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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
United Kingdom | Publication | July 2024
It is common for indemnities to be heavily negotiated in outsourcing and technology contracts (sometimes transitional services agreements include them too, although more rarely).A party wishing to include an indemnity may hope that it will enable it to recover its losses on a so-called “pound-for-pound” basis (for example, permitting the recovery of both direct and consequential losses), in contrast to a breach of warranty or breach of another contractual obligation, where the common law principles of remoteness of damage and mitigation may result in a lesser degree of recovery.
However, it would be wrong to assume that recovery of both direct and consequential losses under an indemnity is always possible under English law. It will depend on a range of factors – for example:
Appropriate drafting can go a long way to achieving an indemnity’s desired commercial outcome (such as the recovery of consequential loss, in the instance given above).
Here we explore a few issues commonly arising in relation to drafting indemnities in outsourcing and technology contracts and transitional services agreements, informed by recent English case law in the area. We will consider the issues first from the customer’s perspective and then from that of the supplier.
We shall use the following scenario:
Would the Customer’s indemnity claim be successful against the Supplier?
The answer depends on the particular wording of the indemnity and the broader contractual and factual context, but there is a well-known Supreme Court decision that is instructive. In Wood v Capita Insurance Services Ltd [2017] UKSC 24:
The Wood v Capita decision is a reminder that care needs to be taken when considering what risks the indemnity is intended to protect against and to ensure that the drafting of the indemnity reflects this.
For example, take the following types of indemnity:
The good news is that, from a drafting perspective, such matters can be made clear by appropriate wording.
We shall take another example using the same Customer and Supplier scenario as above. Now assume that:
Would the Supplier’s indemnity claim be successful against the Customer?
Again, the answer depends on the particular wording of the indemnity and the broader contractual and factual context, but there is a recent case that is of assistance. PA(GI) Ltd v Cigna Insurance Services (Europe) Ltd [2023] EWHC 1360 (Comm) is a judgment of the English High Court that deals with whether an indemnity covers a party wishing to recover losses for its own acts and omissions. In the Cigna case:
Indemnities that indemnify a party for its own acts and omissions, including for negligence, may arise in outsourcing or technology contracts in a number of contexts – for example, indemnities for:
In the examples above:
While the Cigna decision suggests that express words may not always be needed for coverage for a party’s own negligence, given there are earlier cases going the other way (for example, Onego Shipping & Chartering BV v JSC Arcadia Shipping (M/V Socol 3) [2010] EWHC 777), such wording should be included to avoid a dispute about it.
Our observations Whether an indemnity achieves its purpose will almost always come down to the construction of the indemnity. Of paramount importance is the drafting. The scope of an indemnity requires careful consideration to ensure that it captures all intended recoverable losses. An indemnity should not be drafted in the absence of consideration of its relationship with the wider contract. In particular, the drafter will want to ensure that the relationship between the indemnity and the limitations and exclusions of liability provided for elsewhere in the contract is made clear in the drafting. |
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