Warranties and indemnities serve different but complementary roles in business sale agreements. Warranties are contractual promises about the condition of a company, and if they turn out to be untrue, the buyer may claim damages.  

Indemnities, by contrast, offer pound‑for‑pound compensation for specific identified risks, giving the buyer stronger protection with a lower burden of proof.  

Understanding the difference is essential because each mechanism shifts risk differently between buyer and seller, affects the scope of disclosure, and determines how straightforward a claim will be after completion. 

In an M&A transaction, warranties allocate general risk, indemnities address known issues, and warranty and indemnity insurance covers certain warranty breaches but rarely indemnities. For buyers, the distinction shapes the level of protection they can meaningfully rely on. For sellers, it influences negotiation strategy, liability exposure, and the ability to achieve a clean exit. 

In this article we explore: 

• What warranties are  

• What indemnities are  

• The key differences between warranties and indemnities 

• How claims are handled in practice 

• How W&I insurance fits in 

• Practical points for buyers and sellers 

• How Rubric Law approaches these issues 

What are Warranties? 

Warranties are statements of fact about the business at the time of the sale. They commonly cover finances, contracts, employees, tax, intellectual property, compliance, and litigation. Warranties are typically set out in a schedule to the Share Purchase Agreement (SPA) rather than the main body of the agreement. Buyers should review the warranty schedule carefully, as its scope directly determines the protection available. 

Two Purposes of Warranties: 

1. They encourage the seller to disclose any issues in advance. 

1. They give the buyer a right to damages if a warranty turns out to be untrue. 

How warranty claims work 

A buyer usually must prove: 

• That a warranty was breached, 

• That the breach caused a loss, and 

• The amount of that loss. 

The loss is normally calculated using contract law principles and often reflects the reduction in the value of the business. Warranty claims are also limited by what has been disclosed; if an issue has been properly disclosed, the buyer normally cannot claim for it.  

Many warranties are also limited by the seller’s knowledge, often phrased as “so far as the seller is aware.” This type of qualifier significantly narrows the scope of the warranty and is therefore a key point of negotiation. Buyers should aim to minimise these qualifiers or ensure they are linked to a clearly defined knowledge standard, such as the actual or constructive knowledge of specific named individuals. 

What are Indemnities? 

Indemnities are promises to compensate the buyer for specific losses if defined events occur. These events are usually known risks identified during due diligence, such as tax liabilities, employment claims, disputes, or environmental issues. 

How Indemnity Claims Work 

Indemnity claims are usually more straightforward. The buyer does not need to show foreseeability or diminution in value. Instead, the buyer shows that the indemnified event happened and that it caused the claimed loss. 

Because indemnities offer stronger protection to the buyer, sellers typically resist them unless the risk is specific and unavoidable. 

Key Differences Between Warranties and Indemnities 

• Scope: Warranties cover general risk; indemnities cover specific risks. 

• Proof: Warranty claims require more evidence; indemnity claims usually require less. 

• Compensation: Warranties use contract law damages; indemnities generally give pound‑for‑pound recovery. 

• Seller’s approach: Sellers generally prefer warranties and restrict indemnities. 

Limitations on Liability with Warranties and Indemnities 

Both warranties and indemnities are shaped by the limitations in the agreement. These may include: 

• Caps on liability (often a percentage of the price) 

• Time limits for bringing claims 

• De minimis and basket provisions: noting that baskets may operate as a tipping basket (once the threshold is crossed, the full amount is recoverable from the first pound) or a deductible (only the excess above the threshold is recoverable); the distinction is material and worth negotiating carefully 

• Exclusions (for example, no claims for matters fairly disclosed) 

• Mitigation obligations 

The negotiation of these terms can significantly affect the practical value of warranties and indemnities. 

How Warranty and Indemnity Claims are Handled in Practice 

Breach of Warranty 

When a claim arises: 

• A warranty statement was untrue at signing or completion. 

• The buyer suffered a loss as a result (often reflected in reduced business value). 

What the buyer must show: 

• Breach: Identify the specific warranty and why it was untrue. 

• Causation: Explain how the breach caused the loss. 

• Loss: Quantify the amount (often diminution in value or another contract‑based measure). 

• Compliance with the SPA: Follow notice, timing and evidence requirements set out in the agreement. 

What typically limits recovery: 

• Disclosure: Issues fairly disclosed usually cannot be claimed. 

• Time limits: Claims must be notified/issued within agreed periods (e.g. general vs tax). 

• Caps, baskets and de minimis: Recovery may be limited by thresholds and overall caps. 

• Mitigation and remoteness: Standard contract principles usually apply. 

Practical steps for buyers 

• Gather the SPA, disclosure letter, data room index and relevant diligence. 

• Prepare a short timeline of awareness and notices given. 

• Produce a simple calculation showing loss and methodology. 

• Send a notice that meets the SPA requirements (scope, detail, deadline). 

 Breach of Indemnity 

When a claim arises 

A defined “indemnified event” occurs (for example, a pre‑completion tax bill or specified dispute). 

What the buyer must show 

• The event falls within the indemnity wording. 

• The claimed loss fits the listed categories (e.g. principal, interest, penalties, professional fees). 

• Notice and any conduct‑of‑claims steps have been followed. 

Why these claims are often more direct 

• Recovery is usually pound‑for‑pound for the defined loss. 

• Foreseeability and diminution‑in‑value debates are less prominent (the wording governs). 

• Sellers therefore seek tight scope, periods, exclusions and procedures. 

Process points that matter 

• Notice and cooperation: Give timely notice with documents and updates. 

• Conduct of claims: Who controls third‑party proceedings (e.g. tax audits or litigation). 

• Set‑off/escrow: Whether sums can be set against deferred consideration or paid from escrow. 

• Net recoveries: Treatment of insurance proceeds, third‑party recoveries and tax benefits. 

Quick Tips to Avoid Disputes 

• Define indemnified events precisely and link them to a clear time period. 

• Align warranties/indemnities with due diligence findings and the disclosure letter. 

• Spell out recoverable losses (costs, interest, penalties, professional fees). 

• Diary notice deadlines and survival periods on day one. 

• Keep a tidy evidence trail from first awareness to resolution. 

• If using W&I insurance, make sure SPA notice/conduct terms work with the policy. 

Warranty and Indemnity Insurance 

W&I (Warranty and Indemnity) insurance is common in many transactions, particularly mid‑market deals. It covers losses arising from unknown warranty breaches, allowing buyers to claim against the insurer rather than the seller. 

However, insurers generally do not cover indemnities or known issues. These must be handled separately, often through specific indemnities or price adjustments. 

W&I insurance can help bridge gaps in negotiation and enable cleaner exits for sellers. 

Practical Tips for Buyers 

• Ensure warranties match the risks identified in due diligence. 

• Seek targeted indemnities for known issues. 

• Review liability caps and time limits carefully. 

• Check how disclosures affect your ability to claim. 

• Review the disclosure letter critically, not merely as a formality. The disclosure letter is the primary mechanism by which sellers limit warranty claims, and unchallenged disclosures can significantly erode buyer protection. 

• If using W&I insurance, align the agreement with the policy. 

Practical Tips for Sellers 

• Use the disclosure process to protect yourself from warranty claims. 

• Limit indemnities to clearly defined risks. 

• Negotiate caps and time limits that reflect the commercial reality. 

• Review the claims process to ensure it is fair and workable. 

• Consider whether W&I insurance could reduce residual liability. 

How Rubric Law Can Help 

At Rubric Law, we help clients negotiate warranties, indemnities, limitations, disclosure letters and W&I insurance in a clear and commercially practical way. Our focus is ensuring that the risk allocation in your agreement accurately reflects the deal you intend to strike. 

Whether you are buying or selling a business, we can review your SPA or disclosure letter, advise on the implications of each provision, and help you negotiate robust protection.  

If you want to ensure your risk allocation is properly protected, speak to the team here.