I is for indemnity

I is for indemnity

Few things in a construction contract cause more consternation than the giving of an indemnity. In simplest terms it is an agreement by one party to make good a loss suffered by another.

The indemnity may be framed widely to cover all losses suffered, but it is more often restricted to specified losses, typical examples of which are those relating to death, personal injury and property damage, which are commonly found in building contracts.

Indemnities may be drafted to apply only where the party giving it has been negligent and may be prevented from applying if the party receiving the benefit of it has caused or contributed to the losses.

Indemnities are common in large-scale projects such as PFI deals. On such deals, the party at the top of the supply chain will look for an indemnity from the party with which it is in direct contract, who will in turn look to pass off the indemnity on a “back-to-back” basis down the supply chain.

This may result in a party at the bottom of the supply chain accepting huge contingent liabilities. So any party giving an indemnity will need to make due allowance for the contingent liability – such as by having appropriate insurance in place that covers the liability.

As with many legal concepts, there is not an exact form of words that creates an indemnity, although the courts require clear wording for one to be enforced. Some people will scan documents and conclude no indemnity exists as they cannot find “indemnity” in the text, but other phrases such as “hold harmless” also create indemnities.

One of the most important aspects of an indemnity is that liability under it is not triggered until the loss has been established. When compared to liability for a breach of contract (which is triggered when the breach is committed), the limitation period may end much later under an indemnity.

Unless a party is dealing as a consumer, there is no protection under current law for that party if it signs up to an onerous indemnity. In 2005, the Law Commission proposed changes to the law relating to unfair contract terms but the legislation has not been passed.