Indemnity clauses

Indemnity clauses are not new but are certainly becoming more prevalent, possibly as a result of the present economic environment which has led some developers and contractors to exploit their improved bargaining position by passing on greater risks to their consultants.

Griffiths & Armour
03 September 2014

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Case study: Indemnity clauses 1

Case study: Indemnity clauses 2

Indemnity clauses generally make it much easier for a successful claim to be brought under a contract and it is important to bear in mind that giving an indemnity is a serious commitment, which can leave consultants exposed and disadvantaged if a claim does arise.

Indemnity clauses are easily recognisable because they generally contain the words indemnity, indemnify and/or hold harmless.

A typical example is as follows: “The Consultant shall indemnify and hold harmless the client against all claims, damages, losses and expenses arising from the execution of or failure to execute the services.”

There are several reasons why consultants should resist indemnity clauses: 

• They are unnecessary – a consultant already has an implied or express duty to exercise reasonable skill and care and if the consultant provides advice that is negligent, then there are adequate remedies available to a claimant to recover any reasonably foreseeable losses; 
• Indemnities can often extend to claims brought by third parties against the client in respect of some default by the consultant. The consultant may have no knowledge of the claim between the client and the third party, nor need he be involved in that claim, but can simply be presented with a demand by the client for recompense in respect of any settlement reached with the third party. The client may, for instance, have decided to settle the claim for commercial reasons for a sum far in excess of the damages that a court would have considered properly payable. However, an indemnity may take away any right on the consultant’s part to argue over this point. 
• Many indemnity clauses are drafted such that the indemnifier does not necessarily have to have been negligent before being liable to pay under an indemnity. If the clause promises indemnity for a certain loss, it may be of no consequence how that loss arose or whether it was within the direct control of the person giving the indemnity. 
• The type of losses recoverable under an indemnity can be far broader than those that can be claimed in tort. In tort, liability only extends to damage or loss which is a reasonably foreseeable consequence of the negligent act giving rise to it. Under an indemnity akin to the example shown above, there would be no need for the claimant to show that the losses he is seeking to recover are reasonably foreseeable; all that is important is that he has suffered a loss and that the loss is one to which the indemnity applies. Clearly, this ability to recover losses which are more remote than usual can greatly increase the final value of a claim and hence the risks related to the advice given by a consultant. 
• Indemnities can have the effect of extending your liability period. In general terms, where a contract is governed by the law of England and Wales a liability period of 6 or 12 years applies from the date of breach of contract, depending on whether the contract is executed as a simple contract (6 years) or as a deed (12 years). In respect of contractual obligations for the provision of services, the latest point at which a breach of contract could arise is normally the last date that a consultant carries out any services or provides any advice, and the 6 or 12 year liability period would run from that date. 

However, most indemnities we see in consultancy agreements are not obligations connected to the provision of services, but are instead obligations to make good or hold someone harmless from loss. As a result, the trigger point for such indemnities is the date at which a loss covered by the indemnity arises, which can be long after the date when the negligent act (e.g. a design error etc.) giving rise to the loss is committed. For the purposes of determining the applicable liability period, the start point is, therefore, the date of loss. The consequences of this can mean the difference between a successful and unsuccessful claim against a consultant as highlighted by Case study: Indemnity clauses 1.

A similar example can be found in Case study: Indemnity clauses 2

Conclusion

Indemnity clauses can significantly add to a consultant’s liability regardless of how much the party proposing them may try during negotiations to down-play their effects.

Our advice is that indemnities should be avoided wherever possible. If such clauses cannot be negotiated out of agreements, then we would suggest amendments to mitigate their effects, although it should be noted that it is difficult to amend indemnities so that they entirely reflect what the position would have been in the law of tort. 

Amendments that are helpful in this regard include limiting indemnities to properly mitigated and legally enforceable losses which arise as a direct result of the indemnifier’s negligence, and limiting the indemnity so that no liability attaches from a fixed date from completion of the services. 

If you have any particular queries on this, then please contact us - we regularly advise clients on how to amend indemnity clauses as part of our contract review service.

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Introduction
Understanding contractual terms
Indemnity clauses
Strict liabilities
Certification
Net contributions and limits of liability
Novation
Closing remarks