Getting indemnities right

What is an indemnity?

Indemnities are legally enforceable promises by the supplier to make good losses of the customer if specific events occur. For example, the supplier of goods could indemnify the customer against any third-party claims over faulty goods.

When should you give an indemnity?

Your company will be very keen to receive the benefit of an indemnity but will be very reluctant to give one. Tip 1. If you’re the buyer then you’ll be keen to receive the benefit of an indemnity. When reviewing contracts as a buyer, check what indemnity clauses have been included and consider whether these are sufficient or whether further negotiations are required. Tip 2. If you’re the seller, try to avoid giving an indemnity as this may expose the company to future claims. Tip 3. The factors to consider when negotiating indemnities are the level of risk involved in the transaction and your company’s bargaining power.

Drafting indemnities

If you’re giving an indemnity, make sure the wording is very clear. If the language is vague or ambiguous, your company could be left open to the risk of unexpected claims. Similarly, if you’re relying on an indemnity then you need to ensure it won’t be deemed by the courts as too imprecise to cover the loss it was intended to cover. Key points to consider when reviewing an indemnity clause are:

Who’s being indemnified? To be effective, the indemnity clause should list all the specific parties that will be indemnified. As well as the buyer, this is likely to include companies affiliated with the buyer as well as their officers, directors, consultants, agents and employees. If these associated parties are not listed, then the courts usually presume that only the party signing the contract can benefit from the indemnity. Tip. If you’re the seller, you should aim to limit who is being indemnified to just the buyer.

What’s the obligation? Clauses often state to “indemnify, defend and hold harmless”. However, if you’re the giver of the indemnity, you should seek to limit the obligation to simply “indemnify”. This is because if the clause includes the obligation to defend you will also be liable for the costs of defending allegations and not just successful claims. “Hold harmless” entitles the indemnified party to indemnification even when it’s the indemnified party itself that caused the loss - not something you would want to include if you’re giving the indemnity.

What’s being indemnified? To be effective, the indemnity should expressly list all possible losses that are intended to be indemnified. For example, if you want the clause to exclude liability for negligence by the indemnified party, general words such as “any loss” or a reference to loss “howsoever caused” may not be sufficient. Under English law, an express reference to “negligence” should appear in the wording. Tip. If you’re giving the indemnity, consider limiting the period in which a claim could be brought to reduce your exposure to future claims. You should also ensure it requires the indemnified party to take reasonable steps to minimise losses to reduce your potential liability.