Indemnities are essential in many contracts, but they can be tricky to navigate without the right understanding.

Let’s explore what indemnities are, when they apply, and how to manage the risks they can introduce, ensuring you’re better equipped to handle these important contractual elements.

What is an indemnity?

An indemnity is a promise in a contract where one party (the indemnifier) agrees to cover certain losses or damages for another party (the indemnified) under specific conditions. It’s an additional protection beyond standard legal rights.. There are two key types of indemnities:

• “Make good” indemnity: Aims to restore the affected party to their original position before the loss occurred.
• “Hold harmless” indemnity: Aims to prevent the loss from happening in the first place.

When does indemnity apply?

Indemnities are not inherent or mandatory terms in contracts, nor are they required by law or common legal standards. Instead, they are added deliberately to agreements as extra layers of liability. This additional liability only applies if the contract explicitly includes a promise to indemnify. For this reason, indemnities are often referred to as liabilities assumed through a contract.

Why are we concerned about indemnities?

Indemnities can vary greatly depending on their wording and scope. Key concerns include:

• They can make a party responsible for more than what the law would usually require.
• Indemnities may be triggered without any fault from the indemnified party.
• They can be activated even if there’s no breach of contract.
• Claims under indemnities often require a lower standard of proof than common law claims, as the indemnified may not need to show causation or foreseeability.
• Indemnities may not require mitigation of losses.
• Insurance policies might not cover liabilities assumed under an indemnity.
• The right to claim losses under an indemnity is often available much sooner than the right to claim for breach of contract.

How to mitigate risks associated with indemnities?

To reduce the risks tied to indemnities, it’s important to carefully review indemnity clauses. Consider whether an indemnity is necessary or if a different legal remedy, like a breach of contract claim, would suffice. If an indemnity is required, make sure it’s clearly defined by specifying:

• The types of losses it covers.
• The events or actions that will trigger the indemnity.
• The beneficiaries of the indemnity.
• Any restrictions or limitations on its scope.

Understanding indemnities and managing them well can make all the difference in protecting your business. Carefully assessing and crafting indemnity clauses allows parties to safeguard their interests and minimise potential risks. Taking the time to get it right can make all the difference in creating secure, balanced agreements that protect both sides.

Navigating indemnity clauses? Let our team help you draft clear, effective provisions tailored to your needs. With Source, you get an in-house style legal team for all your contract review and drafting needs – all for a fixed monthly retainer. Contact us today to learn more.