WRITTEN BY Katie Innes
Indemnity clauses can play an important role in managing the risks associated with commercial transactions. The tendency is to seek an indemnity which will protect a party to the greatest possible extent against all liabilities arising from the actions of another. Yet, too often, the indemnity is based on a boilerplate clause perhaps obtained from a precedent, so the drafting doesn’t reflect the inherent or underlying risk of a particular business relationship and the parties end up fighting over who is giving an indemnity and to what extent. But is an indemnity really necessary?
At common law, the right to damages is implied by law and does not need to be stated in the contract. It follows that once you have established that a primary obligation has been breached the law implies a secondary obligation to pay damages. A contract can, and usually does, provide for its own regime for breach of contract – here is where an indemnity comes in to play.
An indemnity is a promise made by one party (“the indemnifier”) to cover loss or damage suffered by another party (“the principal”) which may be suffered as a result of a specified event. Indemnities are frequently used to expand the range of losses that a principal could otherwise recover at common law, can alter the contractual rules of interpretation, and can deliver procedural advantages when it comes time to enforce.
So what can indemnities actually do? Indemnities can:
Depending on how the indemnity is drafted, an indemnity can turn what would otherwise be a claim for compensatory damages (subject to the principal proving breach of contract, damages suffered, and an assessment of those damages) into a straight claim for debt. The principal may only need to establish that the event triggering the obligation to pay has occurred.
There can be many benefits to getting an indemnity in your favour but these all assume the indemnity is drafted properly and clearly. Courts will construe indemnities narrowly and if there are any ambiguities Courts will construe indemnities in favour of the indemnifier (because a party should know what liability they are agreeing to).
Indemnities can be useful and provide peace of mind, but not necessarily at the expense of achieving the commercial transaction or maintaining an ongoing working relationship. There are always rights to common law damages if something does go wrong.
If you have any questions about indemnities (or how to enforce them), please get in touch with our Business team.