Indemnities vs Warranties in Commercial Contracts: What Happens If Something Goes Wrong?

Commercial contracts often look calm on the surface. The price is agreed, the services are described, the delivery dates are set, and both sides are keen to move forward. The real risk, however, is often sitting quietly in the warranties and indemnities.

Indemnities and warranties are two of the most important risk allocation tools in commercial contracts. A warranty is usually a contractual promise or statement that something is true. An indemnity is usually a promise to reimburse another party for a particular loss, liability, claim, cost or expense.

That distinction can decide who pays if something turns out to be wrong, if a third-party claim arrives, if a regulatory issue emerges, or if a loss is greater than expected. It can also affect how quickly a claim must be made, what evidence is needed, whether liability is capped, and whether a party can recover legal costs, settlement payments or other losses.

For many businesses, the problem is not that they ignored the contract. It is that they did not appreciate the difference between a warranty and an indemnity until a dispute, claim or unexpected liability had already arisen.

Where is the risk?

The question is not simply, “Which is better?” The more important question is, “Where does the real risk sit in this contract, and what happens if that risk materialises?”

Why indemnities and warranties matter before you sign

In commercial contracts, indemnities and warranties are not just legal wording. They are risk allocation tools. They decide which party carries the consequences if facts are wrong, obligations are breached, customers complain, intellectual property rights are challenged, employees bring claims, tax liabilities arise, or a third party suffers loss.

English courts will generally look at the objective meaning of the words the parties have chosen, considering the contract as a whole. The Supreme Court has made clear that interpretation is not a purely literal exercise, but the court will still pay close attention to the wording used, particularly in professionally drafted commercial agreements.

That matters because a court will not simply rewrite a poor bargain because one side later regrets it. If an indemnity is drafted broadly, it may expose a business to substantial liability. If it is drafted too narrowly, the party expecting protection may find that the loss falls outside the clause.

The practical point

The label “warranty” or “indemnity” is important, but the wording is more important. A clause must be reviewed in context, including the liability cap, exclusions, notice provisions, time limits, disclosure wording and any dispute resolution process.

A business should never assume that an indemnity automatically covers every loss, or that a warranty claim will be easy to prove. The risk depends on how the clause is triggered, what losses are recoverable, and whether the contract limits or excludes liability.

What is a warranty in a commercial contract?

A warranty is usually a contractual statement, assurance or promise. In a commercial contract, a party might warrant that it owns certain intellectual property, has authority to enter into the agreement, will provide services with reasonable care and skill, has disclosed relevant information, or is not aware of any disputes or investigations.

If the warranty is untrue, the usual remedy is a claim for breach of contract. The claiming party will generally need to show that the warranty was breached, that the breach caused loss, and the value of that loss. The contract may also require notice to be given within a particular period and in a particular way.

Warranties are common in many types of commercial agreements, including:

• Business sale agreements. A buyer may require warranties about accounts, employees, tax, assets, disputes, customer contracts and compliance. These warranties are designed to flush out issues before completion and provide a remedy if important statements prove inaccurate.
• Supply of goods or services contracts. A customer may ask for warranties about performance standards, product quality, regulatory compliance, information security and delivery. A supplier may also require warranties from the customer, for example about access, cooperation, data accuracy or payment authority.
• Software and technology contracts. Warranties may cover ownership of code, non-infringement of third-party rights, service levels, security measures and compatibility. These clauses can become very important if a system fails, data is compromised or a third party alleges infringement.
• Distribution, agency and collaboration agreements. Warranties may deal with authority, licences, regulatory approvals, marketing claims and compliance with applicable laws. They can help define who is responsible for statements made to customers, regulators or commercial partners.

Why warranties are often underestimated

A warranty may look less aggressive than an indemnity, but it can still be valuable. It encourages disclosure before signing and gives the innocent party a contractual route to compensation if the statement is wrong.

However, warranties are often qualified. They may be limited by knowledge, materiality, disclosure, financial caps, minimum claim thresholds, time limits and exclusions for certain types of loss. Those limitations can make the difference between a strong claim and a difficult one.

What is an indemnity in a commercial contract?

An indemnity is usually a promise by one party to reimburse or protect another party against a specific loss, liability, claim, cost or expense. In plain English, it often means: “If this particular thing happens, I will cover the resulting loss.”

Indemnities are commonly used for specific, identifiable risks. These may include third-party claims, intellectual property infringement, data protection breaches, employment liabilities, tax liabilities, product liability, pre-completion liabilities in a business sale, or losses arising from a party’s breach of particular obligations.

The attraction of an indemnity is that it can provide a more straightforward contractual recovery mechanism than a standard damages claim, depending on the drafting. It may alter or reduce arguments about remoteness, causation or the usual measure of contractual damages, but this is not automatic under English law. That said, an indemnity is not magic wording. Its scope depends on the language used.

The Supreme Court decision in Wood v Capita is a useful reminder of this. The dispute concerned the scope of an indemnity in a share purchase agreement, and the court held that the wording did not extend as far as the buyer argued. The case shows that even sophisticated parties can end up in expensive litigation where an indemnity is not drafted with enough precision.

Why indemnities can carry greater risk

An indemnity may create exposure to losses that would otherwise be difficult to recover. It may also sit outside the normal liability cap if the contract says so. That is why indemnities often deserve more attention than they receive during negotiation.

The key issue is not whether the contract contains an indemnity. It is what the indemnity covers, when it is triggered, whether it is capped, what losses are included, and what procedural protections apply.

Indemnity vs warranty: where does the real risk sit?

There is no universal answer. In many contracts, the real risk sits in the indemnity because it is more targeted and may be less restricted. In other contracts, the warranties carry the main risk because they are broad, numerous and connected to core commercial assumptions.

The safest approach is to compare the clauses by asking how each one would operate if a real problem arose.

• Trigger for liability. A warranty claim usually starts with the argument that a statement or promise was false or breached. An indemnity claim usually starts with a specified event, liability or claim arising, such as a customer claim, tax demand, regulatory issue or third-party allegation.
• Proof and evidence. A warranty claim will often involve evidence about what was promised, what was untrue, what loss flowed from the breach and whether the loss was recoverable. An indemnity may be more straightforward, but only if the trigger and recoverable losses are clearly drafted.
• Financial caps. Warranties are often subject to negotiated caps, claim thresholds and time limits. Indemnities may be subject to different caps, higher caps or no cap at all, depending on the contract.
• Disclosure and knowledge. Warranties may be qualified by matters disclosed before signing or by what a party knew at the time. Indemnities are often drafted so they are not subject to disclosure, but this depends on the contract and they may be expressly qualified by disclosure.
• Third-party claims. Indemnities are commonly used where the loss may be caused by someone outside the contract, such as a customer, regulator, employee or intellectual property owner. In those cases, the indemnity should say who controls the defence, whether settlement needs consent, and how costs are handled.

What happens if a warranty turns out to be wrong?

If a warranty turns out to be wrong, the first step is to read the contract carefully. The answer will usually depend on the exact warranty, any qualifications to it, the notice requirements, the loss suffered, and the time limit for bringing a claim.

A warranty claim is not simply a complaint that something was unfair. It is a contractual claim. The claiming party must identify the promise or statement, explain why it was untrue or breached, and show how that breach caused loss.

Check the warranty wording

The wording may be broad or narrow. For example, a warranty that a business has “complied with all applicable laws” is much broader than a warranty that a party is “not aware of any material breach of applicable laws”.

Knowledge qualifiers matter. If a warranty is limited to what a party knows, or ought reasonably to know, the claim may become more fact-sensitive. The dispute may then focus on who knew what, when they knew it, and what enquiries they were required to make.

Check disclosure

In business sales and some investment transactions, warranties are often qualified by disclosure. If the relevant issue was fairly disclosed before signing, the buyer may be prevented from bringing a warranty claim in respect of that issue.

This is why disclosure letters and data rooms matter. They are not administrative documents. They can directly affect whether a warranty claim is available later.

Check whether misrepresentation is also relevant

Sometimes the same facts may raise issues of warranty and misrepresentation. A misrepresentation claim concerns a false statement that induced a party to enter into the contract. Under the Misrepresentation Act 1967, damages may be available in certain circumstances where a party entered into a contract after a misrepresentation and suffered loss.

This area needs careful advice. The contract may include entire agreement clauses, non-reliance wording, limitations on remedies, or other provisions that affect whether a misrepresentation claim can be brought.

What happens if an indemnity is triggered?

If an indemnity is triggered, the response should be prompt and controlled. The party seeking protection should avoid steps that accidentally prejudice the claim. The party facing the indemnity should check whether the alleged loss genuinely falls within the clause.

Give notice in the correct way

The contract may require notice to be given within a set period, to a particular person, at a particular address, and with specified information. Missing those requirements may create avoidable arguments about whether the claim is valid.

Notice clauses should be followed precisely. Email notice may not be enough if the contract does not permit it and instead requires formal written notice by hand, post or another stated method.

Do not admit liability too early

Where a third-party claim is involved, the indemnity may include conduct-of-claims provisions. These may prevent the indemnified party from admitting liability, settling a claim or incurring costs without consent.

This is commercially important. If a party settles too quickly without following the contract, the indemnifying party may argue that the settlement was unnecessary, excessive or outside the indemnity.

Keep evidence and losses separate

Records matter. Invoices, correspondence, settlement discussions, expert reports, internal decision-making documents and mitigation steps may all become relevant.

It is also important to separate indemnified losses from non-indemnified losses. If costs are mixed together, the claim may become harder to prove and easier to dispute.

Can an indemnity leave your business with uncapped liability?

Yes, it can, if the contract is drafted that way. This is one of the biggest risks in commercial contract negotiation.

Many contracts include a general liability cap, but then carve out certain liabilities from that cap. Those carve-outs may include fraud, wilful misconduct, confidentiality breaches, data protection breaches, intellectual property infringement, payment obligations and indemnities.

The result can be surprising. A business may believe its liability is capped at the contract value, only to discover that a key indemnity is uncapped or subject to a much higher cap.

Check the liability clause line by line

The liability cap should not be reviewed in isolation. It must be read alongside the indemnities, exclusions, insurance requirements and any definitions of loss.

Look for phrases such as “shall not apply to”, “unlimited liability”, “excluded from the cap”, “without limitation”, and “all losses, liabilities, costs and expenses”. These phrases can materially change the risk profile.

Check whether the clause is enforceable

In England and Wales, exclusion and limitation clauses may be affected by the Unfair Contract Terms Act 1977 in certain circumstances. For example, liability for death or personal injury resulting from negligence cannot be excluded or restricted, and other exclusions or restrictions for negligence are subject to a reasonableness requirement.

This does not mean every tough commercial clause is unenforceable. Commercial parties can often agree robust risk allocation, particularly where they have negotiated the terms. The question is whether the clause works under the contract and applicable law.

Common mistakes businesses make with indemnities and warranties

The most expensive contract mistakes are often made before the contract is signed. Once a dispute has arisen, the wording may already have fixed the parties’ positions.

• Treating indemnities as standard wording. Indemnities should be tailored to the specific risk. Copying a clause from another contract can create exposure that is wider than intended or protection that does not respond to the actual problem.
• Assuming the liability cap applies to everything. A general cap may not apply to every clause. Indemnities, confidentiality obligations, IP claims and payment obligations are often dealt with separately.
• Using broad wording without defining loss. Phrases such as “all losses” or “arising out of” can be powerful, but they can also create uncertainty. The contract should make clear whether legal costs, management time, loss of profits, settlements, regulatory costs and indirect losses are included.
• Forgetting notice and claim control mechanics. An indemnity should explain what happens when a third-party claim is received. Without those mechanics, the parties may argue about who can defend the claim, approve settlement or incur legal costs.
• Ignoring insurance. A contractual indemnity is only as useful as the indemnifying party’s ability to pay. Insurance should be checked against the liabilities being accepted, including exclusions and policy limits.
• Not checking time limits. A claim may be subject to both statutory limitation periods and shorter contractual deadlines. Missing a contractual notice deadline can be just as damaging as missing a court limitation period.

Time limits, notices and deadlines: when can you lose the right to claim?

Time limits are a major risk area. A business may have a strong claim in principle but lose practical leverage because it waits too long.

Under the Limitation Act 1980, an action founded on a simple contract is generally subject to a six-year limitation period from the date of breach. An action upon a specialty, commonly relevant to contracts executed as deeds, is generally subject to a twelve-year limitation period, also typically running from the date of breach. 

However, statutory limitation is only part of the picture. Commercial contracts often impose shorter notification periods. A warranty claim might need to be notified within 12, 18 or 24 months. A tax warranty or tax indemnity may have a longer period. A third-party claim indemnity may require notice as soon as reasonably practicable.

Why notice clauses matter

Some notice clauses are administrative. Others may be drafted as conditions precedent (although clear wording is required for this under English law), meaning the right to claim may depend on strict compliance.

If a contract says a claim must be notified by a certain date and with reasonable details of the claim, it is risky to send a vague holding email and assume that is enough. The safest approach is to take advice early and prepare a notice that complies with the contract.

Why delay can weaken your position

Even where a claim is still within time, delay can cause practical problems. Evidence may become harder to gather, employees may leave, documents may be lost, and the other party may argue that losses increased because action was not taken earlier.

Early advice does not always mean immediate litigation. Often, it means preserving rights, understanding leverage and avoiding procedural mistakes.

What should you check before agreeing to an indemnity?

Before agreeing to an indemnity, ask what specific risk it is meant to cover. If the risk is real and identifiable, an indemnity may be appropriate. If the indemnity is being used as a broad attempt to shift all commercial risk, it should be narrowed.

• What triggers the indemnity? The trigger should be clear. It might be a third-party claim, a breach of a specific obligation, a pre-existing liability, a tax assessment, or a particular event.
• What losses are recoverable? The contract should say whether the indemnity covers damages, settlements, legal costs, regulatory costs, remediation costs and internal costs. If the wording is unclear, the parties may dispute the value of the claim later.
• Is liability capped? The contract should state whether the indemnity is inside or outside the general liability cap. If a separate cap applies, that cap should be commercially realistic.
• Are indirect or consequential losses included? These terms have an established meaning under English law but can still create disputes if used without careful definition in the contract.  It is often better to identify the specific categories of loss that are intended to be recoverable.
• Who controls third-party claims? The indemnifying party may want control over the defence, while the indemnified party may want to protect its reputation and customer relationships. The contract should balance those interests clearly.
• Does insurance support the risk? A party should not assume that insurance will respond simply because the contract contains an indemnity. Policy exclusions, notification obligations and coverage limits should be checked.

What should you check before relying on a warranty?

Before relying on a warranty, check whether it is strong enough to support the decision you are making. Warranties are often used to support due diligence, but they are not a substitute for proper investigation.

Look for qualifications

A warranty may be limited by awareness, materiality or disclosure. Each qualification reduces the protection in a different way.

For example, “there are no disputes” is stronger than “so far as the seller is aware, there are no material disputes”. The second version may still be useful, but it creates more room for argument.

Check the remedy

A warranty is only useful if the remedy is meaningful. That means checking the claim limit, minimum claim threshold, aggregate basket, time limit and exclusions.

A warranty package can look impressive, but if the cap is too low or the notice period is too short, the practical value may be limited.

Connect the warranty to the commercial risk

The best warranties are not generic. They reflect the actual risk in the transaction.

For example, a technology customer may need warranties about data security, uptime, IP ownership and subcontractors. A buyer of a business may need warranties about employees, tax, customer contracts, litigation and regulatory compliance. A distributor may need warranties about product safety, marketing approvals and supply chain obligations.

Is an indemnity better than a warranty?

Not always. An indemnity may be better for a known, specific risk where the parties want a clear reimbursement mechanism. A warranty may be better where one party needs assurance that certain facts are true and wants a remedy if they are not.

From the claimant’s perspective, an indemnity can be attractive because it may provide a more direct route to recovery. From the indemnifying party’s perspective, it can be dangerous because the exposure may be broader, faster and less predictable than a standard warranty claim.

The right answer depends on the contract. A well-drafted warranty may be more useful than a vague indemnity. A narrow indemnity may be safer than a broad warranty package with limited disclosure. The commercial context matters.

Can you negotiate indemnities and warranties?

Yes. In most commercial contracts, indemnities and warranties are negotiable. They are not just “legal boilerplate”.

A sensible negotiation does not simply delete every clause that creates risk. It identifies the risk, allocates it to the party best able to manage it, and limits exposure in a way that is commercially proportionate.

Common negotiation points include:

• Scope. The clause should be limited to the relevant risk. A party giving an indemnity should avoid wording that turns a specific protection into a general compensation promise.
• Caps. Liability should be capped at a level that reflects the contract value, insurance position and potential harm. Different caps may be appropriate for different categories of liability.
• Time limits. Claims should be subject to clear and realistic deadlines. The period should reflect the nature of the risk, including whether it is likely to emerge quickly or only after an audit, customer claim or regulatory review.
• Knowledge and disclosure. Warranties can be qualified by knowledge or disclosure where appropriate. The wording should make clear whose knowledge counts and what level of disclosure is sufficient.
• Conduct of claims. If a third-party claim is involved, the contract should explain who controls the defence and settlement. It should also require cooperation and reasonable mitigation.

How JLN can help with indemnities, warranties and commercial contract risk

JLN can help businesses identify, negotiate and manage risk before a contract is signed and after a dispute has arisen.

If you are reviewing a new commercial contract, JLN can explain where the real exposure sits, which clauses need to be negotiated, and whether the liability position is proportionate. This can include reviewing indemnities, warranties, limitation clauses, exclusions, insurance requirements, notice provisions and termination rights.

If something has already gone wrong, JLN can help you assess whether you have a warranty claim, whether an indemnity has been triggered, what notice needs to be given, and how to protect your position without escalating matters unnecessarily.

JLN can assist with:

• Contract review before signing. We can identify hidden risk, unclear wording and liability gaps. This helps you make informed commercial decisions before you are locked into the agreement.
• Negotiating indemnities and warranties. We can propose practical amendments that protect your position without derailing the deal. The aim is to reduce avoidable exposure while keeping the contract commercially workable.
• Drafting clear commercial contracts. We can prepare terms that reflect how your business actually operates. Clear drafting reduces the risk of disputes and improves your position if a dispute does arise.
• Advising on live disputes. We can review the contract, assess the strength of your position, prepare notices and advise on strategy. Early advice can preserve rights and avoid mistakes that weaken a claim.
• Managing third-party claims. Where an indemnity involves a customer, supplier, regulator, employee or IP owner, we can help manage the process carefully. This includes advice on settlement, evidence, correspondence and preserving recovery rights.

Indemnities and warranties are often where the financial risk in a commercial contract really sits. Before signing, or as soon as a problem arises, taking advice can make the difference between controlled risk and an expensive dispute.

To speak to JLN about a commercial contract, warranty claim or indemnity issue, contact our commercial contracts team for clear, practical advice at an early stage.

How we can help?

We provide enquiries with an indicative scope of work and fee estimate, based on the information you share. We aim to respond within one working day.

FAQs” Indemnities vs Warranties: What Happens If Things Go Wrong?

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.