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A hire business might come across
such a clause for example in a cross hire
situation (where you are asked to accept
a standard form contract that contains
indemnities you are to give) or where you
might be hiring to a very large corporate
who insists on using its own procurement
contract terms under which you will give
indemnities.
An indemnity means making good any
relevant loss that arises. The events
covered typically include a breach of the
relevant agreement, but they might also
extend to other events, including some
over which the indemnifying party has no
control.
For the party receiving the benefit, it is
rather like being insured against the loss.
It is therefore a very serious obligation
and you would be justified in asking: why
are you being asked to insure anything?
When considering an indemnity, you are
really looking at a risk allocation issue:
the party giving the indemnity is being
asked to assume the risk of particular
events occurring. Risk allocation between
the parties to contracts is of course a
fundamental part of contract negotiation,
in which each party typically wants to
push off as much risk as possible to the
other party. That sounds good if you
are the party that has all the power in a
negotiation – you might be able to force
the other party to accept all sorts of quite
unreasonable risks – but where power is
more equally balanced, asking the other
party to accept a wide range of risks is
likely to cause ‘push back’ from the other
party – and extra delays and costs in
reaching final agreement and a signed
contract.
So what does an indemnity clause look
like?
They come in all shapes and sizes, but
you might see something like this:
The Contractor shall at all times
indemnify and hold the Customer
and its directors, officers, employees,
sub-contractors and agents, harmless
What is an ‘indemnity’ and when is hire
business likely to come across one?
By: John Elmgreen, Executive Lawyer, Bartier Perry
Indemnity clauses are often found in commercial contracts. In traditional legal language,
an indemnity is a promise to ‘hold harmless’ and compensate the other party, should a
particular event occur.
from and against any costs (including
reasonable legal costs on a solicitor and
client basis), claims, demands, expenses,
losses or other consequences suffered by
the Customer in relation to any breach
by the Contractor of this Agreement, or
arising out of any act or omission, breach
of statutory duty, negligence or wilful
default of its directors, officers, agents,
employees or sub-contractors or of any
other person for whose acts or omissions
it is vicariously liable.
They often go further – for example
asking for indemnity from liability in
respect of death or injury arising in
connection with the hired equipment
whether or not you or your people have
been negligent.
Breaking it down …
The first part of the clause contains an
indemnity against any loss arising from
breach of the agreement. But why would
you need such a right, if, as is well known,
you can sue the other party for damages
for breach? It is a very good question!
Damages are limited by well-established
legal principles and it is not every
consequence, however remote or
unforeseeable, that will at law result in
compensation. Damages for breach of
contract are designed to put the innocent
party into the same position as it would
have been in, had the contract been
performed. But damages must be shown
to have actually been caused by the
breach, and are usually limited to those
that can be said to have arisen naturally
and in the usual course, or where,
beforehand, some specific risk was made
known.
If you are the Contractor, you might
well say the indemnity clause should
be deleted from the contract because, if
there is a breach, the Customer’s rights
under the general law are reasonable and
adequate, and the Contractor should not
be liable for anything beyond what well
established legal principles would allow.
On the other hand, if you are the
Customer, you might argue you want the
Contractor to be liable for anything that
arises from the breach of the contract,
and damages should not be artificially
limited by the principles a court would be
obliged to apply.
If the indemnity is to stay, then the next
step might be to negotiate the insertion of
words limiting the scope of the indemnity
in certain ways – eg: to ensure only
certain sorts of losses are claimable (such
as direct losses, and excluding certain
types of consequential losses, like loss
of profits), and to provide the innocent
party has a specific obligation to mitigate
its losses (an obligation that would
arise under general contract damages
principles but may not apply to a claim
under an indemnity).
The second part of the clause contains
an indemnity against losses arising from
other causes. This indemnity is very
broad. It might well be objected to on at
least one of the following grounds:
• Generally, the clause purports to
go well beyond any breach by the
Contractor of its obligations under the
contract;
• It purports to impose liability for ‘any
act or omission’. That could mean the
Contractor could be liable despite not
having been at fault in any way;
• It purports to impose liability on
the Contractor for acts of others; ie:
directors, officers, agents, employees
and sub-contractors, and certain others.
Why should there be a possible liability
there for the Contractor which would
go beyond the liability the general law
would impose upon the Contractor for
such matters?
A response to such objections might be
to say a court would be likely to limit the
literal interpretation of the clause in some
ways – eg: to construe the words ‘act
or omission’ to cover these only where
a breach of a legal duty is involved, or
to limit those for whom the Contractor
is liable to those where the law would
INDUSTRY in FOCUS
HIRE AND RENTAL NEWS • MAY 2016
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