When you enter into a commercial contract, you can expect it to include indemnity clauses. These are conditions that allow one party to be compensated by the other for losses sustained in a specified situation.
It is essential to have a clear understanding of the extent of any indemnity you are agreeing to, whether you are the party who will have to pay if the clause is triggered or the one who will be looking for compensation.
Indemnity clauses must be drafted precisely, without ambiguity, to avoid disagreements in the future. You need to work with a commercial contracts expert to ensure that you have the protection you need and that you do not expose yourself unfairly to risk.
The clauses should be tailored to the needs and expectations of your business, taking into account a range of potential risks.
What is Indemnity in Commercial Contracts?
Indemnity in a commercial contract is a way for one party to reduce its exposure to risk arising from the other party’s actions. For example, if one party is buying goods from another, they can ask the seller to indemnify them against claims from a customer, should the customer be harmed because the item is faulty.
Or if one party has agreed to supply something within a specified timeframe, the recipient may seek an indemnity for late delivery to cover any losses arising because of their inability to fulfil a contract with a third party.
How Do Indemnity Clauses Work?
A claim can be made under an indemnity clause if the indemnifying party fails to meet their obligations. The other party does not necessarily have to demonstrate a loss; it can be enough that the incident occurred.
The level of compensation paid will be specified in the indemnity clauses. It could extend to related legal expenses and indirect losses, in which case, evidence will be needed showing the amounts in question.
What is the Difference Between an Indemnity Clause and a Guarantee?
A guarantee is an agreement to do something, ensure something is done or provide compensation if it is not done. By way of example, someone can provide a guarantee to the bank to repay a company’s loan if the company fails to pay the loan itself.
An indemnity is an agreement to provide compensation in a particular situation without the need to prove any breach of the contractual obligation or that a loss has arisen.
The difference is not always obvious, and for this reason, it is essential to make sure contracts are drafted carefully, stating whether a clause is an indemnity or a guarantee.
Limiting Liability
A contract can also include clauses limiting liability. If you are the indemnifying party, it is important to negotiate a reasonable limit and avoid exposure to excessive damages. You could consider imposing limits in the following ways:
- Agreeing to payment for direct losses only
- Imposing time limits, after which time a claim cannot be brought
- Not permitting unforeseen losses or excessive losses, such as loss of future income or loss of reputation
- Requiring the indemnified party to mitigate their losses as far as reasonably possible
- Excluding certain types of losses
- Imposing a cap on claims
- Insuring against claims
- Setting out how claims are to be made so that claims that do not adhere to this process will not be valid
In any event, the Unfair Contract Terms Act 1977 requires contract terms to be reasonable if they are to be valid and enforceable.
You should give yourself sufficient time to pay and to investigate the circumstances of the incident that triggered any claim. If the payment is likely to be substantial, you need to ensure that you have space to obtain funds, including making any related claim, where necessary.
How to Claim Under an Indemnity Clause
The indemnity clauses will specify what is needed to make a claim. For example, evidence of the triggering incident and related losses may be required. If you are the party to be indemnified, you may want to negotiate the clauses to allow for payment without the need to provide details of the losses.
The indemnified party is always expected to take all reasonable steps to avoid a loss occurring, including taking mitigating action to prevent losses from increasing.
Disputing an Indemnity Claim
If you are dealing with an indemnity dispute, you should speak to expert commercial contract solicitors. It is not always straightforward to ascertain whether a claim is valid and what exactly the terms and conditions of the contract mean. A wide range of case law exists dealing with various points and ambiguities, and a solicitor will be able to discuss the best course of action with you.
Involving a legal expert at an early stage can give you the best chance of resolving matters promptly and without the need for litigation. If a solution cannot be found by way of negotiation, other alternative forms of dispute resolution can be tried, such as mediation or early neutral evaluation.
Generally speaking, having comprehensive indemnity clauses in place is a faster and more effective way of resolving issues than bringing action for breach of contract. It can also give the indemnified party a level of security when dealing with third parties, knowing that they have the backup of an indemnity should problems arise, for example, with the quality of goods sold to the public.
For more information, see our article on the differences between warranties and indemnities.
Contact Our Company and Commercial Solicitors
If you are negotiating a commercial contract or need sound indemnity clauses drafted, contact us today, and we will be happy to represent you. We can also advise on contract terms, including indemnities, and negotiate robustly on your behalf where necessary. If a dispute has arisen involving indemnities, we can represent you in seeking a swift resolution.
For more information on our services, see our corporate law page.
To speak to one of our experienced commercial solicitors, ring us on 0330 173 3980, email us at info@witansolicitors.co.uk or fill in our contact form, and we will talk through your situation with you and discuss how we can assist.
