Indemnities vs warranties: 6 frequently asked questions answered

1. What is an indemnity?

An indemnity is a contractual promise from a party to take responsibility and compensate the other party for any financial losses that arise due to a certain event. An indemnity therefore shifts the responsibility for these losses from one party to another. It's a way to protect yourself or your business by ensuring that the other party will compensate you if specific risks or events occur. For example, if you provide services and agree to indemnify your client for any legal expenses resulting from a third-party claim made as a result of using those services; you're promising to cover any costs that they incur in connection with the claim.

2. What is a warranty?

A warranty, on the other hand, is a statement of fact or a promise made by one party to another regarding a particular aspect of the contract that is true at the date of the contract. It assures the other party that certain conditions or qualities promised in the contract will be met. For instance, if you sell a product and provide a warranty that guarantees it will be free from faults for a certain period, you're assuring your customers that the quality of the product will be as promised in the contract. In order to make a claim for a breach of warranty, you must prove that the warranty is untrue.

3. How do indemnities and warranties differ?

While both indemnities and warranties offer assurances in a contract, they have different functions. The purpose of an indemnity is to allocate responsibility for losses or claims from one party to another. Indemnities act as a safeguard against potential risks, as they ensure the party receiving the indemnity will be compensated for any losses they suffer due to the specified event.

On the other hand, warranties mainly give assurances about the quality, performance or condition of the goods or services being provided under the contract. Warranties give the party receiving the warranty a form of recourse if the warranty proves to be false. Warranties create enforceable promises and set expectations for the parties involved. It's important to note that the implications of warranties are very different, as you will typically need to litigate in order to resolve a breach of warranty. Whereas indemnity claims can be resolved out of court.

4. What are implied warranties?

Implied warranties are unwritten promises that products or services will work well, do what they're supposed to, and be of good quality. They are not explicitly stated in a contract but are assumed to be part of the agreement. These warranties automatically come into effect whenever you purchase a product or service. They provide customers with the confidence that what they are buying will work as intended and meet basic expectations, even if these expectations aren't expressly mentioned in the contract.

While they are often associated with consumer purchases (for example, the Consumer Rights Act 2015 includes this type of term which the supplier of the goods cannot contract out of), implied warranties can also apply to other types of contracts, including business-to-business agreements. For instance, legislation such as the Sale of Goods Act 1979 incorporates implied terms concerning the quality and fitness of goods.

5. Are indemnities beneficial to include in a contract?

Yes, they are extremely beneficial to the party benefiting from them, since the payment becomes effective immediately once the specified event has taken place. People often refer to an indemnity as the law’s answer to writing a blank cheque to repay any financial losses that stem from a certain event. Another key aspect of an indemnity is that you do not have to take the usual route through court by issuing a claim against the other party; you simply need to refer to the indemnity set out in your contract.

6. Can indemnities and warranties coexist in a contract?

Absolutely! In fact, it's common for contracts to include both indemnities and warranties. Each serves a distinct purpose. Indemnities primarily cover liability and provide protection against unforeseen events or claims. Warranties, on the other hand, assure the other party about specific aspects of the goods or services being provided. Together, they create a comprehensive framework that addresses both potential risks and the quality assurances expected by the parties.

Conclusion

Understanding the differences between indemnities and warranties can help you navigate contracts with confidence. Indemnities protect against potential liabilities and shift responsibility, while warranties offer assurances about the quality or performance of goods and services. Each can coexist in a contract to provide a well-rounded approach to risk management.

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