Indemnity clauses

Authored by the LexisNexis Legal Writer team.

In the context of commercial and business contracts, an indemnity is a contractual obligation assumed by one party to hold another party harmless against, or to compensate another party for, loss which that other party suffers as a result of certain specified events (such as the indemnifying party breaching the agreement): see, eg Mason CJ’s description of an indemnity as “a promise by the promisor that he will keep the promisee harmless against loss” in Sunbird Plaza Pty Ltd v Maloney at [207].

Purpose of an indemnity

In broad terms, an indemnity is a contractual tool that can be used to manage, allocate or transfer liabilities and risks between parties to a contract. An indemnity is a powerful tool because it gives the indemnified party a contractual remedy that is not necessarily subject to the same limitations that apply to an action for damages for breach of contract.

Ordinarily, a party that suffers loss as a result of another party breaching a contract must apply to court to seek the remedy of damages. The purpose of damages is to put the aggrieved party in the position they would have been in if the other party had performed the contract: Gates v City Mutual Life Assurance Society Ltd at [607].