an indemnity is provided.

This is because an indemnity is effectively a promise to either reimburse or make good relevant issues if they arise.

Furthermore, indemnities:

1. Do not require the person giving the indemnity to have actually caused the loss – in other words, regardless of how the loss arises, liability will be triggered.
2. Common law rules that normally limit the scope of liability, such as remoteness or an obligation to mitigate losses, do not apply in relation to indemnities.

In contrast, a warranty only provides a promise that certain statements are correct. Practically this means:

1. A party seeking to claim in relation to a breach of warranty must do so by seeking damages.
2. The common law principles mentioned above of remoteness and an obligation to mitigate potential losses do apply.

As usual, please make contact if you would like access to any of the content mentioned in this post.

** For trainspotters, ‘does it get you where you wanna go ... with a warranty’ is a line from a song named ‘Days That Used To Be’ by Neil Young and Crazy Horse from their seminal 1990 album ‘Ragged Glory’.

Listen here:

Warranties and indemnities: don’t wanna fight**

Previous posts have considered various aspects of warranties and indemnities.

Generally, the scope of recovery and damages that may be obtained will be greater where an indemnity is provided.

This is because an indemnity is effectively a promise to either reimburse or make good relevant issues if they arise.

Furthermore, indemnities:

1. Do not require the person giving the indemnity to have actually caused the loss – in other words, regardless of how the loss arises, liability will be triggered.
2. Common law rules that normally limit the scope of liability, such as remoteness or an obligation to mitigate losses, do not apply in relation to indemnities.

In contrast, a warranty only provides a promise that certain statements are correct. Practically this means:

1. A party seeking to claim in relation to a breach of warranty must do so by seeking damages.
2. The common law principles mentioned above of remoteness and an obligation to mitigate potential losses do apply.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** For the trainspotters, the title of today's post is riffed from the Alabama Shakes song ‘Don’t wanna fight’.

View here:

Does it get you where you wanna go … with a warranty (and indemnity)? **

Previous posts have considered various aspects of warranties and indemnities (see -What is a warranty?, Indemnities).

Generally, the scope of recovery and damages that may be obtained will be greater where an indemnity is provided.

This is because an indemnity is effectively a promise to either reimburse or make good relevant issues if they arise.

Furthermore, indemnities:

1. Do not require the person giving the indemnity to have actually caused the loss – in other words, regardless of how the loss arises, liability will be triggered. 
2. Common law rules that normally limit the scope of liability, such as remoteness or an obligation to mitigate losses, do not apply in relation to indemnities. 

In contrast, a warranty only provides a promise that certain statements are correct. Practically this means:

1. A party seeking to claim in relation to a breach of warranty must do so by seeking damages.
2. The common law principles mentioned above of remoteness and an obligation to mitigate potential losses do apply. 

** For trainspotters, ‘does it get you where you wanna go ... with a warranty’ is a line from a song named ‘Days That Used To Be’ by Neil Young and Crazy Horse from their seminal 1990 album ‘Ragged Glory’ – listen here – www.youtube.com/watch?v=SQeM2yLSiss

Image courtesy of Shutterstock

Things to consider in relation to indemnities

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

© Stuart Key | Dreamstime.com

The courts have recently applied a restricted view on the use of indemnities and in some cases, have failed to acknowledge the validity of broad, all-encompassing indemnities.  Notwithstanding this, claims under clearly expressed indemnities are generally upheld.

The following issues should be considered by anyone providing an indemnity -

1. the limitation of the loss (i.e. direct loss only and not consequential loss);
2. the scope of the indemnity (e.g. 'loss in connection with' compared to 'loss caused solely by');
3. excluding liability under the indemnity where the liability arises as a result of the indemnified party's default or negligence, or limiting it to the extent it has been contributed to by the party;
4. making the indemnity subject to any exclusions or limitations of liability within the agreement;
5. requiring the indemnified party to mitigate its loss; and
6. including a right for the indemnifying party to defend any claim for which it will be liable as a result of the indemnity.

It is common practice for a buyer to request a separate tax indemnity in share sale agreements.  This is primarily so that the respective obligations of the parties in relation to tax, including as to timing, are clearly and specifically identified. 

It is also common for 'gross up' provisions to be included in these indemnities which account for the tax payable in respect of warranty payments.  Consideration should be given to whether it is appropriate for the parties to agree contractually that any warranty payments are to be treated as a reduction of the purchase consideration.

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.

What is a warranty?

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

A warranty is essentially a guarantee that a factual statement is correct.  Parties will often negotiate to allocate liability for loss between them if the statement turns out to be incorrect.

In a merger and acquisition context, warranties are generally required where a party (often the buyer) makes an assumption when entering into an agreement, and wants to be able to sue the seller if that assumption is incorrect. 

© Skypixel | Dreamstime.com

For example, where a buyer has determined the purchase price of the target company or business on the basis of its reported earnings, the buyer will usually require the relevant financial statements to be warranted by the seller so that the seller bears the risk of the financial statements being inaccurate.

Warranties are usually 'given' within the sale agreement by the warranting party at the time of entering into the agreement, and repeated at completion.  It is also common to see a statement to the effect that the warranties are taken as being repeated each day during the period between signing and completion.

‘Standard’ warranty limitations include -

1.  Seller's knowledge

2.  Disclosure

3.  Exclude future performance

4.  Buyer's knowledge

5.  Recovery from 3rd parties

6.   Specific (ie provided in the accounts; buyers action post completion; law changes; matter of public record)

7.  Insurance

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.