The fairy with the magic wand represents an indemnity – because one wave of her wand will make all of the injured party’s troubles disappear!
If things have gone wrong because of one party’s breach of the contract, the other party might be entitled to seek damages, to compensate them for any losses they’ve incurred. Before they are awarded damages, they have to jump through a number of hoops, to the reasonable satisfaction of the Courts:
- they must prove that the other party has breached the contract; and
- they must prove that they have suffered a direct loss because of that breach; and
- they must prove the amount of the loss; and
- they must show that they’ve used their reasonable efforts to mitigate their loss (i.e. keep the amount of their losses to a minimum).
All of this is time consuming and expensive, and is generally limited to direct losses only (see the baseball cap for more details of direct and indirect losses).
Sometimes, a party will ask to be ‘indemnified’ against the risk of a particular loss, or class of losses, resulting from a particular breach, or class of breaches.
An ‘indemnity’ is essentially a promise to pay all of the other party’s indemnified losses, regardless of whether they are direct or indirect, and without any obligation on the other party to mitigate their losses. So it’s like offering to wave a ‘magic wand’ and make all the other party’s problems go away!
Indemnities are generally better to receive than they are to give – if you are asked to give an indemnity (and a forceful “No!” has not been effective), make it as limited as possible (and ideally subject to your limit of liability), to restrict your commercial exposure. If you are requesting an indemnity, the reverse is true – but you may need to agree to some sensible limits, in order to make the risk of the indemnity commercially acceptable to the other parties.
Want to know more? Contact Devant for contract assistance!