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A warranty is an undertaking from a vendor to a purchaser that statements made in the sales contract are correct. (These are usually subject to a ‘disclosure undertaking’ – see below. An example of a warranty is an undertaking that all litigation with the vendor company has been settled. If these undertakings turn out to be incorrect within a specified time, a penalty will be imposed on the vendor. This penalty is usually a financial one. The total penalties payable can be limited for each individual infringement and/or to a total amount.

A ‘disclosure undertaking’ is a document that clarifies a general warranty statement. For example, it could state: The litigation with Smith and Son, who are claiming a refund on damaged goods of £15000, has yet to be settled.’

An indemnity is usually a specific recompense matching a financial loss. For example, if an amount stated to be due to the vendor business from a debtor (say, £50000) is not paid within 24 months of completion of the sale, then the vendor will pay this amount to the purchaser.

Both warranties and indemnities are common in trade sale agreements.

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