What is an indemnity?
- a lease or hire arrangement, where the tenant indemnifies the landlord for injury to a visitor while on the premises;
- a towing contract;
- a company director’s guarantee for an equipment finance loan; or
- a software licence, where the vendor indemnifies the customer for a claim that the software infringes a third party’s intellectual property rights.
- A venue owner might require a prospective hirer to indemnify the owner for any claim by a guest who is injured while attending a function at the venue. Then if a guest is injured and claims against the owner (or more likely, against both hirer and owner), the hirer would be liable to cover the owner’s liability (if any) for damages and its costs of defending the claim.
- A body corporate which has a towing by-law (about removing a resident’s vehicle from a visitor carpark) may become liable to the resident if the car is damaged during towing. If the body corporate engages a tow truck operator pursuant to the by-law, it will be important that the towing operator is clearly instructed as to its duties and this is reflected in the contract between the body corporate and the towing operator. This would include the operator indemnifying the body corporate against liability for damage to the vehicle during the towing process.
- A company director might agree to personally guarantee the company’s obligation to repay a lender’s equipment loan. If the terms of the guarantee also include an indemnity, the lender would be entitled to call on the director’s indemnity without needing to first exhaust its rights to recover the outstanding amount from the company, such as by enforcing the lender’s security interest (if any) under a goods mortgage or fixed charge over the equipment.
- A software vendor might warrant to its customer that the software does not infringe any third-party intellectual property rights, and the licence agreement provides that the customer can claim damages on an indemnity basis for the vendor’s breach of that warranty. Then if a third-party claims against the customer for IP infringement, the customer could call on the vendor’s indemnity to cover any financial liability to the third-party.
The [Body Corporate] must indemnify the Contractor for any liability incurred by the Contractor to a third party in respect of any default or negligence of the Engineer or any other consultant the [Body Corporate] engages in relation to the Works.
- Remove the indemnity clause – and eliminate the risk;
- Omit the indemnity clause but offer principal’s liability insurance for the particular event or agreement – you will need to consider the costs of obtaining principal liability insurance; or
- Limit the scope or amount of your indemnity:
- cap the indemnity to a particular amount – as a general guide, negotiate up to an overall liability cap of 100% of the contract price plus the proceeds of insurance policies;
- require the indemnity to only cover loss or damage within your control, and to only apply to loss or damage that you actually caused or contributed to;
- provide for a proportional reduction in liability for loss or damage caused or contributed to by the principal or another party; or
- include an obligation on the principal to mitigate their loss or damage (although this is not always possible, for example if the indemnity is to protect the principal against the same loss or damage).
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The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.