Indemnities – Confused…?

Tuesday 9th January 2018

Do you know what an “indemnity” really is… honestly? You can be forgiven if you don’t. Many lawyers are unsure too! And worse still, even the judges sometimes don’t appear to be entirely sure. The terms “an indemnity” or “to indemnify” are thrown about in all sorts of contract negotiations. But there are plenty of misunderstandings as to what these actually mean or what protection or burden they create. A proper indemnity creates a primary obligation or liability to pay a debt. Unlike a guarantee, it is not dependent necessarily on a third party’s default. It is a standalone contractual promise to reimburse another party in respect of a specified loss or damage.

If it is a debt, the giver of the indemnity is liable for whatever loss and damage is suffered by the other party, regardless of whether or not it was reasonably foreseeable or could have been mitigated. It could thus create a much greater liability than under a normal breach of contract claim for general damages. Therefore be extremely careful before agreeing to give an indemnity.

However the courts have indicated that, to be effective, an indemnity must relate to a specified amount which can be determined without further investigation as to the amount. If the sum to be recovered under the indemnity is an indeterminate amount, the courts will usually treat this as a general damages claim. Accordingly it will be subject to the principles of foreseeability and mitigation of loss when deciding how much should be recovered. The courts have also considered “indemnity” clauses obliging one party to “hold harmless” the other party from loss or damage. These do not necessarily create a full “debt” indemnity but have been treated by the courts as giving rise to a general damages claim.

Other than in the field of insurance there is in fact no “law of indemnity”. It is clear that the courts will interpret each indemnity clause on its own merits. The more detailed and prescriptive the terms, the wider the effect of the clause is likely to be. When confronted by an indemnity clause, or when seeking to impose such an obligation, it is dangerous to assume what its effect will be. In this case it does not necessarily do “what it says on the tin”.

If you want advice from us on indemnities or anything else we would be happy to help you.