Table of Contents
An indemnity clause requires your business to indemnify the other party against certain types of loss. Some clauses are much broader than others regarding which types of loss they cover. In general, the other party will seek to ensure your business pays damages in case of certain types of breach of contract. An indemnity clause can have significant financial repercussions for your business if you breach the contract. Therefore, you must carefully read the requirements and assess the situation before signing the contract. This article will explore four legal considerations for your business prior to agreeing to an indemnity clause in your commercial contract.
1. When Could the Indemnity Clause Arise?
Some indemnity clauses are narrow and only apply within a limited range of specified events. This will likely avoid scenarios in which a minor, innocuous breach leads to accusations of contract breach. For example, non-perishable goods arriving one day late due to a postage strike are unlikely to trigger an indemnity clause. However, some indemnity clauses can be wide. This will depend to an extent on negotiations between your business and the other company.
2. How Much Money Could Your Business Owe?
Breach of indemnity clauses can be expensive. For example, suppose your business supplies £10,000 worth of goods on a 12-month contract to another company and, upon the 6-month mark, your company breaches the written agreement by failing to provide goods. The other company’s directors usually make £15,000 profit on reselling your goods each month. As such, they are furious, terminate the agreement and start a contract claim against you.
Your business could potentially face:
- contract termination (costing you six months’ worth of £10,000 orders);
- a request for lost profit (of £15,000 per month for the remainder of the contract); and
- payment of their legal fees and legal costs.
Call 0808 196 8584 for urgent assistance.
Otherwise, complete this form and we will contact you within one business day.
3. What Are the Conditions for Payment?
It is essential to determine indemnity payment conditions. Firstly, you should determine how quickly your business must make payments. Some companies will try to negotiate clauses requiring ‘immediate payment’ or ‘within 14 days’. If the sums are in the thousands, your business may not have that cash at such short notice. As such, it is worth ensuring any indemnity clause allows enough time for payment.
4. Are the Other Party Litigious?
Realistically, the behaviour of the other company (the indemnified party) regarding whether to commence formal legal action will depend on their decision-making and the existing business relationship between you and them. While it is never easy to predict someone else’s behaviour, especially when they are a new business contact, you can aim to get a sense of them during any initial negotiations.
If they seem level-headed and pragmatic, you could potentially resolve a technical breach with them informally without recourse to legal action or terminating the contract. Thereby, you can be less concerned they will aggressively use an indemnity clause against your business.
Key Takeaways
On the one hand, indemnity clauses exist to ensure that your business takes the terms of a commercial contract seriously and avoids committing a breach of contract. On the other hand, the financial consequences of a contract breach can be severe relative to the breach itself. Therefore, it is a good idea to have a lawyer negotiate or advise on these clauses before committing your business to them. A lawyer will often try to narrow the scope of the indemnity clause. This will ensure parties may only penalise major breaches or negligence rather than minor, unintentional breaches.
If you need help with indemnity clauses, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have limited 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.
Frequently Asked Questions
Technically, yes. However, most companies will usually insist on some form of indemnity clause to give them financial protection.
Usually, the strength and breadth of an indemnity clause will depend on the bargaining power between contracting parties and the negotiation skills of their lawyers or agents.
We appreciate your feedback – your submission has been successfully received.
