Indemnities and Your Business - the Highlights

INDEMNITIES

Part 1 - The highlights

1. Many varied forms, but some core concepts

In basic terms, an indemnity is a clause in which:

• a person (the indemnifier);

• promises to another party (the indemnified party);

• that they will hold them harmless, or will reimburse them, against specified losses (liabilities);

• if the conditions of the indemnity are triggered.

2. Indemnities shift commercial risk between parties

Indemnities, by their nature, are powerful contractual clauses that may have significant implications for commercial parties.  

Importantly indemnities shift civil or contractual liability of the indemnified party to the indemnifier.

3. They are the backbone of most liability regimes

Contract parties often endeavour to establish specific liability regimes. Parties frequently use indemnities to make the party best able to manage a particular risk responsible for the consequences of that risk materialising.  Sometimes they are just the result of the bargaining position of the parties.

4. Independent obligation, distinct from guarantees

An indemnity is an independent primary obligation to make good specific losses incurred by the indemnified party. They are different, in legal terms, from guarantees.

In practical terms they mean that the indemnifier has to pay costs that ordinarily the indemnified party would have to pay.

5. Indemnifier be ware

The shifting of risk caused by an indemnity is a material issue to consider by both parties, but primarily by the indemnifier. If required to give an indemnity, you should exercise due caution understanding all the potential implications and outcomes for your business.

6. Potential for easier, broader claims

Indemnities can make claims easier (as opposed to breach of contract claims) primarily because indemnity claims are generally easier to prosecute than contractual claims.

7. Clear drafting is vital

It is critically important that the scope of an indemnity is drafted in clear and precise terms.  It must unambiguously capture the categories of loss and liability intended to be the subject of indemnification.  

This is because the scope of any indemnity is found in the words of the relevant clause.  However, that meaning is determined by reviewing them with reference to the contract as a whole.  Therefore, each indemnity must be considered separately.

8. Can be interpreted narrowly

Indemnified parties should be aware that indemnities are generally interpreted narrowly. That is, if there is a doubt as to the scope of an indemnity, it should be resolved in favour of the party giving the indemnity.

Like the details?

In our subsequent posts we will look in more detail about each of these points.