An indemnity clause imposes an obligation on a party to compensate the other party if that other party experiences harm or loss. Indemnity clauses allocate risk between the parties. Accordingly, each party must understand that risk allocation. This article explores four frequently asked questions about the scope of indemnity clauses and how they could affect your business.
1. What is an Indemnity Clause?
Commercial contracts may include an indemnity clause among other standard terms (also known as boilerplate clauses). Words such as “hold harmless”, “defend”, “make good” or “compensate” often indicate the clause is, in effect, an indemnity clause. The list is by no means exhaustive.
Indemnity clauses will specify what types of loss or harm they cover, for example:
- all lawsuits, actions or proceedings, demands, damages and liabilities;
- all claims, liabilities, losses, expenses and damages arising from the contract;
- loss or damage or injury to property; and
- personal injury or death.
2. What is the Extent of an Indemnity Clause?
Indemnity clauses are sometimes reasonable for the contract’s terms or even considered essential to an agreement. However, other types of indemnity clauses are unnecessary and could expose a party to liabilities they have no control over. Some examples are where an indemnity clause continues long after a contract ends and requires you to indemnify a wide range of parties or indemnities for breaches of every clause of the contract. This is when a problem can arise. Ensure you negotiate the indemnity clause to narrow its scope and duration.
Continue reading this article below the form3. How Does an Indemnity Clause Affect Your Business?
If you are entering into an agreement and must provide indemnity, you should consider negotiating its removal entirely. However, if the other party insists on the clause, you should ensure it is narrow and direct so you are less exposed to risk. For example, you may be able to word it to exclude you from being liable if a loss is the other party’s fault. You may also look to include:
- proportionate reduction wording;
- mitigation obligations; or
- a maximum amount they can claim under the clause.
It is also important to consider the regulatory implications of an indemnity. For example, including an unreasonable indemnity may be a form of “unfair contract term” under certain types of contract. This could make the indemnity void and attract financial penalties for the party benefiting from the indemnity.
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4. What if There is No Indemnity Clause?
Although it is ideal to have the other party provide you with an indemnity, it is okay if your contract does not have one. An indemnity is not the only avenue to recover any loss incurred. Without an indemnity clause, you can still exercise your common law rights and bring a claim for damages resulting from the other party’s breach of the contract.
This may be more complex as you need to make out the requirements for common law damages, including:
- causation;
- remoteness; and
- the obligation to mitigate.
You also may be entitled to less compensation under common law damages than you would have if there were an indemnity.
Key Takeaways
Before negotiating your contract, identify what is important to you and the relevant risks. Only ask for necessary indemnities. Additionally, do not grant any that could be too onerous or expose you to more risk than you are prepared to accept.
If you need help negotiating an indemnity clause, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
An indemnity clause imposes an obligation on a party to compensate the other party if that other party experiences harm or loss.
Without an indemnity clause, you can still exercise your common law rights and bring a claim for damages resulting from the other party’s breach of the contract.
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