What is contractual indemnity

It is common for many types of contracts to include an indemnity clause. In simple terms, a contractual indemnity is a promise to make good the loss and damage suffered by another. They have also been described by a former High Court justice as a provision ‘that purports to exempt one party from civil liability which the law would otherwise impose on it.[i]’ His Honour went on to say, ‘They are provisions that shift to another party the civil liability otherwise attached by law to the first party. Self-evidently this is a serious thing to do or to attempt to do.’[ii]

What constitutes an indemnity clause?

A clause in a contract (or a deed) may be an indemnity clause even though the words “indemnity” or “indemnify” and other grammatical forms of these words are not used.  The key is that if the clause has the effect of shifting to another party the civil liability otherwise attached by law to the first party, then it will be regarded as an indemnity clause.

In addition to shifting risk, there are a number of reasons why contracting parties use indemnity clauses and they include:

• The legal process that is required to enforce the indemnity right is more straightforward. When a person with the benefit of a contractual indemnity right (called the indemnitee) sues the person giving the indemnity (called the indemnitor), it is a claim for a money sum that is certain and not for damages. Damages is the name given to the default remedy that is award by a court for breach of contract and certain other civil wrongs, and until the court determines what that sum is, it is uncertain. Claims for the recovery of a money sum are generally easier to litigate than a damages claim.
• The terms of the indemnity right will determine when the obligation to pay/indemnify arises. This may be before the party having the benefit of the indemnity right has made a payment to a third party.
• There is no requirement for the indemnitee to mitigate its loss, and the principles relevant to the assessment of damages, namely causation and remoteness (which is another way of saying that the indemnity may require the indemnitor to make good indirect and consequential loss that it would not be liable for, if the court were to award common law damages), are irrelevant. However, courts interpret indemnity clauses very strictly and therefore when a court construes the clause(s) it must determine the extent or scope of the clause and therefore principles of remoteness play a de facto role in determining the extent of the indemnitor’s liability.

A contractual indemnity can be an important discussion topic during contractual negotiations because of the significant consequences that arise.

Tips

1. As Justice Kirby stated in Andar Transport Pty Ltd v Brambles Ltd, agreeing to the inclusion of an indemnity clause in a contract is a serious thing to do, and you should not readily agree to their inclusion without first assessing the commercial/economic risks of doing so.
2. Resist under all circumstances indemnity clauses that hold you liable for the negligent, reckless or wilful acts and omissions of the other contracting party and its employees, agents and other sub-contractors.
3. If you are prepared to provide and indemnity, you should consider whether you will have insurance for that liability. It is always important to check with your insurer before you settle the terms of a contract that contain indemnity clauses.