A provision in a contract under which one party (or both parties) commit to compensate the other (or each other) for any harm, liability, or loss arising out of the contract. An indemnity is a promise by one party to compensate another for the loss suffered as a consequence of a specific event, called the ”trigger event”.
The trigger event can be anything defined by the parties, including:
- A breach of contract;
- A party’s fault or negligence; and
- A specific action.
An indemnity operates as a transfer of risks between the parties, and changes what they would otherwise be liable for or entitled to under a normal damage claim.
Indemnity clauses have an important role in managing the risks associated with commercial transactions by protecting against the effects of an act, a contractual default or another party’s negligence. Indemnities are used in a wide variety of contexts and there is no general rule about when to give an indemnity. It depends mostly on the circumstances of the contract- the parties’ willingness to do so and their relative bargaining positions. A party who is in a stronger negotiating position is more likely to ask for an indemnity from the other party, whereas a party in a weaker position is less likely able to ask for an indemnity. It is important to take care in commercial negotiations to confine and document the intended scope of the indemnity being negotiated and to identify precisely what is sought to be achieved economically.