Business Law - Beware of Indemnity Clauses

An indemnity clause is a promise to make right the loss that was experienced by a person, as a result of an act or omission of another person. It is a expressly written promise to compensate a person for specific loss or damages that is stated in a contract to enable a party to have a remedy to correct any defects that could arise in goods or services that were delivered under the contract that was entered into. If an indemnity clause is not included in a contract, a person will be only have their usual rights for a breach of contract to therefore need to recover the specified loss if remedies are available when the contract was drafted. The resulting avoidance of difficulties that may arise in relation to remoteness of damage when recovering loss is down to how well the indemnity clause has been drafted.

The indemnity clause is generally structured with reference to a specific conduct that could arise, although it may be drafted to accommodate for specific events or disappointments, or even some indemnity clauses by just apply to any breach that is applicable under the contractual agreement entered into. They are generally needed in areas of contractual relationships where parties can be exposed for relying on warranties that make them vulnerable of risks and loss in the event of a breach of the contractual agreement. Liability for indemnity clauses may be capped to a maximum amount allowed to be compensated and may be restricted to time limits or even be made everlasting. In many commercial contracts it may be advisable to take out insurance of professional indemnity insurance to cover any potential liability that may occur.

In intellectual property rights and provision of services such as software development, it is common place to incorporate an intellectual property indemnity so that the client obtaining the service will recover losses if the provider of the service breaches a third party's intellectual property rights in the making of the goods under the contract. The forms of indemnity available can be repairs, replacement, and reinstatement or case payments, depending on what the indemnity clause is in relation too.

The duty to indemnify is slightly different from the duty to pay compensation or make a reimbursement. This is because a duty to indemnify is a voluntary duty and is not mandatory. Therefore incorporating an indemnity clause into a contract will be completely up to the parties that are involved in the contractual agreement.

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