When drafting your indemnity clause, always think of:
- which loss a party might suffer;
- how the loss would arise (ie which event/action should trigger the indemnity);
- who should pay for them; and
- to what extent the indemnifying party should pay for them.
Depending on the way the clause is drafted, indemnity can cover:
- all loss caused by the trigger event: the clause can be drafted very broadly, so that the indemnifying party has to pay for all loss ''arising out or in connection'' with the trigger event, no matter how remote or indirect it may be.
- a list of loss: for more certainty, the indemnity clause can include a sub-clause stating that the indemnity covers a specific list of loss, such as liabilities, costs, expenses, damages, taxes, penalties, etc.
- direct loss only: the parties can agree on a narrow indemnity clause that will restrict the indemnity to the loss directly caused by the trigger event.
- the most likely loss: the indemnity can specify what a party has to pay if the trigger event occurs, excluding everything else.
As a general rule, the amount of the indemnity should remain reasonable and should not be more than what the law would allow as damages for breach of contract. Indeed, an indemnity that gives 100% recovery of all loss caused by the trigger event could extend into very onerous obligations which the law would not normally impose.
Ask a lawyer if you need help in the drafting of an indemnity clause.