Kevin House – Commercial Partner
In a business contract negotiation there will often be a suggestion that, in addition to normal contract terms relating to breach, there should be an additional provision which specifies a party in breach indemnifies the other party.
In the heat of negotiation, depending on which side of the negotiation you are on, it is easy to make or give in to such a request without fully considering the possible impact.
On a normal contractual breach claim damages will only generally cover:
- Losses which flow from the breach (i.e. a causation test must be met); and
- Losses which could reasonably be supposed to have been in the contemplation of the parties, at the time of the contract, as a proper result of the breach (i.e. were reasonably foreseeable).
Under an indemnity claim however, unless the wording suggests otherwise, causation and foreseeability are not at issue – the mere fact that the innocent party has suffered loss is enough to trigger liability.
There are different types of indemnities but generally they are to prevent the indemnified party suffering the loss covered or to reimburse the loss suffered (but not prevent it from the outset). What is covered depends on the precise wording.
Some general principles applying are:
- There is no implied duty to mitigate loss under an indemnity;
- There is no right of set-off against an indemnity claim;
- The limitation period on an indemnity runs from the date of failure to observe the indemnity and not from the date of the breach;
- Consequential losses may be able to be recovered;
- Some cases have held that the innocent party may be entitled to recovery of full legal costs.
Therefore an indemnity should be strongly fought for, or against, depending whether one is giving or taking it and the wording of any indemnity should be carefully considered as to width, time it applies, what is covered and how it is triggered.
The information contained in this paper is necessarily of a generalised nature and specific advice should be sought in relation to any particular situation.