What is Indemnity?

When it comes to contracts, there are numerous words and clauses one should be aware of. The importance of this lies in the fact that the entire meaning of a paragraph can change with the insertion or deletion of a word or phrase. This is why understanding your contract, and also having it read by a legal professional is critical. To learn more about the important clauses in a contract, visit our blog here.

Legal terms tend to be nuanced and because of this, being able to interpret the meaning of something is a great skill to have. This blog will focus on one specific term that tends to be misinterpreted. It is often defined and written in a variety of ways, which can cause confusion. However, once you understand it fully, it is clear what the term’s purpose is and why individuals like to include it in contracts. This term is “indemnity”.

What is Indemnity?
Indemnity (against something) is commonly defined as “protection against damage or loss, especially in the form of a promise to pay for any damage or loss that happens”.
www.oxfordlearnersdictionaries.com

Indemnity clauses can be found in different types of contracts but are commonly seen in insurance, service, and construction contracts. Indemnification clauses serve to protect and compensate a party from harm or loss arising in connection with another party's actions or failure to act. The idea behind this is to remove liability away from one individual and pass it to the indemnifying party.

What is an Indemnification Clause?
Indemnification clauses outline the party that will be responsible for damages, losses, legal costs, and any other fees typically associated with a negligent party’s actions. You have probably come across wording that sounds similar to “you agree to indemnify and hold harmless the other party and its employees, agents, and officers against all liabilities stemming from omissions, damages, judgments, fines…”. These clauses can be tricky because if you aren’t careful, you could be exposing yourself to thousands of dollars in damages that may not even involve you.

If you choose to keep an indemnity clause in a contract, you will want to make sure that you are only responsible for the damages caused by your negligent actions. This will ensure that the other party will have to prove your negligence before being entitled to damages. Another note to pay attention to is exposure to liquidated damages and penalties. Many business/service contracts will mention these. Liquidated damages are damages that have been determined from a pre-estimate of probable loss that the other party believes they will suffer due to a delay or late completion of a contract.

Since these damages are intangible and usually hard to define, you could wind up paying a large ‘estimated’ amount in damages that isn’t even accurate. Penalties are amounts that are to be paid to a party if the other party does not adhere to the terms laid out in a contract. As things can change relatively quicky in business, you want to be weary in agreeing to penalties of any kind.

Examples of Indemnity Clauses
Indemnification clauses can be worded in many different ways. Some hold the same meaning, and others do not. Below are two examples of indemnity clauses that are worded slightly differently. Also included are edits that may be made in order to change the meaning of the clause and ensure that the indemnifying party is not responsible for everything.

Example #1
“The Indemnifying Party releases, indemnifies and saves harmless the Indemnified Party, their officers, directors, employees, agents, and consultants from and in respect of every claim, loss, cost, expense, injury (personal or otherwise) and all other damages which the Indemnifying Party suffers directly or indirectly in connection with the performance of contract.”

This is a standard indemnification clause that releases liability and “saves harmless” an indemnified party from any claims, losses, damages, or expenses the indemnifying party may suffer during the course of work. By inserting a clause like this, if the indemnifying party is exposed to any of these risks or losses, the indemnified party will not be responsible for any type of remedy or compensation. Moreover, the indemnified party would also be protected if they or a third party suffers losses or damages caused by the indemnifying party.

Example #2
“The Contractor shall indemnify and hold harmless the Owner, its officers and employees from and against any and all liabilities, damages, costs, claims, suits or actions by third parties directly or indirectly arising out of the project attributable to bodily injury, sickness, disease or death or to damage to or destruction of tangible property [to the extent] caused by any the negligent acts or omissions of the Contractor, its officers, agents, servants, employees, customers, invitees or licensees, or occurring in or on the premises or any part thereof.”

This is an example of an indemnification clause specific to construction work. These clauses are very common in this line of work because unexpected damage or loss can easily occur by a contractor or subcontractor. This clause has been edited to show how the removal or insertion of a word can change the meaning and structure of the entire clause.

To Review:

• The words “or indirectly” have been struck out. This is because as the indemnifying party, you do not want to be on the hook for liabilities that also arise out of your work in an indirect manner. This is too broad and could have you paying for damages that technically weren’t caused by you or your workers.

• The words “to the extent” have been added before the word “caused”. Similar to the above point, this is to limit liability. Without inserting the words “to the extent” the clause is essentially saying that any damage or destruction done to a tangible property would be your responsibility regardless of proximity. By including “to the extent” as a qualifier, it is clear that liability is limited to damage to the extent it is caused by the contractor.

• The word “any” has been crossed out. Again, this strike out is intended to limit liability. By leaving the word “any” in, the sentence remains broad and may expose the Contractor to things that they are not directly responsible for.

These revisions would be done to favour the contractor or indemnifying party in this scenario however, if you were the other party (like the owner or an indemnified party), you may want to leave the clause in its original form to cover yourself under any circumstance. Either way, it is clear that indemnification clauses can hold multiple meanings with the addition or removal of a word.

Remember to always thoroughly review a contract to ensure you are comfortable with it before signing, and also have a legal professional review your contract for you. Visit our “10 Things to Do Before Signing a Contract” blog for more information.

Contact Oduraa Legal Services today for contract review services!