Indemnity clauses are one of the key risk allocation mechanisms within contracts. An indemnity clause seeks to reallocate the risk of loss by one party to a contract by moving that risk to the other party.
There are generally considered to be four categories of indemnity clauses and these are:
a. Bare indemnities: where a party indemnifies the other against all liabilities or loss incurred in connection with a given event or circumstances without any express limitations.
b. Reverse indemnities: where a party indemnifies another against loss or damage arising out of a contract regardless of whether the loss was caused by the other party’s own acts or omissions.
c. Proportionate or limited indemnities: where a party indemnifies another against all loss or damage except that caused by the other party either through that party’s negligence, breach of contract, or wilful misconduct.
d. Third party indemnities: where a party indemnifies another for claims made by a third party.
The lack of an indemnity
In the absence of an express indemnity in a contract there are a limited number of circumstances where an indemnity may be implied. The most common example is where a co-guarantor seeks contribution from another co-guarantor where their joint liability has been met in full. Here, there is a common law right for the co-guarantor to obtain reimbursement.
Ordinarily, the lack of an indemnity will mean that common law and relevant statutory provisions apply.
The issues to be considered when drafting or reviewing an indemnity are complex. Readers may wish to consider this paper and should obtain legal advice on the operation of any proposed indemnity.
An indemnity is only as good as the party who provides it. This means that it is crucial that the party seeking an indemnity ensures that the indemnifying party has the capacity to enter into the indemnity and the means to honour it.