Understanding Contracts – What Is an Indemnity Clause

Ensuring Corporate Documents' Enforceability - What to Know

18/06/2021

An indemnity clause is an agreement that protects one of the parties and holds the other party monetarily responsible in case certain conditions are met. 

Suppose you own a restaurant. As the owner, you will transact with suppliers to provide your needs. However, when a customer suddenly gets food poisoning and sues you for it and asks for monetary aid for hospitalisation, an indemnity clause should allow you to pay for the fees now and ask your supplier for reimbursement later if it is proven that they were the cause. An indemnity clause essentially allocates the risk among the parties.

1. Indemnity Clause in Commercial Contracts

The keywords in understanding indemnity clauses in contracts are “hold harmless,” “defend,” “make good,” or “compensate.” An indemnity clause is a list of actions that a party is insured against, such as lawsuits, actions or proceedings, demands, damages, and liabilities—all as part of a signed contract. Additionally, it can also cover loss, damage, injury, or accidental death in the incidents stipulated in the indemnity clause.

2. The extent of the Indemnity Clause

Indemnity clauses are reasonable in any contract. It means that the parties have found common ground to identify what the scopes and limitations of their partnership are. However, some types of indemnity clauses are unnecessary and expose a party to liabilities beyond their control. It may continue long after a contract ends, so make sure to negotiate well with the involved parties to straighten things out. It should also go without saying that you should understand the terms of anything you sign, whether through your own self-study or the consultation of a lawyer.

3. The Effects of the Indemnity Clause

Entering an agreement will require you to pay an indemnity, which you should negotiate the removal of entirely. However, if the other party insists on having it on the contract, you should make sure that the clause lessens the risks in the future. 

You can reword the clause to exclude you from liability for the other party’s faults, or you can set a maximum monetary limit that they can claim. However, make sure that the clause you create is reasonable as the other party will request the same thing too and will likely attempt to negotiate.

Conclusion

Having an indemnity clause in your agreements can help you mitigate the risks that a contract may encounter in the future. It serves as your protection against liabilities that are beyond your control to protect your business. Remember that an indemnity clause is only as good as the person giving it. Before you enter into negotiations about your contract, remember what’s important for you and the risks that could arise. Only ask for indemnities that are necessary.
GLG Legal is the right solution for your legal needs. As a member of the Queensland Law Society, we are ambitious and innovative in formulating solutions for our clients. Founded in 2014, we have seen an ever-growing demand for legal services. We specialise in commercial and property law, franchising, intellectual property, conveyancing, non-for-profit, and family law. Here at GLG Legal, you are our utmost priority. If you’re looking for a law firm in Brisbane, check out our services today.

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