Indemnities: What Are They?

Indemnities are commonly given by the party responsible for a loss, or in a position to prevent it, to the party who will suffer loss if it occurs. It is up to the parties to define the specified event. The specified event could include a breach of contract, a party’s fault or negligence, or a particular action. Our lead contract lawyer is Neil Williamson who has extensive experience in advising clients on a wide range of contract law matters.

When should I use an indemnity?

There is no general rule about when to give an indemnity. Whether a party gives one will depend on the circumstances of the transaction and the party’s willingness to do so. However common areas where you may want to use such a clause include negligence, infringement of intellectual property rights and environmental issues such as contamination.

Why should I use an indemnity?

It is widely believed that an indemnity gives quicker, easier and fuller recovery than other claims – allowing greater damages recovery than would be the case if one was not included.

If an indemnity dictates payment of a fixed sum, then that arguably creates a debt claim rather than a claim for damages. The case of Royscot Commercial Leasing Limited v Ismail [1993] EWCA Civ J0429-4 supports this principle and states that the rules on causation, mitigation and remoteness do not apply. In other words, the claimant will not need to prove that its losses were foreseeable and could not have been avoided. This position was confirmed in the more recent case of ABN Amro Commercial Finance Plc v Ambrose McGinn & others [2014] EWHC 1674 (Comm) where Flaux J stated that “a party providing an indemnity cannot challenge his obligation to pay under the contract of indemnity which is a claim in debt, by reference to principles relating to the assessment of damages in contract which have no application to debts.”

However this generalisation is not always correct. If, for example, the indemnity is for an unspecified sum, the position is more ambivalent and can often depend on how the clause has been drafted. In the case of Durley House Limited v Firmdale Hotels plc [2014] EWHC 2608, it was concluded that the specific indemnity was in fact a claim for damages. This indemnity was “hold harmless”, where the true obligation of the indemnifier was to prevent the indemnified sustaining any loss in the first place, rather than merely to reimburse the indemnified. The way the clause is drafted is therefore crucial as to how it is subsequently interpreted.

It should also be noted that although the underlying concept of an indemnity is to recompense for any loss or liability which a party has incurred, not every indemnity gives 100% recovery of all loss caused. The parties may have expressly defined the payment in some other way or the clause may be interpreted as giving less than 100% recovery.

Another key difference between a damages claim and a debt claim is the statutory limitation period. With damages for breach of contract, the limitation period runs from the date of the breach that gives rise to the loss. However, if drafted properly, the limitation period for an indemnity will only start if the party giving the indemnity fails to respond to a claim under it, which could be much later.

Conclusion

An indemnity can therefore be an effective tool in any commercial contract. However the way in which it is drafted, and subsequently interpreted, is crucial.

If you have any questions around indemnities or you need support with drafting such a clause please contact Neil Williamson.