Indemnity Clauses: What You Need to Know Before Signing a Contract
Contracts can be intimidating, especially when they contain legal terms that are difficult to understand. One challenging provision is the indemnity clause.
This type of clause is common in contracts, and is one of the most clauses that places the highest risk on the indemnifying party. Unfortunately, clauses about indemnities often confuse Non-Lawyers and leave them unsure of what they're agreeing to.
What are indemnity clauses?
An indemnity clause is a contractual provision in which one party agrees to compensate the other party for financial losses resulting from certain events or actions. These clauses can be found in a wide range of contracts, including construction contracts, service agreements, and employment contracts.
Learn more in this post: What are indemnities?
Why are indemnity clauses important?
Indemnity clauses are important because they protect one party from the financial consequences of another party's actions. For example, if a Contractor is hired to build a retaining wall and the wall collapses due to their negligence, the contractual indemnity would require the Contractor to pay for any damages or injuries resulting from the collapse.
The importance of carefully reviewing an indemnity provision
Indemnity clauses can have real dollar consequences on the parties - whether they understood the clause when signing the Contract or not. Therefore, it is important to thoroughly review the indemnity provision and any related exclusion or limitation of liability clauses to understand your rights and obligations under the Contract.
What are the main components of an indemnity clause?
The main components of indemnity provisions are as follows:
1. Who is being indemnified?
The clause should clearly state who is being indemnified (Party A, often called "the Indemnified") and who is providing the indemnity (Party B, "the Indemnifier").
2. In which circumstances will Party A be indemnified?
The clause should clearly state the circumstances under which Party A will be indemnified by Party B.
3. What will Party A be indemnified for?
The clause should clearly state what Party A will be indemnified for, such as costs, loss, expenses, damages, or liabilities in relation to personal injury or death, loss or damage to property, and negligence and wilful default.
4. What exclusions are there?
The indemnity clause should clearly state any exclusions, such as circumstances beyond the control of Party B, the party providing the indemnity (e.g. Force Majeure) or if Party A, the party being indemnified, contributes to the loss or damages in question.
5. Will there be any reduction of the indemnity?
The clause should state if there will be any reduction of the indemnity, such as if Party A caused part of the loss.
This is often referred to as a proportionate reduction of liability.
Ways a party is commonly indemnified
The most common events or actions that indemnities cover include personal injury, property damage, breach of contract, third-party claims, and acts of negligence.
Common exclusions or reductions in an indemnity clause
Common exclusions or reductions in indemnity provisions include:
- circumstances beyond the control of the party providing the indemnity (e.g. Force Majeure); and
- if the party being indemnified contributes to the loss or damages in question.
"Hidden" indemnities
Indemnity clauses can be "hidden" in different places within a Contract. They may not be in the Indemnity Provision (and may be hidden from sight - I'm not suggesting that the other party deliberately tried to hide them, only that Non-Lawyers may not easily notice those additional indemnities).
Common "hidden" indemnities include those relating to Intellectual Property Rights and Environmental Issues.
It is important to do a thorough review of the Contract to make sure you haven't missed any other indemnities. You can use "CTRL + F + indemni*" to find hidden indemnities.
Search for any Limitation of liability clauses
A key question to ask is whether there is a limitation of liability clause in another part of the Contract that limits the indemnity.
The Contract may contain a limitation of liability clause that limits the amount of damages or costs that can be recovered under the indemnity provision. It is important to review this clause to determine if it will affect the amounts payable under the indemnity. Keep in mind that this clause may not be beside or near the indemnity clause, so you may need to do a word search or read through the Contract to find it.
Key Takeaway
Indemnity clauses play an important role in protecting the parties to a Contract from financial consequences for certain events.
However, they can be confusing and can have a significant impact on parties, whether they understood the clause when signing the Contract or not.
Because of this, before signing a Contract, it is essential that you thoroughly review the indemnity provision, any other indemnities in the Contract, and any related exclusion or limitation of liability clauses to understand your rights and obligations under the Contract. If you're unsure or have questions, get advice from your Lawyer.
I hope this post and my Carousel helped to demystify indemnity clauses and makes it easier for you to navigate and enter into Contracts with confidence.
