Mistaken Indemnity

An indemnity is a contractual promise by one party to make good a specific loss suffered by another. The indemnity entitles the indemnified party to a payment if the anticipated event does indeed take place. Simple enough? Yes and no.

A customer licenses software from a supplier. If the software should turn out to have been copied from a third party, the customer's use of the software will infringe the rights of that third party and the customer could end up being sued for damages. So the supplier provides the customer with an indemnity, protecting it by agreeing to cover any loss that might arise as a consequence of the uncertain copyright position. Problem solved.

When used correctly an indemnity can provide a simple remedy to a situation in which one party should not reasonably be expected to bear the burden of a particular loss from a specified event. But there are a number of popular misconceptions about indemnities which ensure that they are often misused.