Indemnities

The key differences between an indemnity and ordinary contract term (if breached) are:

• scope of liability
  • Indemnities are normally drafted much more widely to cover third parties and circumstances beyond the ordinary breach circumstances.
  • In some circumstances they apply even when there is no breach of contract by the party required to pay, pursuant to the contract, at all.
  • The triggering event may well be the act of a third party.
  • A well known instance of this is that of guarantees in which one party indemnifies a second party for the default or breach of a third party.
• scope of damages
  • Liability in damages for an ordinary contractual breach is limited to loss and damage which is foreseeable and arises due to the breach.
  • This is not the case with indemnities.
  • For instance it is in some cases possible to be indemnified for your own negligence or wrongful act.
• limitation periods
  • For an ordinary breach of contract, proceedings must be commenced within the statute of limitation period ¹⁾ of the loss or damage arising.
  • This does not apply for an indemnity which is continuing obligation and may survive the termination of the agreement.
• Indemnities also have the following additional problems:
  • Liability for an indemnity is often not as a matter of contractual interpretation limited by Limitation of Liability clauses;
  • Agreeing to an indemnity may invalidate your insurance policy and or permit a basis on which the insurer make reject a claim;
  • You should obtain your insurer’s consent in relation to any indemnity offered; and
  • An indemnity may invalidate the contractual rule of the need to mitigate any losses.
• Where offered for a claim the process by which the claim is resolved and who controls same should be set out.