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.
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.
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.
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.
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.
Indemnities can make claims easier (as opposed to breach of contract claims) primarily because indemnity claims are generally easier to prosecute than contractual claims.
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.
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.
In our subsequent posts we will look in more detail about each of these points.
The information in this article is provided for general information purposes only. It does not, nor is it intended to, constitute legal or other professional advice. The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.