Contracts can be complex, especially when it comes to managing risks and liabilities.

Two key concepts that often come into play are mitigation and indemnity clauses, which are designed to address how losses are handled. Understanding how obligations to mitigate work with indemnity clauses can help protect you from unnecessary exposure.

But what are the issues here, and why do they matter? We explore the two concepts below, and how they can shape the outcome of your agreements.

What is mitigation?

When something goes wrong there’s a principle in common law that says parties need to take reasonable steps to minimise their losses – this is what we call “mitigation.”

In simple terms, if you can reduce your losses by doing something reasonable, or by refraining from doing something, then you’re expected to do just that. The obligation isn’t meant to be overly strict, but it’s important, especially if you’re expecting to claim your losses from someone else.

If you fail to mitigate your losses, the law might not let you recover damages beyond what your loss would have been had you taken those reasonable steps to reduce it. In other words, you can’t just let your losses pile up and expect someone else to cover the full amount when you could’ve done something about it.

What is an indemnity clause?

Indemnity clauses are pretty common in contracts. They’re a way for one party to get compensation from the other if something goes wrong under a contract. Think of it as a built-in contractual safety net – a promise that one party will cover certain losses if specific conditions are met. These clauses provide a separate form of protection, different from the general protections under common law.

What really matters here is the wording.

The exact language used in an indemnity clause dictates what the indemnifier is responsible for. Unlike regular breach of contract claims, where you need to prove a breach occurred, an indemnity claim is more straightforward – it’s just about making good on that promise to cover the loss, no matter if there was a breach or not.

Why does mitigation matter in indemnity clauses?

Indemnity clauses are often drafted quite broadly, giving one party the right to recover a wide range of losses. In some cases, the indemnity is proportionate, meaning that if the indemnified party contributed to the loss, their damages would be reduced accordingly. But this alone doesn’t necessarily create an obligation for them to actively minimise their losses.

When negotiating an indemnity clause, it’s important to be specific. If you want the indemnified party to be required to mitigate their losses, you need to write that into the clause explicitly. Otherwise, you may end up on the hook for losses that could have been avoided had they taken reasonable steps to reduce them.

Without specific language requiring mitigation, the common law obligation to mitigate might not apply. This could leave the indemnifier – potentially you – more exposed to covering losses that could have been lessened with a bit of effort on the other side.

How to include mitigation in an indemnity clause

Before agreeing to an indemnity clause, take a step back and consider whether the indemnity is appropriate and how far it extends.

Some of the key questions to think about are:

• Who’s being indemnified?
• What kind of events or damages will trigger the indemnity?
• When should the indemnity obligation be reduced, and how should that happen?

While there’s a lot to consider, one thing is clear: every indemnity clause should at least reduce the indemnity by the amount that the indemnified party contributed to the loss. And just as important, the clause should explicitly require the indemnified party to mitigate their losses. This helps limit your own risk and ensures that both parties are doing their part to keep damages in check.

In the end, when you’re dealing with contracts, it’s important to be clear about mitigation and indemnity clauses. Taking the time to carefully draft these provisions can make a big difference in protecting yourself from unnecessary risks.

If you need help ensuring your contracts include these critical clauses, our team is ready to assist. With Source, access an in-house style legal team who can support you with the day-to-day legal needs, such as reviewing and drafting contract clauses – all within a fixed monthly retainer. Reach out today to learn more.