Blog Details

Representations and Warranties (“R&W”) for any kind of services are generally in the form of a statement as on a particular date providing the correct position of the relevant state of affairs.. R&W is one of the considerations for the promisee to engage in a transaction, and breach of the same may entitle the promisee to relief under the terms of the contract as well as under the law. An indemnification is the most preferred contractual remedy for breach of R&W. The absence of an indemnity, however, does not bar remedies in the form of compensation for damages or specific performance. In this chapter, we discuss the function and effectiveness of these clauses in M&A transactions in light of customary contractual practices, as well as how they interact with law and jurisprudential precedent. We also look at insurance in terms of R&W in M&A deals.

The mitigation of risks for the Buyer/Purchaser/Acquirer is one of the crucial areas in the negotiation of an M&A deal, particularly one that involves a share deal. This attains more significance in cases where the Purchaser, relying on the R&W, faces an imminent danger of breach of such R&W or during the diligence stage has identified high risk areas which cannot be covered through the R&Ws. Thus, one of the most significant issue is that even after performing the most thorough due diligence, the buyer still lacks the time or in-depth knowledge necessary to evaluate all the risks associated with the target company. On the other hand, it's possible that the due diligence itself identified risks that may or may not  materialize until the deal is closed.

Such risks can either be managed legally by agreeing on appropriate warranty rights between seller and buyer as part of the Transaction Documents, which is highly controversial with both the parties, or economically by reducing the purchase price, which is very unpopular with the Seller.

The phrase “indemnification”, which needs to be distinguished from a warranty, regularly appears in contracts under common law. An indemnity is a commitment by the vendor to hold the buyer harmless for a specific risk, as opposed to a warranty, which is a contractual assurance by the vendor on the assets or the state of the business being sold. Therefore, the indemnification gives the buyer a weapon to defend himself against a known or defined risk. These include possible product liability claims, tax risks, and environmental legal risks, as examples.

On the other hand, “damages” can be claimed by the Buyer in case of breach of general covenants of the transaction documents by the seller which will also include the general R&Ws. However, in case of damages, the Buyer will have to prove the actual breach of the covenant, the nature of loss and the quantum of loss.

Damages have grown in importance, particularly in economic transactions and as a form of punitive measure for the violation of someone's rights. Claim for damages whether liquidated or unliquidated under Indian Law (liquidated or unliquidated) are awarded by the courts only after accessing the directness of the harm and the mitigating actions taken by the non-breaching party. The courts also ensures that the party who violate the contract's terms would be responsible for paying liquidated damages if those terms were clear and unambiguous, unless the court determines that the estimate of damages or compensation is irrational or is the result of a penalty. Furthermore, the party that has been injured by a breach of contract does not have to provide evidence of the real loss or harm they have experienced. Even if no actual damage is demonstrated to have been sustained as a result of the breach of the contract, the court is nonetheless competent to award adequate compensation in such instances. The court can award the same if it is a true pre-estimate by the parties as the measure of reasonable compensation in situations where it is impossible for the court to determine the compensation arising from a breach and if the compensation anticipated is not by way of punishment.

Differentiation between Damages and Indemnity is as follows:

1. An indemnity covers third-party claims, but damages can only be asserted against the promisor, or the person who made the promise under the contract.

2. A party may file an indemnity claim even before experiencing any actual losses. Whereas the claim for damages can only be filed after the party has suffered losses.

3. Under Indemnity clause; consequential, indirect and remote losses can all be covered however the same is not applicable in the case of damages.

4. Losses may be claimed as indemnity without having to prove that they were caused by a breach of contract event, but in case of damages must show a direct and adequate nexus between the breach of contract event and the damages incurred.

5. Restoring a person to their previous situation prior to the loss is the basic goal of indemnification. In contrast, when someone is awarded monetary damages, the award may be for more or less than the actual loss that happened.

6. While a damages guarantee must be filed after an agreement has been breached, an indemnity guarantee may be filed prior to the breach of an agreement