Warranties and indemnities are forms of contractual protection provided by a seller in any contract for sale of goods including an agreement for sale. In most transactions, the buyer will insist upon the agreement containing warranties and/or indemnities to ensure that he/she is compensated against any loss or damage incurred during the sale and buying process while the vendor may attempt to protect its position by refusing to give certain warranties and indemnities or restricting their scope. The distinction between warranties and indemnities is critical as the remedies to which an innocent party will be entitled to will differ depending on whether the term/clause of the agreement breached was a warranty or an indemnity.
What is a Warranty?
Section 2 of the Sale of Goods Act defines a warranty as “an agreement with reference to goods which are the subject of a contract of sale, but collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages, but not to a right to reject the goods and treat the contract as repudiated.”
Black’s Law Dictionary defines a warranty as “an express or implied promise that something in furtherance of the contract is guaranteed by one of the contracting parties.”
Essentially, a warranty is a contractual statement of a fact or assurance given by one party (seller) to another (buyer) that a certain state of affairs exists or is true.
Types of Warranties?
In Contract Law, there are two types of warranties:
- Express warranties
- Implied warranties
An express warranty refers to a statement in which a seller explicitly guarantees to the buyer that the good/service being sold has certain qualities. The buyer enters into the contract of sale on the reasonable assumption that the quality, nature, character, purpose, performance, state, use, or capacity of the goods or services are the same as those stated by the seller. For there to exist an express warranty the following essential elements must exist:
- A statement concerning the good/service must be expressly made by the seller to the buyer and
- The buyer must rely on the statement made by the seller in making a decision to buy the good/service.
An implied warranty is unwritten promise/guarantee that arise from the nature of the contract for sale, rather than from the express representations of the seller. Section 14(b) and (c) of the Sale of Goods Act provide for the following implied warranties which also apply to an agreement for sale:
- An implied warranty that the buyer will have and enjoy quiet possession of the property and
- An implied warranty that the property is free from any encumbrance/charge in favour of any third party not declared or known to the buyer before or at the time when sale agreement is entered into.
However, it should be noted that most agreements for sale will expressly provide for the above-implied warranties to avoid cases of ambiguity.
Breach of Warranty
The warranting party gives an assurance that the information set out in the warranty is true, and verifies this by assuming responsibility to pay damages if that warranty is (or becomes) untrue.
Section 13 (2) and 53 of the Sale of Goods Act provides that if a warranty is breached, it gives rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated. Therefore, in a sale agreement, a breach of warranty gives rise to a claim of damages but does not entitle the buyer to rescind/cancel the agreement. The purpose of this is to compensate the buyer for their loss, by putting them in the position they would have been in had the warranty been true.
How to Prove a Warranty
It should be noted, in making a claim for damages, the onus is on the buyer to show a breach of contract and quantifiable loss. The buyer needs to prove the following:
- a particular warranty is untrue and that the contract has been breached,
- sufferance of loss or damage,
- the loss was caused by the breach,
- the loss is not too remote (that is, the loss suffered was reasonably foreseeable from the breach in question), and
- he/she has taken reasonable steps to mitigate the loss.
Indemnity is defined by Black’s Law Dictionary as “a duty to make good any loss, damage, or liability incurred by another.”
An indemnity is an agreement by one party to protect another party and to reimburse that party for, loss or damage suffered, or any expense incurred on the occurrence of a specified event. Therefore, the concept of indemnity usually arises in contracts where there is a possibility of loss or damage to one party during the term of, or arising from the circumstances of the contract. A party is generally able to recover all the losses covered by the indemnity since contractual principles of remoteness and foreseeability will not apply, provided that the indemnity is sufficiently widely drawn. It should be noted that a buyer is not prevented from claiming under an indemnity clause regardless of when disclosure by a seller was made. Therefore, a buyer can claim damages after disclosure has been made by a seller against any loss or damage that might be suffered during the contract.
Breach of an Indemnity
An indemnity provides guaranteed compensation to a party on the occurrence of loss or damage suffered by that party. Therefore, an indemnity clause should be carefully drafted and reviewed by a lawyer to accurately reflect the intentions of the parties. This is because a party providing an indemnity is essentially agreeing to cover losses, damages or liabilities that may be incurred by the other party as a result of a certain event or circumstances specified in a clause.
Warranties and indemnities offer different forms of contractual protection and it is crucial for a party to negotiate a good balance of both in an agreement depending on the circumstances and particular concerns that a party has. Warranties are used to provide information by encouraging sellers to make disclosures while indemnities on the other hand are used to protect the buyer against specific concerns that arise after disclosure. Generally, a sale agreement in which the vendor has rejected the inclusion of warranties is quite risky as it does not protect a buyer against losses.