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Feb 11, 2024 · This comprehensive guide is tailored to navigate you through the complexities of indemnity and liability clauses, equip you with robust negotiation strategies, and highlight common pitfalls to avoid, ensuring your business is fortified against potential legal quandaries.
Jun 8, 2020 · Indemnification clauses are ubiquitous in commercial contracts. This Article discusses the basic components of an indemnification clause, including the duties to indemnify, hold harmless, and defend, as well as typical limitations and common exceptions to indemnification.
- Back to Basics
- In Focus | Drafting The Trigger
- In Focus | Causation Is Within Your Control
- In Focus | Are Indemnities Against Fines Or Penalties Enforceable?
- Drafting Tips
What is an indemnity?
An indemnity is a promise, usually made in a contract, to pay money on the happening of a specified event. Indemnities protect one party from a contract from suffering financial loss in relation to certain eventualities – usually those that would arise from the conduct of the other contracting party, or over which the other contracting party has control. In other words, an indemnity is a contractual mechanism for allocating risk, in a similar way to a warranty in a typical M&A contract, or a...
Why are businesses keen on including indemnities in contracts?
An indemnity is a primary obligation; it does not depend on having to prove a breach of a contractual obligation. This offers a number of advantages over bringing a damages claim for a breach of contract: 1. An indemnity will typically be triggered by losses being incurred, without the need to prove any "fault". This can also avoid rules around causation and mitigation, which can otherwise make recovery more problematic. 2. If the scope of the indemnity is wide, it can allow fuller recovery o...
Why are indemnities such a challenging topic?
Being creatures of contract, indemnities are highly flexible, according to how they are drafted. But this can also be a challenge. Compared to mechanisms like guarantees, indemnities are subject to few fixed rules. There is no settled "law of indemnities". As a result, the questions of whether concepts like causation and mitigation apply, and what is needed to prove the amount being claimed, are all dependent on how the indemnity is drafted.
It is crucial that there is absolute certainty in relation to the relevant factual event that triggers the indemnity. A prime example of this issue arose in the recent Supreme Court case of Wood v Capita Insurance Services. The case turned on the interpretation of an indemnity in a share purchase agreement, which read as follows: "The Sellers under...
How close is the connection?
One of the restrictions on the recovery of damages in a breach of contract claim is the rule on legal causation. The loss must have been caused by the breach (in the sense that the loss would not have been caused absent the breach), but a new intervening act will break that chain of causation. But the causal connection required in relation to an indemnity depends on the wording of the indemnity itself and its interpretation. For indemnities that relate to the performance by one party of its o...
How remote is the loss?
In Capita v RFIB Group, the Court of Appeal held that using the causal words "directly or indirectly" within a contractual indemnity imported the Hadley v Baxendaletest of remoteness into the clause. The indemnity was worded as follows: "The Seller undertakes to indemnify … the Buyer … from any liabilities costs claims demands or expenses which [it] may suffer or incur arising directly or indirectly from … any services or products supplied … prior to the Transfer Date". The court ruled that i...
With both the level and instance of regulatory fines on the rise, a question of increasing importance is whether a party can be indemnified against such fines or penalties. Our view is that, where it is commercially feasible to do so, a party that could have fines or penalties imposed on it as a result of the actions or inactions of its counterpart...
If you are the indemnifying party
Where you are giving an indemnity, the concern is that any resulting claim would give rise to a claim in debt (such that the principles of mitigation and remoteness would not apply) and therefore you should seek to draft expressly such that mitigation and remoteness do apply! First, you should consider providing for an express duty to mitigate. This could be achieved by way of a boilerplate clause in the agreement which applies on a mutual basis to all indemnities in the relevant agreement. F...
If you are the indemnified party
Where you are receiving the benefit of an indemnity, your aim is likely to be ensure that the claim will be treated as a debt claim, or in the same way as a debt claim would be treated. We would therefore advise that you draft the indemnity narrowly so that the loss is quantified in the contract, or is easily quantifiable, or there is perhaps a mechanism within the contract which can be used to quantify the liquidated loss. You should consider drafting expressly so that remoteness will not ap...
Jul 2, 2024 · Indemnity clauses play a crucial role in defining and allocating risks between parties to a contract. These clauses provide a unique approach to managing financial responsibility for potential liabilities.
It discusses legal controls on indemnities, negotiating and drafting an indemnity clause, words and phrases commonly used in indemnity clauses, and the interaction between indemnities and clauses limiting liability.
This presentation gives a high-level overview of indemnification and limitation of liability clauses and discusses how they interact to allocate and shift contractual risks. It reviews consequential damages waivers and liability caps as components of limitation of liability.
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Oct 20, 2024 · Indemnification clauses appear in most commercial agreements. Learn how they protect against third-party claims, breaches of contract, negligence, and more.
