Businesses that don’t negotiate to narrow the scope of the indemnity clauses in their commercial contracts could be exposing themselves to too much risk warns Taylor Walton Solicitors.
Increasingly the firm is seeing draft contracts being worded which pushes much broader indemnities onto one party, but the draft wording if unchallenged means they could be liable for any breach in relation to that area of the contract, which clearly exposes them to too much risk.
Whilst one sided agreements are common in many contracts, by negotiating, the contracting parties can tailor the amount of risk which they are willing to undertake with each transaction and protect themselves from damages or litigation which should be the responsibility of the other party.
It is also important that indemnities are clearly worded in a contract to reflect the intentions of both parties.
Peter Kouwenberg, Head of Commercial at Taylor Walton Solicitors comments: “Indemnities in contracts are a key part of mitigating risks for one party, but they can also represent a significant liability. Whilst there is a contractual obligation for one party to compensate the other for loss or damages incurred by them or the goods or services they supply, the indemnity needs to relate to a specific trigger event and the type of losses covered. There also needs to be a level of cooperation required from the indemnified party in the event of a claim and who controls the defence of the claim.”
“I’ve recently reviewed a contract for a client which would have loaded all of the responsibility onto them for indemnifying the other party in respect of third-party intellectual property, which was much too broad and would have posed a huge financial risk to them had it not been negotiated.”
“It can be difficult for clients who are eager to sign a contract with a client as it is business which they have been chasing for some time. Sometimes they may not spot an indemnity clause in a contract as they are not always labelled explicitly which is often where issues and disputes arise. This is why it is important for a contract to be reviewed by a solicitor so that responsibilities and expectations are fully understood by both parties. This also helps to reduce ambiguity and in the longer term minimise the chance of disputes which will lead to a stronger relationship between both parties.”
