Seller’s indemnity: Overview, definition, and example
What is a seller’s indemnity?
A seller’s indemnity is a contractual provision in which the seller agrees to compensate the buyer for any losses, damages, or expenses incurred as a result of certain issues that may arise after the sale of goods, services, or assets. The indemnity protects the buyer from financial harm caused by factors like breaches of warranty, undisclosed liabilities, or legal claims related to the item being sold. Essentially, it ensures that the buyer is not left financially responsible for issues that were the seller’s fault or occurred prior to the sale.
For example, if a seller sells a piece of property and the buyer later faces legal action due to a defect that was not disclosed, the seller’s indemnity clause would require the seller to cover the costs of defending against the legal claim or any potential damages.
Why is a seller’s indemnity important?
A seller’s indemnity is important because it helps allocate risk between the buyer and the seller in a fair and predictable way. By providing indemnity, the seller assumes responsibility for certain risks that may exist before the sale, allowing the buyer to proceed with the transaction with greater confidence. It also gives the buyer a legal avenue for recourse if issues arise after the sale.
For sellers, while offering indemnity can be a risk, it can also help facilitate smoother transactions by making the sale more attractive to the buyer. It may also provide a clear boundary around the seller's responsibility for any issues that arise.
Understanding seller’s indemnity through an example
Imagine a business that is selling its intellectual property rights to a buyer. The seller provides a seller's indemnity in the contract to ensure that if any intellectual property disputes or claims arise that were tied to the property before the sale, the seller will take responsibility for those claims. If a third party later sues the buyer for violating patent rights that existed before the sale, the seller would be required to indemnify the buyer by covering legal fees and any damages incurred.
In another example, a homeowner selling their property might include a seller’s indemnity clause in the sale agreement. If the buyer discovers that there were undisclosed environmental hazards on the property, such as contaminated soil, the seller may be required to cover the costs of remediation and legal fees.
Example of a seller’s indemnity clause
Here’s how a seller’s indemnity clause might appear in a contract:
“The Seller agrees to indemnify and hold the Buyer harmless from and against any and all claims, damages, losses, liabilities, or expenses, including legal fees, arising from any breach of the representations and warranties made by the Seller in this Agreement or from any undisclosed liabilities related to the goods sold prior to the closing of the transaction.”
Conclusion
A seller’s indemnity is a key component of many sales agreements, ensuring that the buyer is protected from certain risks and liabilities that may arise after the transaction. By offering an indemnity, the seller assumes responsibility for specific issues, providing the buyer with financial protection. This provision is essential for both parties to clearly understand the scope of responsibility and manage potential risks in the transaction.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.