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“Indemnity” is not a word that comes up in normal conversation.
But, if you’ve ever read a commercial contract, you’ve probably seen an indemnity clause.
The indemnity clause is often one of the most important clauses in a contractual negotiation!
So let’s explore what it means and why lawyers care about it so much.
What Is An Indemnity Clause And How Does It Work?
An indemnity clause is all about allocating risk.
If there is any damage arising from a contract, the parties would generally want to know:
- What is the compensation for the damage?
- Who has to compensate who?
In effect, an indemnity clause transfers the risk from one party to another. It’s like saying, “If this event happens, I’ll cover you for it”.
Indemnity clauses are often the source of heavy negotiation between contracting parties because the consequences that flow from a business risks could be dramatic.
What Is A Good Indemnity Clause?
A good indemnity clause for your business is an indemnity clause that protects your business as much as possible within the limitations of the law.
Commercial contracts are complex by nature, so it’s important to make sure your indemnity clause is drafted properly in light of the rest of the contract. This is the best way to save you from headaches and complications later on.
Even if your indemnity clause seems right, the court may interpret it as ambiguous or different to your intentions. An ambiguous indemnity clause is a big red flag to the courts, and could lead to an adverse finding against your business.
It’s also important to keep an eye out for any caps that the other party may have placed on their liability. If the other party has capped their liability at a certain amount, the indemnity may not be sufficient to cover the whole loss and you may be out of pocket for any amounts above the cap.
It’s important to dig deep into the details because you don’t want to end up paying for someone else’s mistakes.
Another thing to look out for is the scope of the indemnity clause – you want to avoid taking responsibility for risks that are beyond your business’ control.
Having an experienced lawyer to draft your commercial contracts is the easiest way to ensure you’re getting a good deal for your business. If you’re worried about an indemnity clause and need help drafting or reviewing a contract you can talk to our contract experts at Sprintlaw!
When Is An Indemnity Clause Used?
An indemnity clause is commonly used in contracts for:
- Supply of goods
- Terms and conditions of services
- Leases
- Sale of property
This is not an exhaustive list – indemnity clauses are used in most commercial contracts!
What Can An Indemnity Clause Cover?
Since an indemnity clause is all about one contracting party paying compensation for the loss or harm of a third party, there are a range of areas to cover.
Some common areas are:
- Negligence of a contracting party
- Injury or death of a person related to the contract
- Damage to property
- Intellectual property rights
- Legal costs and disbursements
Indemnity Clause Example
| Here is a simple example of how an indemnity clause can work. Terry pays a graphic designer, Ben, to design a logo for his plumbing business. The contract says that Ben indemnifies Terry for any lawsuits against him in relation to use of the logo. Terry gets the logo and puts it on his website and all his marketing materials. 2 months later, Terry is approached by Elise, another graphic designer. Elise says that Terry’s logo is a copy of her design. Terry trusted Ben to make an original logo, but Ben had stolen someone else’s work! Elise sues Terry for infringing her copyright, and the court finds that Terry has to pay Elise damages. Fortunately, Terry is able to reclaim his compensation from Ben because Ben had indemnified Terry for any lawsuits related to use of the logo. |
What to Take Away…
The scope and extent of an indemnity clause will always depend on the nature of your commercial contract and the risks involved.
Indemnity clauses shouldn’t be drafted or agreed to lightly. You should always seek legal advice before signing a contract to make sure you fully understand the effect of the terms.
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