Business Contracts: Importance of Using Both Warranties and Indemnifications

In complex business contracts, to protect your business, it is important that the contract(s) contain both warranty and indemnification provisions. A good San Diego corporate attorney can help review your contracts and ensure that your business is protected.

In general, a warranty is a written guarantee, upon which the other party is allowed to rely, that certain facts are true. Take a copyright example in which the seller of a copyright or the company offering a license makes these warranties:

• COPYRIGHT is owned by the Seller/Licensor
• Seller/Licensor has the right and authority to sell/license COPYRIGHT
• COPYRIGHT does not infringe on any third-party-owned copyrights
• COPYRIGHT does not infringe on any other type of third-party-owned intellectual property rights (like a trademark)
• Seller/Licensor has not received notice of any claim that COPYRIGHT infringes any third-party-owned intellectual property

Under standard California and federal contract law, if termed “warranties,” these statements are guaranteed to be true, it is expected that the buyer/licensee will rely on the statements, and if false, the buyer/licensee will initiate litigation and have a very good case. This is one reason that experienced corporate attorneys are careful with the phrasing of warranties. An attorney for a buyer/licensee will want to have many warranties worded as broadly as possible; the attorney for the seller/licensor will want few warranties, which are narrowly stated.

However, a good contract drafted for a buyer/licensee will not limit protections to just the warranty provisions. Rather, a buyer/licensee will want to include indemnity provisions as added and overlapping protections. There are two important reasons: Warranties do not cover the full set of risks being undertaken by the buyer/licensee and litigation is uncertain and you want to have as many “arrows in your quiver” as you can. Note that the warranties are limited to issues of ownership, authority to transfer, non-infringement, and receipt of notice and that the warranties are limited to the pre-transaction time period. Indemnity provisions help offset risks of occurrences that happen post-closing (such as a legal proceeding to invalidate a copyright in our example).

Thus, an indemnity provision might provide that seller/licensor shall indemnify buyer/licensee from and against any and all claims, suits, actions, proceedings or the like brought against buyer/licensee [duty to defend] and/or any and all damages suffered by buyer/licensee (including judgments, fines, litigation expenses, attorneys’ fees and the like) if:

• A third-party claims that COPYRIGHT is infringing its copyright
• A third-party claims that COPYRIGHT is infringing or otherwise violating other intellectual property rights
• A third-party claims that COPYRIGHT is invalid
• Seller/licensor has breached any of its warranties

As can be seen, the combination of warranties AND the indemnity provisions provide a very powerful contract-based set of legal protections.

Contact San Diego Corporate Law Today

If you would like more information about indemnification and warranty provisions, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” for four years running by SuperLawyers.com. Every business needs a good business attorney like Mr. Leonard to review, draft, and assist in executing business contracts and with other business-related matters. Mr. Leonard can be reached at (858) 483-9200 or via email.

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