In negotiating agreements, it is often the case that arguments will occur about indemnities being required from one party. It is often confusing for clients to understand why lawyers get so exercised by indemnities.

Without going too deeply into the law (some of which is contradictory), the general view is that there are benefits to an indemnity as opposed to relying on an award of damages based on breach of contract or negligence.

  • With an indemnity claim, there is no need to show fault or negligence, it will be sufficient to demonstrate that the “trigger event” for the indemnity has occurred
  • An indemnity may give an ability to recover all loss which flows from such trigger event, no matter how remote or indirect it is (a key limitation imposed by the law on general damages)
  • There is no requirement for the indemnified party to show that it has minimised its loss.

So any potential damages under an indemnity could be higher and the claim easier to establish. Possibly. Difficulties can arise where the indemnity is weak. An indemnity will be weakened if:

  • the loss claimable is not fully set out in the indemnity
  • the indemnity has express carve outs applicable to it
  • the exclusions in any limitation of liability clause apply to cover loss claimed on an indemnity basis (this could include a general prohibition of indirect or consequential loss)
  • the indemnity doesn’t cover all costs it is supposed to. For instance, where a litigation indemnity is concerned with damages payable to a third party, the drafting may have omitted to deal with the internal management costs associated with resolving matters
  • the indemnity inadvertently excludes other rights. If the indemnity only covers part of the potential loss, a right to sue for damages for ancillary costs arising from the same trigger event may be desirable
  • the indemnity is capped accidentally by the limits of liability set out in the contract. Just because a loss is expressed as recoverable on an indemnification basis, does not automatically prevent general liability caps applying
  • there is a provision elsewhere in the agreement obliging the indemnified party to mitigate losses generally.

Indemnities can be valuable tools but there are traps for the unwary. They may not always do what the drafter thinks they will!