Beware of Indemnity Clauses
Indemnities can appear in a number of legal documents such as leases, purchase contracts and business sale agreements. They are often described as 'standard' provisions as though that automatically makes them reasonable. So what is an indemnity?
Here is an example of an indemnity from a lease:
The Tenant shall keep the Landlord indemnified against all expenses, costs, claims, damage and loss (including any diminution in the value of the Landlord´s interest in the Building and loss of amenity of the Building) arising from any breach of any tenant covenants in this lease, or any act or omission of the Tenant, any undertenant or their respective workers, contractors or agents or any other person on the Property or any other part of the Building with the actual or implied authority of any of them.
An indemnity is a promise by one party (party A) to reimburse another party (party B). Sounds prettty innocuous so far, doesn't it? The crucial questions are:
Under what circumstances is the party reimbursed?
The terms of the indemnity will provide when Party B should be reimbursed. The above example includes the circumstances:
Arising from any breach of any tenant covenants in this lease
or any act or omission of the Tenant
any undertenant or their respective workers, contractors or agents or any other person on the Property or any other part of the Building with the actual or implied authority of any of them.
The above examples show that there doesn't need to be any requirement for fault on the part of Party A. They also show that Party A may become liable for the acts or omissions of someone who is not under his control eg a customer in his shop or a workman attending his premises.
What is reimbursed?
Again the terms of the indemnity will set out what Party A is actually reimbursing. The above indemnity uses the words:
"all expenses, costs, claims, damage and loss"
In other words, all expenses - whether they are reasonable or not, all claims - with no obligation on Party B to defend such claims if it would be reasonable to do so, and all losses - whether or not they are foreseeable
English Law has established rules which set out when one person should pay damages to another where the former's acts or omissions cause the latter to suffer loss. In most cases, there has to be some element of fault and the injured party can only recover certain losses depending on the type of loss and how foreseeable the losses were.
What's the purpose of an indemnity?
What an indemnity seeks to do is remove all the limitations imposed by decided caselaw. On the basis that decided caselaw is the result of careful deliberation over many years, it would seem reasonable to suppose those limitations have been imposed for good reason.
You should always beware of signing a legal document that requires you to 'indemnify' someone else especially where the other party doesn't agree to indemnify you in return. Leases, for example, almost never include an indemnity by a landlord but almost always include an indemnity by a tenant. Any suggestion that either the tenant's indemnity should be removed or that the landlord should reciprocate is normally met with incredulity by the landlord's solicitor. Why? If it is such a reasonable provision then why is it unthinkable that a landlord should provide an indemnity?
The answer, of course, is that indemnities are unfair.
If you are being asked to sign a lease or other legal document which includes indemnity clauses take legal advice. You can arrange an initial free consultation about just this subject with Cousins Business Law here.
Article added: 4 August 2008 © Cousins Business Law
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