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As the individual signing contracts on behalf of your business, it is highly likely you are aware of ‘indemnity clauses’. At its core, they are a promise from one party to the other that they will compensate them for certain losses or damage. They are a contentious contract issue and can carry very broad and onerous responsibilities. This article will explain what you need to know about indemnities, how they apply and whether you should include one in your contracts.
What is an Indemnity?
As mentioned, an indemnity is a contractual promise made by one party to the other that they will compensate the other party for loss or damage suffered by the other party during the performance of the contract.
Indemnities may also be referred to as or include the wording “hold harmless”. This echoes the promises that one party agrees to hold the other party harmless, as though no damage was done to them.
Types of Indemnities
Suppose you purchase goods under a contract and want the supplier to indemnify you, the customer. Below we have outlined the different forms this indemnity could take:
|Bare Indemnity||The supplier indemnifies the customer for losses caused by an active action or set of circumstances under the contract. The indemnity does not specify other events, such as losses caused by the customer.|
E.g. “the supplier agrees to indemnify the customer for any loss or damage suffered in connection with the goods supplied.”
|Reverse Indemnity||The supplier indemnifies the customer for any of the customer’s acts or omissions during the contract.|
E.g. “the supplier agrees to indemnify the customer for any loss or damage suffered in connection with the acts or omissions of the customer.”
|Proportionate Indemnity||The supplier indemnifies the customer only for losses that flow from the supplier’s acts or omissions during the contract.|
E.g. “the supplier agrees to indemnify the customer for loss or damage suffered in connection with the goods and services supplied to the extent caused by the supplier’s acts or omissions.”
|Third-party Indemnity||The supplier agrees to be responsible for any losses because of a claim against the customer by a third-party related to the contract.|
E.g. “the supplier agrees to indemnify the customer for any loss or damage suffered by, or claims arising against, a third-party in respect of the goods and services supplied.”
|Party/Party Indemnity||The supplier indemnifies the customer where the supplier breaches the contract. It also requires the customer to indemnify the supplier where the customer breaches the contract.|
E.g. “each party agrees to indemnify the other party for any breach of the obligations outlined in this Agreement”
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Implications of an Indemnity?
Indemnities can cover events or circumstances where one party seeks compensation for loss associated with that event. Some common events in an indemnity clause include:
- negligence on a contracting party;
- a third party claiming a breach of their intellectual property;
- property damage;
- injury or death to a person related to the contract; and
- legal costs or other disbursements, such as those involved in employing a debt collector.
The compensation could be significant depending on the nature of the contract or the claim.
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Should I Use an Indemnity Clause?
The nature of indemnities means that they often cannot be quantified when parties sign the contract. As a customer, you will want the assurance that you will not be subject to large fees due to a breach of contract or the bad behaviour of your supplier.
Parties often reject indemnities due to this inability to quantify their impact. They may also be unwilling to accept responsibility for events they believe they have no control over or their insurance may not cover. If you would like to include an indemnity clause, you should justify the inclusion and determine how much you are willing to limit it if the supplier tries to make amendments.
Indemnities are often a contentious issue in contract negotiations. There are multiple types of indemnity clauses including bare indemnity, reverse indemnity, proportionate indemnity, third-party indemnity and party/party indemnity. If you decide to include an indemnity clause, you must ensure that it follows strict wording.
If you need help with 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
Many insurance policies will not cover suppliers for liabilities assumed under an indemnity. Insurers often offer specific insurance for indemnities, but the level of insurance will vary between providers. Speak to an insurance broker to clarify what coverage you may need.
A standard indemnity will say that a supplier indemnifies the customer against all kinds of loss. Suppliers will want to limit this clause so that they are not unfairly held responsible for losses that are out of their control. Generally, you will introduce these limits in the negotiation stage. They will likely include exclusions for remote losses, losses that occur beyond a certain time period or losses contributed to by the customer.
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