Indemnity clauses are frequently included in contracts, whether they are simple contracts or complex commercial contracts. However, simply because indemnity clauses are common, their importance should not be understated. Indemnity clauses can play an important role in managing the risks associated with commercial transactions, but can have serious consequences for parties entering into them.
In general terms, an indemnity is a promise made by one party (“the indemnifier”) to cover loss or damage suffered by another party (“the principal”) which may be suffered as a result of a specified event.
An indemnity clause can often go above and beyond what would be available under a claim for breach of contract. It is common to see indemnity clauses that are so wide that they make the indemnifier liable for the costs and expenses of the principal even if there has been no breach of contract, and/or make the indemnifier liable for damage suffered by the conduct of a third party (strangers to the contract).
Under a claim for breach of contract, the party making the claim is under a duty to mitigate loss. Indemnity clauses can modify this positon with the result that it may increase the losses to be paid for by the indemnifier.
The principal is the party who receives the benefits on an indemnity. Any person considering providing an indemnity should carefully consider whether it is required for the transaction to proceed, and the potential consequences. Consideration should be given to any applicable insurance policies to ensure that providing an indemnity does not put any insurance cover at risk. It is prudent to obtain legal advice prior to providing an indemnity.