Breach of Warranties and Indemnities

The information is a general guide to some of the main issues relevant to most claims for breach of warranties, or under specific indemnities which may arise following a purchase of a company or its assets.

A successful warranty or indemnity claim will usually have the following hurdles to overcome:

Most agreements set out procedures which must be complied with in order to bring a warranty/indemnity claim. Failure to comply with any one or more of these conditions could be fatal to a claim's validity.

Proper notice to the vendor will usually need to be given, consequently a claim can be prejudiced by serving a defective notice which cannot be remedied later.

There are likely to be minimum and maximum amounts that can be claimed and also exclusions of certain liabilities within the agreement

Establishing a breach will require careful investigation of the matters. Care should be taken in creating documents during such investigations because these could be disclosable to the vendor in any subsequent proceedings.

Some of the warranties in the agreement may be limited in some way, for example "so far as the vendor is aware".

Evidence for breach must be collated.

Usually, the vendor will not be liable to the purchaser under the warranties to the extent that matters giving rise to a claim are disclosed in the disclosure letter, the accompanying disclosure bundle or in a data room. The only remedy is where the disclosure has been insufficient.

Contractual damages for breach of warranty are based on the purchaser's loss of bargain. They are intended to put the purchaser into the financial position in which it would have been, had the warranty been true.

Damages are normally the difference between:

1. the market value of the company or assets had the warranty been true; and

2. the true market value of the company or assets as bought.

The link between the breach and the loss must not be too remote. There is also a duty on the purchaser to mitigate its loss.

Some clauses provide that the vendor warrants and represents that the warranties are true and accurate. This is because the measure of damages for misrepresentation is based on the difference between:

1. the price actually paid for the company or assets by the purchaser in reliance on the misrepresentation; and

2. the true market value of the company or assets as bought.

Damages for misrepresentation may therefore be higher or lower than damages for breach of warranty.

Some of the limiting factors which apply to damages for breach of warranty are irrelevant to indemnities. Since an indemnity is a promise by the vendor to reimburse the purchaser in respect of a particular type of liability.

If the event giving rise to the indemnity has occurred, a Court will assess how much needs to be paid to fix the problem (ie. without the purchaser having to prove a link between the breach/liability and the loss). An indemnity may also provide for costs and expenses relating to the matter to be recovered.