A loan agreement will generally contain an indemnity clause. An indemnity is an obligation by one person (the indemnitor) to provide compensation for a particular loss suffered by another person (the indemnitee). Indemnities must be clearly and precisely worded in the contract in order to be enforceable.
Mutuality
A lot of contracts contain mutual indemnities (so each party is obliged to compensate the other party for loss suffered by that other party). However, with loan agreements, it is usual for only the borrower to agree to indemnify the lender. The lender will not agree to indemnify the borrower. This is due to the strength of the lender’s bargaining position compared to the borrower’s.
Nature
The indemnity clause will state when the borrower must indemnify the lender (e.g. on demand by the lender or within [X] Business Days of demand by the lender).
It must also set out clearly what the borrower must indemnify the lender against. For example:
Any loss, liability, cost or expense caused or contributed to by:
- any failure by the borrower to comply with any obligation under the loan agreement;
- any Event of Default or potential Event of Default; or
- the exercise or attempted exercise of any right by the lender under the loan agreement.
General
The indemnities contained in any contract, including a loan agreement, will generally be stated to be continuing obligations which survive termination of the contract. This is so that if a party (the indemnitee, here the lender) only discovers the loss after the contract has been terminated, it can still claim under the indemnity. It is therefore important that the lender ensures wording of this nature is included in the loan agreement.
Conclusion
There are many important clauses in a loan agreement. We have already explored most of them with you and will be exploring the final ones with you in the last part of this series.
To find out more about loan agreements, or for any other finance law related matters, please contact us on 1300 544 755. One of our finance law specialists would be delighted to assist!