An indemnity is a provision in a contract under which one party promises to reimburse the other party for loss or damage suffered as a result of a specific event or circumstance.
Indemnities commonly address liability arising from breach by one party of particular provisions of the contract, for example tax, employment, intellectual property, data protection and confidentiality provisions. In addition, indemnities may cover potential liability arising out of third party claims against the party benefiting from the indemnity. A common example of this is where the indemnifying party may promise to reimburse the indemnified party for any losses arising out of a claim that the indemnified party has infringed a third party’s intellectual property rights.
We set out below some points to be aware of in relation to indemnities in commercial contracts:
- Only those persons expressly listed as beneficiaries will benefit from the indemnity, and therefore the indemnity should be drafted to cover all persons being indemnified, for example, group companies, directors and employees.
- The extent of the losses which can be recovered under an indemnity will depend on how they are defined in the clause. A broad definition may cover indirect and consequential losses whereas a narrow definition may only cover direct loss. If the indemnity relates to third party claims, the indemnity provision will usually specify how the claim should be managed and which party takes control of the claim. For example, the indemnified party may be restricted from admitting liability or settling the claim without the consent of the indemnifying party (as the indemnifying party will have to bear the cost).
- Contrary to popular perception, most indemnities are subject to the common law rules on remoteness of damage and a duty to mitigate, however these rules may not apply to some indemnity claims, and therefore an express obligation to mitigate loss is often included.
- Any indemnities in a contract should tie together with any limitations of liability contained in the contract, for example there may be a cap as to the maximum amount that may be recovered under the indemnity. Note that unlimited indemnities may give rise to significant liability. This will be discussed in more detail in our future blog post on “Limitations of Liability”.
For more information please contact Stephanie Craig or any member of the commercial contracts team at Stevens & Bolton LLP.