In the context of UK law contracts, indemnity refers to a promise to pay money on the happening of a specified event.
Indemnities are included in contracts to protect one party from suffering financial loss in relation to certain things happening, such as the conduct of the other party, or over which the other contracting party has control.
They are a contractual mechanism to allocate risk and safeguard one party (or both parties where the indemnities are mutual) against potential financial harm resulting from certain events or actions.
An indemnity clause will typically set out the scope and extent of indemnification, including the specific circumstances under which indemnification is triggered.
These circumstances may include breaches of contract, third-party claims, intellectual property infringement, or any other identified risks.
The clause may also specify the limitations or exclusions on the indemnitor's liability, such as caps on the amount of compensation or exclusions for certain types of losses.
An indemnity is a primary obligation and does not depend on proving that there has been a breach of a contractual obligation before it can be triggered by the party to be indemnified.
Indemnities can cover a narrow range of events that will trigger an entitlement to be compensated or, if circumstances require, they can react to a wider scope of matters.
The exact scope is something to be settled when the contract is being prepared. It is essential for parties to carefully review and negotiate the terms of an indemnity clause to ensure that they are adequately protected and that the obligations and liabilities are clearly defined and understood by both parties.
See also our article on Guarantees and Indemnities which helps explain the difference between the two.
For a more in-depth review of indemnities read this article by Osborne Clarke, solicitors.
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