You may be asked at some time to provide a warranty or indemnity personally, or on behalf of your company. What’s the difference between them and what are the implications for the directors personally when they are given?
A warranty is a form of contractual assurance given by one party to another and usually takes the form of a statement of fact about a certain set of affairs, such as, for example, that an item sold is of a particular quality. A warranty is therefore an integral part of any contract. If it is discovered that the warranty is not true, the person giving it would technically be in breach of contract and this may entitle the other party to terminate the contract. The right to terminate will depend on whether the breach of warranty is incidental to the contract, or an integral (and therefore more important) part of the contract. If the other party is entitled to terminate, they can try to recover damages (money) if a financial loss has been suffered. If asked to provide a warranty, you or your company should always ensure that the warranty given is reasonable and can be fulfilled.
An indemnity is a term in a contract in which the party giving the indemnity agrees to make good any loss suffered (financial or otherwise) by the other party – it is in effect a promise to reimburse the other side if something happens. The courts have made it clear that if a contractual clause is to be treated as an indemnity it must explicitly state this, as it cannot be implied later. Directors are sometimes asked to give personal indemnities in respect of their company’s failure to meet its obligations. If this should happen make sure you do not give a blanket indemnity; be quite specific about what is covered so that you are not leaving yourself (or the company) open to wider liability.
Matt Fretten, Managing Partner, says "It is also worth noting that in giving warranties and/or indemnities, is may be possible to limit any liability you incur, financially, by placing a cap on the amount you or the company would be liable for in the event that a breach occurred."
For a free initial meeting please call 01202 499255 and Matt or a member of his team will be happy to discuss any questions you may have.