In contract law, warranties and indemnities are two common forms of contractual provisions that provide remedies for breach of contract. These terms are often used interchangeably, but they have distinct differences in terms of the extent of liability, the proof required, and the obligations of the parties. Below we discuss the differences between warranties and indemnities in terms of damages, mitigation, disclosure, proof of loss, and the buyer’s knowledge of the breach.
|Damages||For damages to be awarded, the buyer must prove the following: the warranty was untrue and the contract has been breached, he/she suffered loss or damage, the loss was caused by the breach, the loss is not too remote and that he/she took reasonable steps to mitigate the loss.||An indemnity provides a guaranteed compensation to a party on occurrence of loss or damage suffered by that party.|
|Mitigation||A warranty is subjected to contractual rules of mitigation. The buyer has the responsibility to mitigate losses incurred due to breach of warranty.||Contracting parties can create an indemnity clause that expressly applies or excludes the rules on mitigation, remoteness and causation. In the absence of express wording, Courts as in the case of Total Transport Corp v Arcadia Petroleum Limited (the Eurus) (1996) 2 Lloyd’s Rep 408 are likely to interpret an indemnity against breach of contract as giving rise to a claim equivalent to damages for that breach.
|Disclosure||The purpose of a warranty is to encourage disclosure from the seller and therefore obtain from the seller material information which may not otherwise come to light. A seller makes disclosures against the warranty to limit liability. Once proper disclosure has been made, the buyer can no longer make a claim for damages due to a breach of warranty.
|A buyer is not prevented from claiming under an indemnity clause regardless of disclosure. Therefore, a buyer can claim for damages after disclosure has been made against for any loss or damage that might be suffered during the contract.|
|Proof of Loss||A buyer must prove that the loss or damage suffered was as a result of breach of warranty by the seller and that the contractual principle of remoteness of damages apply.||The contractual principles of causation and remoteness do not apply. With a properly worded indemnity clause, a buyer can recover loss or damage sustained without having to prove that there is any corresponding loss or damage suffered.|
|Buyer’s knowledge of the breach||Depending on the terms of a contract, a buyer that is aware of a breach of warranty might be precluded from bringing a claim on the basis he/she was aware of the breach and decided to enter into the contract regardless.
|Knowledge of a breach of contract will not prevent a buyer from making a claim under an indemnity clause.|
How can we help?
It is essential for a buyer and a seller to understand the differences between warranties and indemnities when negotiating the terms of an Agreement for Sale, Licence or Lease Agreement. This is because they offer different forms of protection and impose different rights and obligations on the parties involved in the agreement. Therefore, warranties and indemnities should be carefully drafted and reviewed by a lawyer to accurately reflect the intentions of the parties.
Written by Cynthia Kitolo
Legal Officer & Advocate of the High Court of Kenya