Representations vs Warranties vs Indemnities: Key Differences in Business Contracts

When negotiating a business contract, the so-called legal boilerplate can feel like a wall of unnecessary text. But buried in those clauses are three terms that can significantly affect your risk if something goes wrong: representations, warranties, and indemnities.

These concepts are often bundled together, misunderstood, or underestimated. For entrepreneurs and small business owners, knowing the difference isn’t legal trivia: it’s about understanding who pays, when, and how much if a deal turns sour.

What Is the Difference Between Representations, Warranties and Indemnities?

In simple terms:

• A representation is a statement of fact that induces someone to enter into a contract.

• A warranty is a contractual promise that a statement of fact is true.

• An indemnity is a promise to reimburse specific losses if a defined risk occurs.

  
  

All three allocate risk — but in very different ways.

What Is a Warranty? (A Contractual Promise)

A warranty is a statement of fact written into the contract. By giving a warranty, you are promising that something is true at the time the contract is entered into.

Example:

“The supplier warrants that it owns all intellectual property rights in the software.”

What happens if a warranty is wrong?

If a warranty turns out to be untrue, this is a breach of contract. The innocent party can bring a claim for damages. However, they must generally prove that the breach caused them a financial loss and take reasonable steps to mitigate (reduce) that loss.

Why warranties are usually more manageable

From a risk perspective, warranty claims are often limited by liability caps, subject to exclusions and time limits, and harder to pursue than indemnity claims. For this reason, warranties are usually more supplier-friendly than indemnities.

What Is a Representation? (The Inducement)

A representation is a statement of fact made before the contract is entered into, which induces the other party to sign. This is why contracts often use the combined wording:

“The Seller represents and warrants that…”

What happens if a representation is false?

If a representation is untrue, this may give rise to a claim for misrepresentation. Depending on the circumstances and the type of misrepresentation, the remedies may include rescission (setting the contract aside) and/or damages (which may be assessed on a different basis to contractual damages).

Why representations are commercially sensitive

Unlike a warranty claim, a successful misrepresentation claim may, in limited circumstances, allow the contract to be unwound altogether. However, rescission can be barred where, for example, the contract has been affirmed, too much time has passed or restitution is impossible.

As a result, representations are often more risky for the party giving them and should be carefully limited and qualified.

What Is an Indemnity? (A Promise to Reimburse)

An indemnity is a contractual promise to compensate the other party for specific losses arising from a defined event or risk.

Example:

“The supplier shall indemnify the customer against all losses and legal costs arising from third-party intellectual property infringement claims.”

Why indemnities are powerful

Indemnities are commonly drafted to cover specific categories of loss (including legal costs), apply on a pound-for-pound basis, and avoid the need to prove loss in the same way as a damages claim.

Depending on the wording, an indemnity may operate more like a reimbursement obligation than a traditional breach of contract claim.

Because of this, indemnities are often a faster and more certain route to recovery. They are also therefore a higher risk for the party giving them.

Representations vs Warranties vs Indemnities: At a Glance

Feature	Representation	Warranty	Indemnity
What is it?	Pre-contract statement of fact	Contractual promise	Promise to reimburse losses
Claim basis	Misrepresentation	Breach of contract	Debt
Key remedies	Rescission and/or damages	Damages	Recovery of specified losses
Duty to mitigate	Depends on remedy	Yes	Often excluded (depends on drafting)
Risk profile	Potentially high	Moderate	Often highest

Why This Matters for Small Business Owners

If you are the supplier

If you are the supplier, you will usually want to limit or carefully qualify any representations, rely primarily on warranties, and tightly control the scope, duration and financial cap of any indemnities. Poorly drafted indemnities can create open-ended liability.

If you are the customer

If you are the customer, you will usually want representations to protect against being misled, indemnities for high-risk issues such as data protection, tax liabilities or IP infringement, and clarity on exactly what losses are covered.

Practical Contract Tips for Entrepreneurs

1. Watch for “represent and warrant” language: This gives the other party two potential routes to claim. Make sure statements are accurate, limited and properly disclosed.

2. Always check the liability cap: Your liability, including under indemnities, should be subject to sensible financial limits wherever possible.

3. Narrow the indemnity trigger: Avoid broad wording such as “all losses whatsoever”. Tie indemnities to specific, controllable risks.

4. Check your insurance cover: Professional indemnity insurance often covers breach of warranty, but may exclude misrepresentation or contractual indemnities that go beyond your normal legal liability.

Need a Contract Health Check?

A single representation or indemnity clause can expose your business to significant and unexpected risk.

If you are reviewing a customer or supplier contract, updating your terms of business, or unsure whether a clause is market-standard, we can explain the risks in plain English and help you decide what’s reasonable before you sign.

Get in touch to arrange a contract review or send us a clause you’d like explained.