The Santa clauses

Many a consultant's contract negotiation glides freely through smooth waters until the subject of indemnities arises. Smiles nervously fade. Iceberg ahoy. But what exactly is it about indemnities that causes all the furore?

Let us look at an example of an indemnity. "The consultant indemnifies the client against all losses, damages, costs, expenses, liabilities, claims, proceedings or actions resulting from any act or omission by the consultant in carrying out its work." A harsh example, but not an unusual one.

The problems start with the fact that indemnities can allow a client to recover damages far more remote than those prescribed by the law of contract or negligence. One way or another, these areas of law demand a degree of predictability. But depending on the precise wording of an indemnity, the mere fact that the indemnifying consultant caused the loss suffered by the client can be sufficient for the client to recover. In other words, the question of whether the consultant foresaw or should have foreseen that loss, or even whether or not it was at fault, need not arise. Surely rather draconian in anyone's books.

That is just the beginning. It gets worse. Case law is a little sketchy on this point, but it seems that if the indemnity is not triggered by a breach of contract, the client may have no duty to mitigate its loss. Perhaps the client could have repaired the damage more cheaply, or, with a bit of haggling, might have reduced a third-party claim from a disgruntled tenant or purchaser, rather than paid over the odds simply to get it off his desk. One hopes clients might act with more caution before their compensation is secured, but an indemnity could allow them to behave in such a cavalier and unjust manner.

Indemnities have yet more horrors to dish out. An entirely spurious claim might be presented by a third party against the client, which predictably fails. Nevertheless, any legal and other expenses incurred by the client in rebutting that claim could be passed on to the indemnifying consultant.

It gets worse. If the indemnity is not triggered by a breach of contract, the client may have no duty to mitigate its loss

The indemnity's cruel scythe thrashes on. The consultant (and therefore its insurers) is almost inevitably precluded from the handling of a third-party claim against the client. Indeed, the indemnifier may not even have an inkling of the third-party claim until such time as the client taps on their shoulder and asks for compensation. Equally alarming is the fact that the "limitation period" during which claims can be brought runs from the date the client suffered its loss, not the date of the consultant's act or omission. If the third party were to sue the client at the end of a 12-year contract liability period, the client would have another 12 years (assuming a contract under seal) to claim compensation. The consultant could be faced with double the usual period of exposure to claims.

As if that were not enough, it has even been suggested that the client's contributory negligence might be ignored in the event of an indemnity.

Now if, as a client, all this sounds like music to your ears, remember there is a catch. A successful indemnity claim may offer only pyrrhic victory if the consultant's PI policy excludes cover outright, demands that the indemnity is so qualified as to lose its impact, or effectively negates cover through the small print. That should come as no surprise. If indemnities can allow losses way beyond those normally recoverable in law, for a considerably longer period, and even on a no fault basis, then they amount to ex gratia payments by the insured – and you would hardly expect insurers to trip over themselves to cover those.