This blog has been written by our Senior Associate, Juliet Nutland, to give readers a basic understanding of indemnity clauses. For a deeper understanding, we’d recommend her blog, “Microsoft Partners: 4 Myths about Indemnity Clauses.“
What are indemnities?
In a nutshell, an indemnity is a promise within a contract to pay money to the other party when a specific and agreed ‘bad’ event happens (one which neither party wanted or expected to happen) such as intellectual property infringement or a breach of contract.
Are indemnities useful?
Yes, they are useful if you are the party looking to claim under them, because the promise to pay is effective as soon as the event occurs. You don’t have to start any legal proceedings to get paid, you just have to point to the indemnity in your contract.
Is an indemnity the same as a warranty?
No. They are similar because a claim can be made under either an indemnity or a warranty but they are dealt with differently. A warranty is another kind of contractual promise, but if a warranty promise is broken you’re likely to end up in court.
So is an indemnity better than a warranty?
Not for our Microsoft Partner clients or most supplier businesses. Suppliers and service providers are the party most frequently asked to pay out on indemnities and so are more at risk of being out of pocket.
Are warranties better for suppliers?
Yes, because there are often opportunities to resolve breaches of warranty that are not usually available under an indemnity.
If there is a breach of a warranty then there is usually another provision in the contract for you to fix the problem in a specified period. There may also be terms setting out a dispute resolution procedure so that you can both find a more constructive way to solve the problem.
Should I avoid indemnities?
Sadly, it’s not as simple as that. Often the other party (particularly if they are a larger business) will insist on at least one indemnity being included in the contract. What we recommend is to try to remove the indemnities as the customer can still rely on contractual remedies instead or if the customer insists on keeping in the indemnity please do limit the exposure of how far reaching that indemnity goes.
Law 365 top tip: Whenever you agree to include an indemnity clause you should always also include language that limits the extent of that indemnity and ensures that you have control.
Further reading
