Indemnities come in all shapes and sizes. Generally speaking, an indemnity is a promise to make good another’s loss which has either occurred because liability has arisen under the contract (for example there has been a breach of contract) or there is a third party claim against the indemnified party (such as third party IP infringement). Some are more reasonable and appropriate than others but regardless, they each need to be given proper attention before you agree to give the benefit of one to another party.
Here are some general tips of what you should be looking for as a starting point when being asked to give an indemnity:
- Be specific - as you’re giving the indemnity, you want it to be as precise as possible. The other party will want it to be wide so that it covers more scenarios where they will be able to benefit from having the indemnity. You should try to drill down to what exactly you are indemnifying for and if it’s not clear, ask for clarification.
- Exclude certain types of losses - usually found in the section titled “limitation of liability”, check whether any caps or restrictions on liability apply to the indemnities given under the contract. You want to aim to exclude certain types of loss such as loss of profits, business, goodwill and indirect losses.
- Negotiate a cap - it’s always worth trying to negotiate a cap. Suggesting a reasonable cap will mean that it is more likely to be accepted by the other party, rather than going in too low. It’s not always going to be possible to cap your liability depending on the negotiating position of the parties and what you are indemnifying for but well worth a go.
- Take control - if you’re paying for it, you’re going to want to have control over it. So check that the contract specifies what happens if an event or action occurs that triggers your liability under the indemnity. You will want the other party to promptly notify you, allow you to correspond with the relevant third party on their behalf and, if relevant, be free to settle the claim in your sole discretion. This allows you to take control of what damages may be payable to a third party, keep your legal fees in check and in some cases, your insurance policy will require that you have this contractual right in order for your cover to be valid.
- Check insurance cover - as already mentioned, your insurer might have specific conditions under your policy in respect of indemnities so it’s worth checking those, especially if the risk or value is likely to be significantly high. Be mindful of the aggregate total of all the indemnities you give to other parties and keep track of whether you have adequate insurance cover if, worst case scenario, you’re liable under several contracts at the same time.
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