22 Oct Plain English – “Indemnity or not to be”
An indemnity clause is an agreement by one party (the “indemnifier”) to keep another party (the “beneficiary”) harmless against specified loss or damage which the beneficiary may suffer. Properly drafted, indemnities can be a very effective way of managing risk.
The most important effect of a properly drafted indemnity is to change the position at law which would, without an indemnity, restrict the right of a party to recover losses. These restrictions include limitation periods, causation, requirements to mitigate loss and the tests of foreseeability and remoteness.
Despite the importance of indemnities, they are often used without properly considering their scope and the legal principles that will be applied in determining whether they are in fact enforceable. If not properly drafted, there is a real risk that an indemnity will not give you the protection that you think it will (or, for the indemnifier, can open you to liabilities that you didn’t expect).
When reviewing an indemnity, there are a number of issues to consider. These are by no means exhaustive but regularly arise between counterparties:
- Ambiguity – Where indemnity clauses are ambiguous, the courts will construe them in favour of the indemnifier. And, to compound matters for any beneficiary, the courts will tend to construe the provisions strictly meaning that if, for example, losses that were intended to be covered by the indemnity are not expressly set out in the provision, they may not be recoverable. The bottom line: be very clear about what you want protection against. In this respect, it may be helpful to prepare a risk matrix.
- Who does it apply to – Following on from the previous point, if the indemnity relates to the conduct of the indemnifier but does not expressly relate to its contractors or representatives, the indemnity may not provide protection in relation to actions done on the indemnifier’s behalf by those contractors or representatives.
- “arising out of” / ”in connection with” – These are terms often used in indemnities. They will be construed broadly but care must be applied. In both instances, there must be a casual or consequential relationship or a sufficient nexus.
- Caps – Are caps on liability appropriate to the indemnity? Or, perhaps a time limit on when claims can be made?
- Insurance – The relationship of an indemnity and insurance in respect of that indemnity is important. For one, it could be important in interpreting the scope of the indemnity. The requirement for the indemnifier to take out insurance in respect of a particular type of loss may be considered as supporting an interpretation that the indemnity intended to cover that loss. Additionally, the beneficiary should ensure that the indemnifier has taken out insurance in respect of the protected losses. This may involve getting assurances from the indemnifier and the insurer that the relevant policies will cover the liabilities.
- Survival – Does the indemnity survive termination of the contract?
- Causation – Importantly for the indemnifier, does the indemnity extend to loss which is not within the control of the indemnifier? Some indemnities cover all loss irrespective of whether it is the fault of the indemnifier or not. Should the indemnifier be liable for losses caused through a force majeure event?
- Contribution – Is there a contributory component for losses contributed to by the beneficiary?
There are a number of other issues to consider when drafting or accepting an indemnity, each of which will depend on the factual matrix surrounding the provisions. In all situations, however, indemnities require considerable care whether taking on liabilities or looking for protection.
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