Indemnity versus warranty claims?

In a recent High Court decision - Learning Curve (NE) Group Ltd -v- Lewis [2025] EWHC 1889 (Comm), the court found that a buyer’s ability to bring a claim under a specific indemnity did not preclude a claim for breach of warranty in a share purchase agreement (SPA).

The claim involved many different arguments from failure to notify the claim to whether the proceedings were properly served but the key point of interest relates to the arguments around the warranty and indemnity claims.

Warranties/indemnities

Unlike buying a car for example, English law provides a buyer of shares in a company with very little statutory or common law protection regarding the nature and extent of the assets and liabilities it is acquiring. To allow the buyer some protection against significant undisclosed risks or understated liabilities, the buyer usually insists that the seller provide a set of express warranties under the SPA relating to various aspects of the company and its business. Breach of these warranties exposes the seller to liability in damages. The measure of damages for breach of warranty in an SPA is generally expressed to be the amount required to put the buyer in the position it would have been in had the warranty been accurate, namely the difference between the value of the shares as warranted and their actual value as at the completion date. Careful calculations are invariably required to quantify these losses.

Contrast this with an indemnity which is an express obligation on the indemnifying party to compensate the beneficiary of the indemnity for some defined loss or damage arising from a particular cause, requiring a monetary payment to the beneficiary. It differs from a warranty, which is a contractual promise that, if breached, gives rise to a right to sue for damages for breach of contract. Indemnities are often used in SPAs to address specific areas of often known risk which are of particular concern to the buyer and where it is appropriate for the relevant risk to be picked up by the seller. The quantification of an indemnity is accordingly much easier to calculate than damages for breach of warranty.

Given the implications of indemnity versus warranty, sellers tend to be much more reluctant to provide an indemnity than a warranty on a particular issue, but is such an approach always right?

The difference between warranties and indemnities and the need for careful drafting of both is clearly illustrated in the Learning Curve case.

Facts

The claimant (Learning Curve) purchased from the defendants the entire issued share capital in a company called APCymru Limited (APC) for over £16million. Post-completion of the SPA, Learning Curve discovered that APC had in breach of ESFA’s funding rules overclaimed almost £1.25 million funding from ESFA. APC received funding for some of its activities from the Department for Education via the Education and Skills Funding Agency (“ESFA”). Post-completion of the SPA, Learning Curve discovered that APC had, in breach of ESFA’s funding rules and had overclaimed almost £1.25 million funding from ESFA. Learning Curve sued the sellers for breaches of several of the warranties contained in the SPA, including a warranty that, during the last four years before the purchase, APC had complied with the funding rules. After taking into account some additional work carried out by APC, the ESFA eventually clawed back a lesser but still significant sum of £783,325 from APC (Clawback). The defendant sellers agreed to and paid this Clawback sum under a specific indemnity in the SPA. However, Learning Curve also brought a separate breach of warranty claim, arguing that certain issues had much wider and longer-lasting impact on APC’s value, requiring operational changes, reducing future funding, and causing a fall in APC’s EBITDA. The sellers denied the breaches of warranty and alleged that the indemnity payment was Learning Curve’s sole remedy.

Relevant provisions

The SPA included a series of warranties from the defendants, including some fairly standard warranties that:

• APC had complied, and continued to comply, in all material respects with the ESFA funding rules;

• Since the accounts date there had been no material adverse change in the company’s financial or trading position, nor any fact likely to cause such a change;

• APC was entitled to receive all funding due under contracts with the ESFA and others;

• APC had complied with all applicable laws and regulations binding on it.

The SPA contained an Indemnity which stated that the sellers would indemnify the buyers in respect of “…the clawback, recovery or repayment to ESFA…of any sums paid to any Group company in the period from 1 March 2018 up to and including the Completion Date whether pursuant to an audit, investigation, inspection or otherwise…” The Clawback was quantified at £783,325.

Finally, there was a provision preventing double recoverability which provided: “If the same fact, matter, event or circumstance gives rise to more than one claim for breach of any of the Warranties, or to a claim both under the Warranties, an Indemnity Claim and/or the Tax Covenant the Purchaser shall not be entitled to recover more than once in respect of such fact, matter, event or circumstance”.

The issue of whether the claim could proceed as a claim under the Indemnity or as a Warranty claim was important because the Indemnity was capped under at 50% of the consideration actually received by the sellers whereas the warranty claim cap was the full amount of the consideration received, so a significantly higher cap. The sellers argued that “as a matter of construction and/or necessary implication if a matter may be pursued as [an Indemnity] claim it could not be pursued as a Warranty Claim as well as otherwise there would be no purpose in negotiating …the lower rate of 50% of the Consideration.”

The judge found on the express wording in the SPA that the ability to claim under the Indemnity did not preclude a warranty claim in respect of the Clawback.

He said “The defendants suggest that [Learning Curve] cannot pursue both an indemnity claim and a warranty claim in respect of the Clawback. However, the paragraph not only does not say that but, instead, expressly contemplates that there might be a claim for both. It says that, if there is “more than one claim” for breach of any of the Warranties or “a claim both under the Warranties [and] an Indemnity Claim”, then, if those claims are based on the same matter, there shall be no double-recovery under such compound claims. The most obvious reason for doing so is because the SPA provides different caps on the defendants’ liability for each, thereby recognising that one may be greater than the other.”

In fact judgment was awarded to Learning Curve in the sum of £5.21 million for breach of warranty rather than £783,325 they would have received under the Indemnity.

Conclusions

An indemnity may be considered to be more pro-buyer than a warranty as it allows recovery of all loss flowing from the event, without having to prove breach, foreseeability or certain causation hurdles. Often, relying on an indemnity will produce a higher recovery than under a warranty. The current case illustrates that this is not always the case and that where it is the parties’ intention clear drafting of the indemnity is required with careful consideration of its implications.

There is also a lesson for sellers in this case - where the typical reaction may be to push back and refuse a request for an indemnity, this case shows that with suitable caveats, an indemnity may be the better option.

For further information on warranty and indemnity claims please contact Kate Steele and Moya Clifford.