In this webinar, we talk about indemnity in business to business contracts, and particularly why you might want to include indemnity in your commercial contracts, some of the controls which may apply to indemnity clauses, and other key considerations to have in mind when drafting indemnities.
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Hi, my name is Matthew Sutton. I'm a partner in the commercial team at Shakespeare Martineau in this webinar, I'm going to talk about Indemnities in business, to business contracts.
So I'm going to look at particularly why you might want to include an indemnity in your, in your commercial contract, some of the controls which may apply to indemnity clauses and some of the things to have in mind when drafting Indemnities.
But I guess the first question is, What actually is an indemnity?
Well, an indemnity is essentially a promise to protect a party against loss by paying money to that party on the occurrence of a particular events. So there were two key elements or aspects of an indemnity. The first is the trigger event that gives rise to the payment obligation. So, it's important that this event is defined clearly. This might be, for example, a specific or general breach of contract, or it may be a third party claim in relation to goods or services, which have been provided.
So, that's a trigger event. The second key element of of an indemnity is to set out very clearly what losses are to be covered by an indemnity. This could be all of the losses which had been caused by the trigger event or it might be certain specified losses. Or I guess it could it could be it could be losses up to a specified ....
So, given that we sort of understand a little bit now about what an indemnity actually is, Why And why might we look to include it in, in, in our business, to business, commercial contract? Well?
I think the first point to, to, just just to just think about is, there were no general rules about when way of indemnities a given, whether a party to a commercial contract, Gibson, an indemnity, will really depend on the circumstances of the transaction. And, I guess, the relative bargaining powers of the parties.
It's worth remembering that Parties, I think, are generally reluctant to give indemnities unless they have complete control of the risks for which the indemnities, given common scenarios or situations where in indemnities conventionally inspect it conventionally expected of a party.
Yeah, include things like Software Development Contracts, where a software developer will usually be expected to provide an indemnity to the customer in respect of third party claims that the development developed software has infringed a third party's intellectual property rights. Indemnities are also commonly given in contracts for services in relation to certain employee liabilities in situations where the transfer of undertakings regulations are expected to apply at the end of the contract. But as I say, there are no, those those are conventional expectations, but they're not hard and fast Rules.
So, given that a party requiring a very, an indemnity very often does so against an event, which is already a breach of contract, I think it's worth considering why? Why, why party would do so in those circumstances? So so, what are the advantages of claiming undoing indemnity compared to simply claiming damages for breach of contract?
I don't think probably they will two key advantage or two key benefits to the identity in, in, in in these circumstances. The first is that the rules on remoteness may not apply to limit recovery undoing indemnity. So.
As you will know under the general damages, the right of a party to recover damages is limited to losses which are foreseeable when the contract was made.
This isn't necessarily the case for a claim made under an indemnity and it's certainly possible to draft an indemnity that enables an indemnified party to recover for losses which could not have been foreseen when the contract was made.
A second potential benefit of an indemnity as opposed to a simple claim for an indemnity claim as opposed to a simple claim for breach of contract, is that the rules are mitigating loss, potentially don't apply to claims made under the indemnity.
So, again, as you know, under the General Law of Damages, a party is required to act reasonably to reduce its loss and cannot recover for losses that could reasonably have been avoided.
Again, it's possible to draft an indemnity. Which, which, which, which certainly doesn't put a party under an obligation to take steps to mitigate its loss. So, so, so, so. So, again, an indemnity claim could be advantageous from that perspective as well.
So given that we've just sort of looked at some of the indemnities of some, some of the advantages of of an indemnity, I think it's worth spending a few minutes, just looking at some of the controls, or rules, which apply, to the use of indemnity clauses in contracts.
So looking at the slide, the first two bullet points, I'm really sort of picking up very, sort of a similar theme.
So so the English courts won't allow an indemnified party to recover for losses caused by its deliberate act or fraud or other criminal activity.
Yeah, The third point on the slide is really sort of what that's driving out is the idea that clear words will always be required in indemnity to indemnify a party against losses caused by its own negligence, OK?
So, so, so anything which which seeks to to to indemnify you for your own negligence or that of your own employees or contractors, you will always be required to use clear words to ensure that is covered by the scope of your indemnity. Not an expert on the bullet points.
The next point on the slide, which talks about indemnities, which operates exclusions of liability, will work that Steve driving up, really is that I'm wanting to important to remember is that indemnities which effectively operate to exclude the liability of an indemnity guide party will be subject to the laws on limited liability. Now, this means, that full indemnities in, in most business to business contracts, the unfair Contract terms Act 977 applies and potentially, the reasonableness test under under the unfair contract terms Act will apply. So, in some ways, this is a very similar points to the points made in the previous three bullet points.
So, for example, if the effect of an indemnity clause is to exclude a party's liability for its own negligence, then in addition to the need to use clear wording to ensure that the the the the negligent act is potentially caught within the scope of the indemnity.
That clause will also potentially be subject to a reasonable S under the unfair reasonableness test, under the Unfair Contract Terms Act, because effectively, the party is looking to exclude liability for its own negligence.
And finally, on this slide, I think it is just worth mentioning the rule on penalties.
So, as you know, the contract law of damage EA's precludes the recovery of penalties.
This rule effectively the context of an indemnity may prevent recovery of a level of payment under the indemnity which is disproportionate to the indemnified parties, legitimate interest in contract performance. So it is worth remembering that the potentially could be a rule which kept the amount of recovery hundred indemnity, even though the rules on remoteness of damage and mitigation of loss don't apply potentially to a well drafted integrity close.
OK, so moving on I think it's worth just finishing with drafting tips. So these are the sort of things that I consider are important when when you're looking to draft your indemnity clauses. So I think the first thing to do is to consider what law, what losses you are looking to or what risks you're looking to cover off in the devotee clubs. Once you've done that, I think it's extensible and certainly I do. I will always go back and look at precedence.
As as a as a as a as a base for for for providing ideas as to how I'm going to draft a clause to, to to to to to capture the devotee correctly. So certainly the use of precedence is a very, very sensible approach. I think most people would would would would would would use precedence. I think once drafted, it's important to test your indemnity tools against the most likely, or events or scenarios to ensure that, to ensure that it works in the way that you you think it will. Testing You're drafting I think is is important.
And certainly in the context of indemnity clauses is crucial.
It's particularly important to spend some time just thinking about the trigger event. What's what event is going to trigger the payment obligation under the indemnity? It's important that this is clearly set out. I can't emphasize the significance of that enough. Just think about sort of, what events are intended to be covered by the indemnity and what events will actually trigger payments under that indemnity.
And final points just to think about in the context of drafting your indemnity is really whether whether the parti providing the indemnity should have control over claims covered by the indemnity.
So, for example, it's very common and if you're giving an indemnity ... in relation to third party claims, I would say it's essential for the party providing an indemnity in relation to third party claims to make the indemnity conditional upon having control of the defense to settlement of the claim.
And, and, and and to require or to make it clear that the person who has the benefit of the indemnity can't make admissions. And so and so settle a liability question without, without the party providing the deputy, having the opportunity to contest the claim.
That brings us to the end of this brief tour of indemnities.
I hope you found it useful.
If there was something you'd like further information on, or have a specific query on any matter that you would like to discuss, please do let me know, and I'll be happy to help.
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