Indemnity is used as a shield from liability, but how useful is it?
Venkatesh Vijayaraghavan details key issues that affect its efficacy
While indemnity provisions are routinely included in all kinds of contracts, including those for mergers and acquisitions and the supply of services or products, they are often misunderstood and may be of little help unless drafted carefully.
An indemnity is typically sought to compensate for breaches of representations (or assurances on certain matters) and covenants (or agreements to do or not do certain things) and also for specific and anticipated or unknown sources of risk, such as litigation or tax liabilities.
It is helpful for parties on both sides of an indemnity to be aware of its legal effect, and also understand drafting mechanisms that can be used. Otherwise, a party may include an indemnity to protect claims arising from contract breaches, only to find that it instead serves mostly to limit liability for such claims. In addition, the law may prohibit or restrict certain types of recovery.
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Venkatesh Vijayaraghavan is a lawyer at S&R Associates. The views expressed in this article are personal to the author and not a substitute for legal advice.
