Indemnities For Breach of Contract - Do They Do What You Think They Do?

Key Points: An indemnity covering breach of contract must be properly drafted if it's to work as expected.

The inclusion of an indemnity covering breach of contract has become increasingly common in modern construction contracts. There are two perceived key benefits of including this sort of indemnity:

it allows for the recovery of loss as a debt as opposed to a traditional claim in damages; and all losses are able to be recovered including remote loss. In this article we'll examine what type of obligation arises under an indemnity clause and whether these two perceived benefits do in fact exist.

What type of obligation arises under an indemnity clause?

The case law suggests that courts have been inconsistent in the way that they have interpreted indemnity clauses and the obligations arising under those clauses. There appears to be two alternative obligations that may arise under an indemnity clause:

Preventing loss: An obligation to indemnify another party has been interpreted by some courts as giving rise to an obligation to prevent the loss or harm covered by the indemnity from occurring (for example, Firma C-Trade SA v Newcastle P & I Assn (The Fanti) [1991] 2 AC 1). In other words, it gives rise to an obligation to prevent something from happening rather than a mere obligation to compensate for loss or harm suffered. If an indemnity clause is interpreted in this way, the indemnifier will be in breach of contract if the relevant loss or harm is suffered and will be liable to pay damages for breach of contract to the indemnified party. Therefore, the indemnified party's remedy under the indemnity will be a claim in damages for breach of contract. Making good: Some courts have interpreted an indemnity as only giving rise to an obligation on the...