Alex is Sprintlaw’s co-founder and principal lawyer. Alex previously worked at a top-tier firm as a lawyer specialising in technology and media contracts, and founded a digital agency which he sold in 2015.
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When you’re negotiating a commercial contract-whether it’s with a supplier, a business partner, or a client-some of the terms can feel a little overwhelming. Terms like “warranty” and “indemnity” are often thrown around in contracts, but what do they actually mean? More importantly, how do they affect your rights and your risks as a small business owner?
If you’ve ever wondered about the difference between warranty and indemnity, you’re not alone. Getting your head around these key terms is crucial for protecting your business from unexpected costs, arguments, and headaches down the line. In this guide, we’ll break down exactly what you need to know-and what to watch out for-before you sign on the dotted line.
Keep reading to learn how warranties and indemnities work, what makes them so different, and how you can make sure your next commercial contract puts you on solid legal ground from day one.
What Is a Warranty in a Business Contract?
Let’s start simple: a warranty is basically a promise about a certain fact or condition in the contract. Think of it as an assurance that specific things in your business deal are true at the point of signing (or will be true by a certain date).
Warranties tend to:
- Cover “less serious” breaches-such as small errors or failures to meet certain specs
- Only entitle the other party to claim compensation for actual loss suffered (not to pull out of the deal entirely)
- Focus on facts, for example, “The products supplied will match the description” or “All equipment is in good working order”
If a warranty is breached, the person on the receiving end can usually ask for damages-that is, enough money to put them back in the position they would have been in if the statement was true. But a warranty breach usually isn’t enough to cancel the whole contract (unless it’s a very serious one or it’s been made a key or “fundamental” condition).
This is an important reason to make sure all your key promises in a contract are clearly defined, so you’re not left arguing later about whether something is a warranty or a more serious “condition” (which might allow termination of the contract).
What Is an Indemnity in a Commercial Contract?
An indemnity goes a step further than a warranty-it’s a legal promise to cover someone else’s losses if a specific event happens, no matter what caused it. In contract language, you “indemnify” the other party against things like lawsuits, damages, or third-party claims.
Key features of indemnities:
- They shift risk - if the specified event happens (for example, a breach of data protection, product liability, or a third party sues), the person giving the indemnity must reimburse the other party for their loss, often on a “pound for pound” basis.
- No need to prove fault - the person being protected doesn’t have to show how the loss happened or that you were to blame. If the event happens, you pay.
- Potentially unlimited - unless the indemnity “caps” or limits the losses covered, you could be on the hook for much more than just the contract value.
This is why indemnities are considered much more serious and risky than warranties. If you’re asked to give an indemnity in a contract, you need to understand exactly what it covers, for how long, and if you can put any limits on it.
Looking for more detail on what clauses you need in your agreements? Our guide on the most important contract clauses offers practical tips.
How Do Warranties and Indemnities Actually Differ?
Here’s where it gets interesting. On the surface, both warranties and indemnities involve promises between the parties-but the consequences for breaking them are very different. Understanding these differences is key for any business owner signing (or drafting) a contract.
The Main Differences in Simple Terms
- What They Cover:
- Warranties promise that certain facts or conditions are true/proper.
- Indemnities promise to reimburse the other party for certain types of losses-however big they might be.
- How Losses Are Proven:
- With a warranty, the other party must prove they suffered a loss and that your breach actually caused it.
- With an indemnity, the other party often just needs to show the loss happened-how it happened is less relevant.
- Amount of Compensation:
- Warranty claims are generally for “direct losses” only-so only what can be proven as a natural result of the breach.
- Indemnities can be much broader, sometimes covering all losses, including legal costs, fines, and even losses that aren’t directly connected to the breach.
- Limitation of Liability:
- Warranties can often be limited (you can negotiate caps on liability, time limits, etc.).
- Indemnities, unless capped in the contract, could result in much higher financial risk as they’re often not limited by standard contract rules.
For an even deeper legal dive, check out our breakdown of warranties in commercial deals and how indemnification works in business contracts.
Why Does It Matter for Small Businesses?
When you’re running a small business, you can’t afford surprises. Getting tripped up by unclear contract terms could mean paying out more than you ever expected-or worse, ending up in a legal dispute you weren’t prepared for. This is why understanding the difference between warranty and indemnity in contracts is so important.
Here are some typical scenarios to consider:
- Supplier Agreements: You buy products from a supplier. If they breach a warranty (say the goods aren’t as described), you may get compensation-but you have to prove the extent of your loss. If there’s an indemnity (for example, against third-party IP claims), the supplier might have to cover all your losses, whether or not it was their “fault.”
- Service Contracts: You provide IT support. If you breach a warranty (like a service-level promise), your client’s remedy is limited. But, if you’ve agreed to indemnify them for any data breaches, you might have to pay out even if it wasn’t entirely your fault.
- Partnership or Collaboration: You work with another business and give a warranty about compliance with UK law. If you get sued due to a compliance failure and there’s an indemnity clause, you could end up liable for their total loss-including legal costs.
Bottom line: Know what you’re agreeing to. If you see the words “warrant,” “represent,” or “indemnify,” ask yourself what risks you’re exposing your business to-and if you’re comfortable with that risk. If not, it’s time to negotiate!
Common Examples of Warranties and Indemnities
To make things even easier, here are some sample wording types you might see in business contracts:
Examples of Warranties
- “The company warrants that the goods supplied will conform to the agreed specification.”
- “The supplier warrants that it owns or licences all intellectual property required to perform the services.”
- “The provider warrants that their services will comply with all applicable UK legislation, including the Consumer Rights Act 2015.”
Examples of Indemnities
- “The supplier shall indemnify the buyer against all claims, damages, and losses resulting from any third party’s claim of intellectual property infringement.”
- “The service provider will indemnify, defend, and hold the client harmless against all direct and indirect losses arising from any data breach or security incident.”
- “The party indemnifies the other for any penalties or fines arising from their failure to comply with applicable law.”
You’ll notice indemnities are usually much broader and may use terms like “all losses” or “hold harmless.” These are red flags-always get tailored advice before agreeing to this sort of wording!
Should You Use a Warranty or an Indemnity?
This really comes down to what you’re trying to protect, and what level of risk you’re prepared to accept.
- Warranties: Good for everyday commercial promises-you just want assurance that certain facts are correct, and that you can seek compensation if they’re not.
- Indemnities: Essential where you want stronger, more direct protection (for example, protection against third-party claims, regulatory risks, or expensive legal liabilities).
It’s common for business contracts to include both-each playing a different role. For instance, warranties protect you from a supplier not doing what they promised, while an indemnity can cover you if a third party makes a claim because of something your supplier did.
The trick is to balance your contract so that neither party is taking on disproportionate risk. Always consider negotiating:
- Limiting (capping) the amount you can be liable to pay under an indemnity
- Specifying time limits for warranty claims (e.g. 12 months after delivery)
- Getting insurance cover for the risks that can’t be capped or managed
- Defining exactly what kind of “losses” are covered
Not sure what to include or how to draft these clauses properly? It’s wise to get your contracts reviewed by a legal expert-this can help you avoid serious pitfalls down the line. We’ve unpacked more about this in our resource on key contract terms for businesses.
What Other Contract Terms Should You Watch For?
Warranties and indemnities are just part of the picture when it comes to strong, enforceable contracts. Depending on your business type, you may also want to look out for:
- Limitation of Liability-sets out the maximum amount a party will need to pay if something goes wrong. (Read more in our guide on liability clauses.)
- Exclusion Clauses-spell out what is not covered or what liability is specifically excluded. (Dive into exclusion clause drafting tips.)
- Entire Agreement Clauses-make it clear that the written contract is the “whole deal,” so you’re not bound by separate discussions or emails.
- Governing Law and Jurisdiction-sets out which country’s laws apply if there’s a dispute.
These terms can dramatically shift your legal and financial risk, so make sure they work together with your warranties and indemnities, not against them.
How to Get the Right Legal Protection in Your Contracts
Setting up solid contracts isn’t just about avoiding disaster-it’s about building trust and confidence for everyone involved. Here are some practical steps:
- Never assume standard wording fits your needs. Every business is different, so your contracts should be too.
- Flag any indemnity clauses and ask for them to be explained. If you’re not sure, ask! Indemnities are high-risk and should never be agreed to lightly.
- Negotiate limitations where possible. Cap indemnities and specify exactly what’s covered (and what isn’t).
- Make sure there’s a clear process for making a claim. Both for warranties (e.g. notice periods) and indemnities (e.g. requiring the indemnifying party to be notified of third-party claims promptly).
- Consider getting professional support. Avoid DIY templates-these rarely provide enough protection and might create new headaches. Speak to a lawyer who can tailor your contracts to your exact business needs.
If you want more details about what makes contracts “stand up in court,” check out our article on enforceable contracts, or connect with one of our contract law solicitors for a review.
Key Takeaways
- Warranties and indemnities look similar but serve very different roles in business contracts: warranties are assurances, indemnities are risk-shifting promises.
- A breach of warranty usually means compensation for direct loss; a breach of indemnity can trigger payouts for all sorts of losses (even if you weren’t at fault).
- Be wary: indemnities create much higher financial risk, so always look for ways to limit or cap liability and define what’s covered.
- Your contract should be carefully drafted and reviewed to ensure your business is protected from all foreseeable risks-don’t leave it to chance or cheap templates.
- Legal advice can help you understand, negotiate, and set up the right terms for your business scenario, giving you confidence and protection as you grow.
If you’d like help understanding warranties, indemnities, or any contract terms-or if you simply want your agreements reviewed by experts-reach out to the Sprintlaw UK team at team@sprintlaw.co.uk or call us on 08081347754 for a free, no-obligations chat.
