Indemnity clauses are a vital part of contract law that clients and contract solicitors alike should be aware of. In this article, our contract law solicitors offer an overview of indemnity clauses and when it may be appropriate to use them to protect your interests, or when to be wary of them. For more information please get in touch with one of our trusted solicitors through our contact us page or call them directly on 01273 726951.
What is an Indemnity Clause?
Indemnity clauses are written into contracts to allow an indemnifier to take on any losses incurred by a party in the contract. They can also be used to absolve either the indemnifier or the other party of liability if a breach of contract occurs or damages/loss of goods are incurred. Most commonly, indemnity clauses are used to compensate service providers in the event their goods are damaged. For example, if you’re buying a second-hand iPhone from friend A and friend B agrees to act as an indemnifier for friend A, they promise to pay friend A the value of the iPhone if you are unable to go through with the purchase.
What is the Difference Between an Indemnity Clause and a Guarantee?
Although similar, the difference between an indemnity clause and guarantee lies in the ‘obligation’. Indemnity creates a primary obligation, whereas guarantees create a secondary obligation. In practice, this means an indemnity clause offers compensation to you if you suffer a loss or future loss, and a guarantee offers you either compensation or fulfilment of a contract as a guarantor will take on responsibility if the other party is unable to perform.
If you’re confused, here’s an example.
John books a package holiday through a travel agent, which includes a hotel stay. As part of his package holiday contract, there’s an indemnity clause stating if John causes any damage to his hotel room, he’s required to compensate the hotel. There’s also a guarantee in the contract signed by the travel agent that says if John is unable to indemnify the hotel for the damage, the travel agent promises to compensate the hotel on John’s behalf.
This means that either way, the hotel is protected against any losses, either through John directly, or by a third party, the travel agent. The guarantee only comes into effect if the primary obligation identified by the indemnity clause (in this case John paying for the damages) cannot be fulfilled. Indemnity and guarantees are not ‘either/or’ scenarios, rather they offer layers of protection.
Who is Indemnified?
Indemnity clauses can only be made between two parties; the indemnifier and the beneficiary of a contract, and 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). The indemnity will always identify the beneficiary (the person or company who is indemnified).
What Can Indemnity Clauses Cover?
Indemnities usually cover liabilities in two ways:
- third party claims against the indemnified party, such as intellectual property infringement, and
- directly between the indemnifier and the beneficiary, 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. It is always advisable that you seek independent legal advice on all contracts from a contract solicitor.
What Losses are Covered Under an Indemnity Clause?
A contract solicitor will first look at the indemnity clause to see what losses are recoverable under the clause, which in turn will depend on how it is defined.
When our contract solicitors 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 Solicitors in Brighton and Hove, we consider whether the indemnity clause 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 our contract solicitors 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 into the indemnity clause that specifies that 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, This means that it may fall under the remit of the Unfair Contract Terms Act 1977 (UCTA 1977).
Having said that, the Unfair Contract Terms Act 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 the Unfair Contract Terms Act 1977 is likely to apply to the indemnity clause. If so, we ensure that it is drafted to satisfy the requirement of reasonableness.
What is Indemnity Insurance?
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.
For example, a retailer buying buying goods from a factory may be required to sign an indemnity clause in their contract stating the retailer must indemnify against any losses suffered by the factory if they decide not to take the goods. If the retailer has a reputation for being unreliable or financially unstable, the factory may ask that they take out indemnity insurance to ensure regardless of whether the retailer can pay, the factory receives payment. Indemnity insurance in effect acts as a guarantee of indemnity.
As a matter of course Britton and Time Solicitors 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 Solicitors can check whether the contract contains an insurance clause and whether the type and amount of insurance is enough to meet any liability which is likely under the indemnity clause and we always request copies of the insurance documentation.
Why Contact Our Contract Solicitors for Indemnity Clause
If you are considering a contract, then you probably need an indemnity clause specific to your requirements. Britton and Time Solicitors in Brighton and Hove often draft terms and individual clauses for its clients. Our contract solicitors can help you to 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.