Understanding Warranties and Indemnities

• Posted onOctober 28, 2025

When buying or selling a business in England or Wales, understanding warranties and indemnities is essential. These legal mechanisms protect both parties, allocate risk, and ensure transparency in the sale process. Whether it’s a share purchase or asset transaction, well-drafted warranties and indemnities can prevent costly disputes and protect your investment.

 

What Are Warranties and Indemnities?

Under English law, the principle of caveat emptor — “buyer beware” — applies. This means the buyer must carry out thorough due diligence before completing a transaction. Without it, they’ll have limited recourse once the deal is done.

To manage this risk, buyers seek contractual reassurances about the business they’re acquiring. That’s where warranties and indemnities come in.

• Warranties are contractual statements of fact made by the seller about the business — for example, confirming that financial records are accurate or that no undisclosed disputes exist. If a warranty proves untrue, the buyer can bring a claim for breach of contract.
• Indemnities are promises by the seller to reimburse the buyer for specific, identified losses — such as ongoing litigation or pre-completion tax liabilities. Unlike general warranties, indemnities compensate the buyer on a pound-for-pound basis.

Together, these clauses encourage disclosure, protect both parties, and serve as vital tools for managing post-completion risk.

 

How Are Warranties and Indemnities Negotiated?

In most business sale agreements, warranties and indemnities are heavily negotiated. The level of protection required depends on the type of transaction:

• In a share purchase, the buyer acquires the company as a whole — including its liabilities, whether known or unknown.
• In an asset purchase, the buyer can choose which assets and liabilities to take on, meaning lower overall risk.

Common Negotiation Points:

AREA	BUYER’S POSITION	SELLER’S POSITION
Scope of Warranties	Extensive, covering all potential risk areas	Limited to matters within seller’s actual knowledge
Disclosure	Restricted to issues disclosed in the disclosure letter	Full and fair disclosure against relevant issues
Indemnities	Cover all losses, costs, and liabilities	Include time and value limits on claims

 

What Risks Do Warranties and Indemnities Address?

For buyers:

• Reveal potential issues before completion.
• Provide legal remedies if a seller’s statement is inaccurate.
• Protect against unexpected costs like tax, litigation, or employment claims.

For sellers:

• Allow full disclosure to reduce the risk of future claims.
• Limit exposure by indemnifying only known liabilities.
• Protect sale proceeds from unforeseen post-completion costs.

Examples of Common Warranties and Indemnities

Typical Warranties:

• Legal ownership of shares and authority to sell
• Accuracy of financial statements and accounts
• Key contracts and supplier relationships
• Employment, pension, and tax matters
• Ongoing or potential disputes
• Intellectual property rights
• Environmental compliance

Typical Indemnities:

• Tax liabilities arising before completion
• Ongoing or pending litigation
• Employment or redundancy claims

 

What Happens if a Warranty Is Breached?

If a warranty turns out to be false, the buyer can claim contractual damages — typically the difference between the actual value of the business and what it would have been worth if the warranty were true.

To succeed, the buyer must prove that:

1. A specific warranty was breached, and
2. The breach caused a measurable loss in value.

However, buyers are expected to mitigate losses — for instance, by taking reasonable steps to reduce financial harm where possible.

 

Expert Legal Support for Business Sales

At WSP Solicitors, our Corporate Commercial team advises on every stage of the business sale and purchase process — we help with navigating your journey from due diligence and negotiation to drafting sale agreements and identifying potential risks to your transaction.

We put ourselves in your shoes to give commercial, pragmatic advice at every turn.

If you’re considering buying or selling a business in England or Wales, our expert solicitors can help ensure you are given solid corporate legal advice to suit your business needs from start to finish.

Get in touch by using the enquiry form on this page. Alternatively, you can call us on 01453 847200.