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Contractual indemnities are often heavily negotiated clauses to help manage risks between suppliers and customers. As a supplier of products or services, your customer may request that you compensate them in certain circumstances under an indemnity clause. However, indemnities can be highly onerous and risky provisions. This article will explore the purpose of an indemnity clause and whether you should ask a solicitor for legal advice on indemnities.
What is a Contractual Indemnity?
Indemnities are clauses within a contract designed to address specific known risks.
Put simply, an indemnity is:
- a promise made by one party (the indemnifying party) to compensate the other party (the indemnified party) for a particular loss they experience under the contract if a specific event occurs.
The contract should outline what triggers this payment and when the indemnifying party must cover the loss. The trigger event might be the indemnifying party’s breach of contract, negligence, or specific actions. Indemnities effectively allocate responsibility for risks within a contract.
Why Do Customers Request Indemnities?
Business customers often request suppliers’ indemnity to ensure protection against potential losses or liabilities. For instance, a customer could request an indemnity that obligates a supplier to compensate them on a pound-for-pound basis for various financial losses, costs, and damages they incur due to the supplier’s fault.
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Such indemnities offer several advantages to a customer business, including the following:
- indemnities assure the customer that the supplier will compensate the business in specific circumstances, offering a safety net against unforeseen risks;
- indemnities can offer a streamlined route for recovering losses compared to lengthy breach of contract claims. This simplicity saves time and resources for the business;
- unlike breach of contract claims, indemnities do not necessitate proving fault or breach by the supplier to trigger compensation. This removes the burden of proof for the business; and
- a comprehensive indemnity clause may allow a customer to recover more extensive sums than through breach of contract claims alone, enhancing its financial protection.
Overall, indemnities serve as a proactive risk management tool for customers, offering peace of mind and financial security in their commercial dealings with suppliers.
A customer may request indemnities such as:
- a data protection indemnity, requiring a supplier to compensate them for any losses they suffer from the supplier breaching data protection laws; or
- an intellectual property indemnity requires the supplier to compensate them for any losses they suffer due to third-party intellectual property claims arising from the supplier’s services.
These examples represent common scenarios in which a customer might seek an indemnity. However, indemnities can be applied in various situations to mitigate diverse types of risks.
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Should I Ask a Solicitor to Review an Indemnity Clause?
Indemnities are complex and have potential risks, so approaching these clauses carefully and cautiously is crucial.
When a business customer requests an indemnity from a supplier, it is essential to understand the implications for the supplier’s business fully. As such, legal advice can prove helpful.
Given the complexity and nuances of indemnity clauses, legal advice offers significant value.
How Can a Solicitor Best Assist My Business?
An experienced solicitor can assist your business in the following ways when dealing with customer indemnity requests:
- Review of Indemnity Clauses: A solicitor can carefully review the scope of the indemnity request and assess the supplier’s comfort level with it and its potential consequences. They can provide insights into what the indemnity means in practice and ensure that the supplier is comfortable with the compensation obligations it could give rise to
- Risk Assessment Expertise: Certain customer indemnities may be disproportionately broad and onerous. With extensive experience in contract negotiations and industry standards, a solicitor can quickly detect such instances and provide informed guidance to the supplier. Drawing upon their expertise, solicitors are skilled in identifying critical risks that suppliers might overlook, protecting them from signing up for heavy onerous indemnity terms that could jeopardise their business.
- Indemnity Negotiation Support: Solicitors can help negotiate the terms of the indemnity to ensure the supplier is comfortable and reach an agreement satisfactory to both parties. For instance, if a supplier services numerous customers, multiple indemnity obligations could pose a substantial financial risk to the business. A solicitor can help mitigate these risks by limiting indemnity obligations and negotiating a maximum financial cap on the supplier’s liability under the indemnities. Or, a solicitor could help push back on an indemnity altogether if it is inappropriate in the circumstances and unduly onerous.
Seeking legal advice on indemnity clauses can help suppliers mitigate risks, negotiate comfortable terms, and understand what they are signing up for.
Key Takeaways
As a supplier, it is vital to understand what customer indemnity requests mean in practice and the impact they could have on your business. Seeking legal advice on indemnities can be extremely valuable. An experienced solicitor can help you understand indemnity requests, identify critical risks, and mitigate and negotiate indemnities on your behalf. With the support of professional legal expertise, you can confidently navigate the complexities of indemnities, ensuring that your business is protected from risk.
If you need advice on a contractual indemnity, LegalVision’s experienced commercial contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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