An indemnity clause is a contractual term written into a contract that promises to reimburse another a specified loss or damage and/or, in some cases, will absolve them of liability.
Unlike a guarantee, an indemnity clause creates a primary obligation which is not always dependent on the wrongdoing of a third party.
Who is indemnified?
The benefit of an indemnity will only extend to the person or company that is listed as beneficiary in the written contract (including any person mentioned in the third-party rights clause).
What can be covered?
Indemnities usually cover liabilities in two ways:
- third party claims against the indemnified party such as intellectual property infringement, and
- directly between the parties to the contract, for example, for breach of contractual provisions like warranties or a failure to pay an invoice
Indemnity clauses can include ‘hold harmless’ wording under which one party agrees that the other will not be liable for any losses that the first party suffers arising from the specified events.
What losses are covered under an indemnity clause?
The losses that will be recoverable under an indemnity clause will depend on how it is defined.
When we draft indemnity clauses, we ensure that the wording covers the types of losses that the parties have agreed will be covered.
At Britton and Time, we consider whether the indemnity will cover indirect and consequential losses and draft accordingly.
A broad definition of losses may be drafted as follows:
‘all damages, liabilities, demands, costs, expenses, claims, actions and proceedings (including all consequential, direct, indirect, special or incidental loss or punitive damages or loss, legal and other professional fees, cost and expenses, fines, penalties, interest and loss of profit or any other form of economic loss (including loss of reputation))’
When we act for the party giving the indemnity, the scope of losses will be limited as much as possible and only to direct losses.
Following the case of Total Transport Corp v Arcadia Petroleum Ltd in 1997, we would usually add wording that says losses are recoverable under the indemnity whether they were foreseeable or not.
Does the Unfair Contractual Terms Act 1977 (UCTA 1977) apply?
An indemnity clause transfers liability and may, in certain circumstances, be treated as a term excluding or limiting liability and may therefore fall under the remit of the Unfair Contract Terms Act 1977 (UCTA 1977).
Having said that, UCTA 1977 only applies in relation to business-to-business contracts when dealing on one party’s standard terms and conditions.
At Britton and Time Solicitors, we consider and advise on whether UCTA 1977 is likely to apply to the indemnity. If so, we ensure that it is drafted to satisfy the requirement of reasonableness.
An indemnity can add significant assurance if the person giving it has the means to pay by way of an insurance policy. Forcing the indemnity provider to maintain insurance of a certain level can mitigate the risk of them being unable to pay and meet any liability to you or your organisation.
As a matter of course we recommend to all clients that they undertake credit checks and other searches (for example, a search at companies’ house) should be done before the contract is signed and agreed.
Britton and Time can check whether the contract contains an insurance clause and whether the type and amount of insurance is enough to meet any liability which are likely under the indemnity clause and we always request copies of the insurance documentation.
If you are considering a contract, then you probably need an indemnity clause specific to your reequipments. Britton and Time often draft terms and individual clauses for its clients. These can avoid problems and disputes in the future and give both parties certainty. There are other considerations that must be addressed when entering into a written contract. For advice and drafting of written agreements, please contact us on the contact page or call (01273) 726951.