Indemnity Clauses in Commercial Contracts

Indemnity clauses effectively allocate risk between the parties. The danger, however, is when the clause is more extensive than the party thought when they entered into the agreement.

How to spot an Indemnity Clause?

Commercial contracts typically include an indemnity clause among other standard terms. Words such as “hold harmless”, “defend”, “make good” or “compensate” often indicate the clause is an indemnity clause.

 Indemnity clauses often set out a list of what actions a party is insured against, for example:

• All lawsuits, actions or proceedings, demands, damages and liabilities. 
• All claims, liabilities, losses, expenses and damages arising from a contract.
• Loss, damage, injury or accidental death from any cause to property or person occasioned or contributed to any of your acts, omissions, neglect or breach or default. 

What is the extent of an Indemnity Clause? 

Indemnity clauses are sometimes reasonable for the contract’s terms or even essential for parties to carry out an agreement. Other types of indemnity clauses are unnecessary for the reasonable protection of a party’s interests. For example an unreasonably indemnity clause may be when it continues long after the contract has been performed.

How to negotiate a contract that includes an indemnity clause

If you are entering into a contract and are required to provide an indemnity, you should first negotiate its removal entirely. However, if the other party insists on the clause, you should ensure it is narrow, so you are less exposed to liability from the clause. For example, you may be able to word it to exclude you from being liable if a loss is the other party’s fault.

 If you are seeking an indemnity from the other party you should have regard to potential losses you may incur as a result of doing something in the performance of the contract, and tailor the clause to the reasonable minimising of those losses..

How you can further protect yourself from indemnity clauses? 

An option to consider is obtaining insurance to cover any indemnity you provide. Obtaining insurance in this instance is not to be confused with Professional Indemnity Insurance, which covers you for negligent advice or misrepresentations among other things. For some indemnities, you may be able to get quotes for insurance and, in fact, asking for these may open your eyes to how much risk you are taking on.

If you have further questions, please contact us at frank@franklaw.com.au.

This is not legal advice.