DealLawyers.com Blog

We continue to get member feedback on John Jenkins’ recent blog regarding reliance and letting the buyer beware (here is other feedback). So we’ve decided to put the concept to an anonymous vote. Putting aside whether reliance is – or should be – an essential element of breach of warranty claims, should/does reliance matter if the contract provides for indemnification?

Consider the following example: Seller tells the buyer at the beginning of negotiations that completion of a new factory will cost no more than $1 million.

Alternative 1: Buyer asks for a representation and warranty (without an express reservation of rights) that the factory under construction will be completed for $1 million or less and for an indemnity for any breaches of warranty and inaccurate representations.

Alternative 2: Buyer doesn’t bother asking for a representation and warranty regarding the cost of completing the factory, merely a specific/special indemnity for the costs of completing the factory in excess of $1 million.

Before signing seller tells the buyer that completion of the factory will cost more than $1 million. Under the Second Circuit decisions in Galli v. Metz and Rogath v. Siebenmann, this would appear to preclude a claim for breach of warranty.

Here is the anonymous poll: [poll expired, removed]

[e.g., see: Gusmao v. GMT Group 2008 WL 2980039 (S.D.N.Y.) applying NY law (explores reliance issue in action for release of funds held in escrow for indemnification claims), but see Gloucester Holding v. US Tape & Sticky Products, 832 A.2d 116 (Del. Ch. 2003) applying Delaware law (“[r]eliance is not an element of claim for indemnification.”)]

Of course, even if reliance is not an element of claims for indemnification, indemnification rights are often subject to baskets and caps.