Things to consider in relation to indemnities

Following on from recent posts, this week's post is again extracted (with thanks) from the Chairman's Red Book.

© Stuart Key | Dreamstime.com

The courts have recently applied a restricted view on the use of indemnities and in some cases, have failed to acknowledge the validity of broad, all-encompassing indemnities.  Notwithstanding this, claims under clearly expressed indemnities are generally upheld.

The following issues should be considered by anyone providing an indemnity -

1. the limitation of the loss (i.e. direct loss only and not consequential loss);
2. the scope of the indemnity (e.g. 'loss in connection with' compared to 'loss caused solely by');
3. excluding liability under the indemnity where the liability arises as a result of the indemnified party's default or negligence, or limiting it to the extent it has been contributed to by the party;
4. making the indemnity subject to any exclusions or limitations of liability within the agreement;
5. requiring the indemnified party to mitigate its loss; and
6. including a right for the indemnifying party to defend any claim for which it will be liable as a result of the indemnity.

It is common practice for a buyer to request a separate tax indemnity in share sale agreements.  This is primarily so that the respective obligations of the parties in relation to tax, including as to timing, are clearly and specifically identified. 

It is also common for 'gross up' provisions to be included in these indemnities which account for the tax payable in respect of warranty payments.  Consideration should be given to whether it is appropriate for the parties to agree contractually that any warranty payments are to be treated as a reduction of the purchase consideration.

You might also be interested in The Chairman’s Red Blog, which is a supporting resource for the book.

Until next week.