Tuesday, July 5, 2011

Indemnity types

Indemnities are described in a number of different ways depending upon the scope of the indemnification and the subject matter.  The indemnitor is the party providing the indemnity and the indemnitee is the party being protected by the indemnification.

A “broad form” indemnity has indemnitor hold the indemnity harmless from the risk in question, even if the entire loss was caused by the indemnitee. 

A “intermediate form” requires the indemnitor to assume all of the risks associated with the subject of the indemnification, but not if the sole cause of risk is attributable to the indemnitee. 

A “comparative fault” indemnity, would hold the indemnitor responsible only for the loss caused by the indemnitor, or to the extent caused by the indemnitor. 

A “mutual” indemnity has each party indemnifying the other party for losses that they caused the other party. For example the supplier indemnifies the buyer for losses the supplier causes and the buyer indemnifies the supplier for losses the buyer caused.

In many jurisdictions a broad form indemnity may not be enforceable as it goes against the principles of equity where the party providing the indemnity is being penalized for something they didn’t do. Most buyers prefer intermediate form indemnities rather than comparative fault or indemnities.  The reason why they don’t like comparative fault remedies is it almost always requires both parties going to court to establish their percentage liability.  Mutual indemnities are not frequently used as between a buyer and supplier the liability risks are different. A buyer may be liable for the acts of a Supplier because the law of agency would consider the buyer the principal and the supplier the agent, and principal are liable for the acts of their agents. A supplier would not be liable for the acts of the buyer under the theory of agency.  As a result most indemnity provisions will carve actions of the Buyer out of the indemnification.  For example, in an indemnity provision against personal injury or property damage claims,  injuries or damage caused by the sole negligence of the buyer would be carved out of the suppliers indemnification.  For intellectual property indemnifications suppliers will want to be excused from providing the indemnification in situations where the Buyer caused the infringement.

There are other potential indemnities such as “work related” indemnities that relate to the indemnitor’s  work and would not require negligence. In many contracts rather than include an indemnity the buyer may include a warranty that would require certain facts be true now and in the future or they could require insurance.  For example a partially constructed building could have damage in which the contractor wasn’t negligent so instead of an indemnity you might require insurance on the completed operations as protection against the loss. A “financial” indemnity is nothing more than a guarantee of payment by a third party to the indemnitee.  For example the buyer a third party to purchase items directly from the supplier and the supplier wants protection from the buyer that the third party will pay for what they purchase. Most buyers seek to avoid providing any form of financial indemnity or other payment guarantees for third parties such as other suppliers as the risk can be managed in a number of other ways.


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