Commercial contracts and agreements contain a range of clauses designed to govern the relationship and protect the parties’ interests. Whether you are entering into a confidentiality agreement; an agreement to supply services; or an agreement to sell shares in your company, there are a range of clauses which are commonly found in all of them. One such clause is the ‘indemnity’ clause.
An indemnity clause is a statement that one party will ‘indemnify’ the other for all the losses and expenses that arise from a certain event, usually a breach of the agreement. This can include consequential losses and the costs incurred to rectify any harm done, for example legal fees and other professional costs. Whilst this may seem a reasonable request, an indemnity works on a pound for pound basis with no obligation to mitigate these losses. As a result, there is no obligation for the benefitting party to attempt to reduce their losses, for example by engaging another service provider or appointing the solicitor who offers the lowest fees. The party providing the indemnity is placing themselves, and their business, at significant risk if the triggering event occurs. This is particularly concerning if you are not contracting as a limited company or limited liability partnership.
If you contract as a limited company or a limited liability partnership, then your liability is ring-fenced. This means that it is only the company’s or the partnership’s assets that are at risk. If, however, you are contracting in your own name, which could include providing a personal guarantee that your company will perform its obligations, then your personal assets are at risk. Therefore, it is of vital importance to ensure that you understand the risks associated with the indemnity you are providing.
One way to reduce the risk associated with the indemnity is to negotiate the inclusion of a clause to limit your liability and to cap the amount of money that you can be required to pay out. It is usual for such a cap to be the sum payable under a relevant insurance policy or the amount that you are due to receive under the contract. Whatever you agree this limit to be, this can significantly reduce the impact that a claim under an indemnity clause could have on you or your business.
It is most important that you ensure that you understand when the indemnity clause can be triggered and the exposure to both your business and you personally under the indemnity.