Should you agree to provide an indemnity?

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Often in commercial contracts one party is asked to give an indemnity to another. Should you agree to such terms?

In general terms, an indemnity is a promise to pay money to reimburse someone for certain amounts e.g. to pay another party for any cost, expense, liability, loss or damage that the other party might incur on the happening of a particular event.

Indemnities, however, often go above and beyond what would be available under a claim for breach of contract.  While there are a number of distinctions between parties’ rights and obligations under an indemnity and a claim for breach of contract, two important considerations include:

  • Often indemnities are so wide that they make one party liable for costs and expenses of the indemnified party even if there has been no breach of contract or the costs and expenses that are incurred by indemnified party have not been directly caused by the other party. 
  • Under a claim for breach of contract, the party making the claim is under a duty to mitigate its losses that arise from any breach by the other party.  However, if a party is indemnified for any such liability, that party is under no obligation to take steps to mitigate its loss.

Depending on which side of the contract you are on, indemnities can be risky or beneficial.  It is important to pay close attention to what is and is not covered, and whether there are other provisions in the contract which affect the indemnity (for example, a limitation of liability clause). 

Generally speaking, you should avoid giving any indemnity.  However, if there is no other alternative, you should fully understand the implications of giving the indemnity and look to restrict the scope of the indemnity.

If you have a contract that you’d like further advice on, please contact one of our business law specialists.

Our thanks to Chris Taylor for writing this article