8
Hire&Rental
INDUSTRY NEWS
NOVEMBER 2021
Indemnity clauses: what you should consider when negotiating indemnities Bartier Perry’s Michael Cossetto, Partner; Eric Kwan, Senior Associate and Natalie Zomaya, Lawyer explain the why’s and how’s of indemnities.
When negotiating equipment rental and other agreements, you have likely come across the term ‘indemnity’ – what does this really mean and how wise is it to give an indemnity? It is important to understand the implications of both requesting and providing an indemnity as there can be significant ramifications. While this overview can assist in understanding when it is (and is not) appropriate to include indemnity clauses in agreements, reliable legal advice is essential.
UNDERSTANDING INDEMNITY
Essentially, an indemnity in a contract is a promise or guarantee to compensate the other party to the contract for loss or damage suffered. However, an indemnity is not required to recover loss suffered under a contract. If a party has suffered loss under a contract and there is no indemnity to rely on, that party can rely on their rights under common law to make a claim for damages against the breaching party to recover the loss suffered. Recovering loss by way of a claim for damages under common law may be considered more beneficial to parties, especially given that there are inherent checks and balances to protect both sides.
WHY ARE INDEMNITIES USED?
While an indemnity is not required to recover loss, indemnities are commonly used because they are seen as an easier way to recover loss. This is because a party does not need to prove or demonstrate everything they would normally need to prove if they were to make a claim for damages under common law. Rather, they are only required to demonstrate the event giving rise to the indemnity occurred and that they have suffered loss or damage and they can provide parties with increased certainty regarding liability under a contract.
WHAT ARE THE CONSEQUENCES OF GIVING AN INDEMNITY?
While indemnities may be good for the party receiving it, they can have some unintended consequences for
the party giving it. One example is the contracting out of defenses. One of the main consequences for the party giving the indemnity is that they are effectively contracting out of some of the defenses they may have under common law. This is because the party receiving the indemnity may not need to show any causal link between the event and the damage suffered. All they must do is show the event that they are being indemnified for has occurred and that they have suffered loss. They may not need to show that they have taken any steps to try and minimise or mitigate their loss. This means that the party giving the indemnity may find themselves liable for loss beyond what the common law would deem them liable for. It is also common to find ‘exclusion provisions’ in insurance policies which limit or completely exclude coverage for assumed contractual liabilities (such as an indemnity). This means the party giving the indemnity may not be able to recover from their insurance policy all the amounts they have paid out, or are required to pay out, under the indemnity.
WHEN ARE INDEMNITIES APPROPRIATE?
An indemnity may be appropriate where there is no other practical way to manage or apportion risk fairly. Typical examples of this include situations where the potential impact to a party is huge but they have no direct control or ability to manage, for example, if the equipment is used by someone other than a customer. Another example is a party being promised something fundamental but there is no practical way for that party to verify that promise — for example, the other party has not infringed on someone else’s intellectual property. When considering whether to ask for an indemnity, it’s advisable to first conduct an internal risk assessment. This would include identifying potential risks and work out where you might suffer loss or damage, assessing the likelihood of those risks occurring; and evaluating what steps can be taken to manage those risks if no indemnity is given.
