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:
- The wording of the indemnity itself and its relationship to the rest of the contract.
- The relationship between the indemnity and the exclusion of liability provisions.
- Whether a claim under the indemnity is characterised by a court to be a claim for a debt or for damages.
- Whether the indemnity is linked to contractual breach.
- Whether the indemnity provides for matters in addition to the payment of money.
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.
Does an indemnity meet the customer’s needs?
We shall use the following scenario:
- A company carries on the business of selling insurance (the Customer). The Customer entered into an outsourcing agreement with a third party (the Supplier) to outsource the selling of the Customer’s insurance products by the Supplier.
- During the provision of services, the Supplier’s personnel used misleading sales practices to pressure customers into purchasing the Customer’s insurance products.
- The Customer became aware of the mis-selling practices by the Supplier’s personnel and notified the relevant regulator of the mis-selling of insurance. The regulator investigated and required the Customer to compensate the customers affected by the mis-selling and also fined the Customer for breaches under the insurance industry regulations.
- The outsourcing agreement contains an indemnity in favour of the Customer that “the Supplier indemnifies the Customer for all losses following and arising out of claims or complaints registered with the insurance regulator pertaining to any mis-selling or suspected mis-selling of any insurance or insurance related product or service by Supplier”.
- The Customer claimed under the above indemnity for its losses incurred in compensating its customers and the payment of the fine.
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:
- In an M&A context, the purchaser of a company had the benefit of an indemnity, similar to that set out above, given by the seller under a sale and purchase agreement.
- The indemnity provided that the seller would indemnify the purchaser for losses it incurred following and arising out of claims or complaints to a regulator for the mis-selling of insurance prior to the completion date.
- There had been mis-selling of insurance and the purchaser notified the insurance regulator of this issue. The regulator subsequently ordered the purchaser to implement a remediation scheme to pay compensation to affected customers. The purchaser made a claim under the indemnity for these losses but the seller argued that it was not liable for the losses.
- The Court agreed with the seller and held that the purchaser was unable to claim under the indemnity for the misleading sale practices prior to completion. The reasoning was that the indemnity was only triggered if there was a claim or complaint to the insurance regulator by a customer, as opposed to the self-reporting of an issue to the regulator by the purchaser.
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:
- An indemnity for third party IP infringement claims: is it intended that the indemnity is to apply for any third party claim asserted, or does the claim need to be finally adjudicated before the indemnity is triggered?
- An indemnity for regulatory breaches: is it intended that the indemnity is to apply where there is any suspected breach or any investigation by a regulator (which may not result in any enforceable action being taken by the regulator), or does the breach need to be substantiated and/or an enforcement action taken by a regulator before the indemnity is triggered?
The good news is that, from a drafting perspective, such matters can be made clear by appropriate wording.
Does an indemnity meet the supplier’s needs?
We shall take another example using the same Customer and Supplier scenario as above. Now assume that:
- The Supplier received a claim from a customer that purchased one of the Customer’s insurance products. The claim involved the customer alleging that that it was mis-sold insurance due to the Supplier’s personnel acting negligently.
- An indemnity is included in the outsourcing agreement in favour of the Supplier: “Customer indemnifies the Supplier against the payment or performance of any and all actions, costs, claims, losses, liabilities, proceedings or expenses which the Supplier may suffer or incur as a result of any third party claim in connection with the provision of the Supplier’s services”.
- The Supplier subsequently claimed under the above indemnity for the losses and costs it incurred in having to respond to and defend the third party claim.
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:
- The buyer was to indemnify the seller for the business’ liabilities with effect from the effective date under the sale and purchase agreement.
- The seller’s group mis-sold insurance prior to the effective date and the seller’s group subsequently paid out amounts to customers to redress the mis-selling.
- The seller claimed the amounts paid from the buyer under the indemnity, which the buyer resisted, arguing that it was not a liability contemplated by the indemnity as it arose due to the seller’s own negligence.
- The Court disagreed with the buyer’s interpretation and held that, based on the language and context, the drafting was broad enough to capture all liabilities of the business (other than where such liabilities arose as a result of fraud or dishonesty) and so included liabilities that arose due to the seller’s own negligence.
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:
- A party dealing with any investigations, proceedings or hearings involving a regulator as a result of the other party’s acts or omissions: where the indemnified party’s actions in dealing with the regulator could result in additional costs (for which it seeks indemnification) if not managed in an efficient and proper manner.
- Third party IP claims: where the indemnified party may try and defend / settle the claim which could result in additional costs being incurred (and for which it seeks indemnification).
In the examples above:
- The Cigna decision could be helpful where express wording does not cover the loss in question.
- The party giving the indemnity might argue that, if the indemnity claim can be characterised as a claim for damages (and not a debt), then the party seeking indemnification has failed to mitigate its losses.
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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