In its simplest form an indemnity is an agreement between two parties in which one party agrees to cover loss and damage suffered by another. As such indemnities are a very effective tool to allocate risk between transacting parties. The risk we are talking about is the risk of something specific going wrong, and the allocation of that risk being who has to pay for it.
For example a contractor may agree to indemnify the principal for loss the principal suffers as a result of the contractor damaging the principal's property during construction works.
You don't. But if you don't have the benefit of an indemnity the amount you recover from the offending party may be less. This is because the innocent person will need to rely on the remedy of damages to recoup its loss.
Under a damages claim the loss may not be recoverable unless:
A carefully drafted indemnity will not be constrained by the above factors because indemnities are not governed by the law relating to damages. So the inclusion of an indemnity and how it is drafted can have significant financial implications on the party granting the indemnity if anything goes wrong.
Every commercial arrangement is unique. Whether or not a party proceeds with an agreement under which it grants an indemnity will depend on both the risk posed by the indemnity and the importance of the overall deal to the party. In analysing the risk it will be up to the indemnifying party to consider both the probability of the indemnified event occurring and the consequences of the indemnity, including effects on its insurance cover. It is also important to be realistic and take into account the capacity of the party giving the indemnity to meet the obligations of the indemnity.
A broadly worded indemnity clause will be useless to an indemnified party if the person giving the indemnity does not have the financial resources to make good on its obligations to pay the innocent party.
In short, be commercial about the way you go about negotiating indemnities. Identify the risk, assess it from a commercial perspective and negotiate accordingly. In business it's all about keeping deals on track, keeping the momentum going.
CK Agribusiness Consultant Tim Ferrier was recently listed in Doyle's Guide to the Australian Legal Profession as a Preeminent Leading Agribusiness Lawyer (Queensland) for 2018. To make this list requires feedback from various sources but most importantly our clients. We thank our clients for that valuable input and look forward to assisting in your continued commercial growth. VIEW MORE