When diving into contractual agreements, indemnities are a frequent topic, but they often come with a bit of mystique and caution.
Let’s break down what they are, why we encounter them so often, and how to handle them with care.
What exactly is an indemnity?
At its core, an indemnity is a promise within a contract where one party (the “Indemnifier”) agrees to cover losses or damages suffered by the other party (the “Indemnified”) under certain conditions. This commitment isn’t a replacement for a party’s usual rights under common law; rather, it’s an extra layer of protection that can offer peace of mind to the client and create extra obligations on the contractor.
Indemnities usually take one of two forms:
- “Make Good” Indemnity: This approach requires the Indemnifier to restore the Indemnified to the position they were in before the loss occurred.
- “Hold Harmless” Indemnity: Here, the obligation is to prevent the loss from happening in the first place.
The difference is subtle but important, impacting the level of responsibility the Indemnifier undertakes.
When does an indemnity come into play?
It’s essential to understand that indemnities aren’t automatic features in every contract. Unlike obligations under common law or legislation, indemnities require explicit agreement from both parties. This type of liability is contractually assumed, meaning it only exists because both sides have agreed to it within their contract.
Because they don’t come as standard terms, you’ll want to evaluate if an indemnity is genuinely necessary for your contract.
Why should we be cautious about indemnities?
Indemnities come in various forms and can significantly alter the scope of liability within a contract.
Here are a few critical reasons to approach them carefully:
- Indemnities can stretch liability beyond what’s typically required by common law or legislation.
- An indemnity can kick in without either party actually being at fault.
- Even without a breach of contract, an indemnity could be triggered.
- Unlike common law claims, indemnity claims often don’t require proof of causation or foreseeability.
- While standard claims generally need the injured party to try and mitigate their losses, indemnities don’t always require this.
- Your insurance may not cover liabilities you’ve agreed to take on under an indemnity.
- An indemnity claim can often be made much faster and more easily than a breach of contract claim.
Understanding these factors is crucial in assessing whether the indemnity aligns with your risk tolerance and your contract’s intent.
How to manage indemnity risks
Given the potential impact of indemnities, it’s wise to scrutinise these clauses closely.
Here’s a guide to help ensure you’re protected:
- Review carefully: Always examine indemnity clauses to confirm they’re suitable for the situation.
- Consider alternatives: Could a breach of contract claim cover the same ground? If so, an indemnity may not be necessary.
- Clear and specific drafting: If an indemnity is essential, ensure the clause specifies:
- The type and kind of loss covered by the indemnity
- The events or actions covered by the indemnity
- Who is entitled to the benefit of the indemnity
- What restrictions apply to the indemnity
A well-drafted indemnity clause should feel like a safety net, not an exposure to unexpected risk. With a little foresight and careful drafting, you can create a contract that protects your interests without overextending your obligations.
Navigating indemnity clauses? Let our team help you draft clear, effective provisions tailored to your needs. With Source, you get an in-house style legal team for all your contract review and drafting needs – all for a fixed monthly retainer. Contact us today to learn more.
