11/12/23
In the UK, indemnity covenants are agreements between two parties in which one party, the indemnifier, agrees to compensate the other party, the indemnified party, for any losses or damages that may occur as a result of a specific event or occurrence. These covenants are commonly used by solicitors in contracts for the sale of goods or services, leasing agreements, and other commercial transactions.
Indemnity covenants can be used to protect one party from financial losses, legal liabilities, or other potential harm that may arise from the performance of the contract. For example, an indemnity covenant in a contract for the sale of a property may require the seller to compensate the buyer for any losses suffered as a result of a defect in the property. Similarly, an indemnity covenant in a leasing agreement may require the tenant to compensate the landlord for any damages caused to the property during the tenancy.
It is important to note that indemnity covenants should be carefully drafted to ensure that they are clear, enforceable, and that they provide the intended level of protection to the indemnified party. In addition, the parties should consider the scope of the indemnity and the potential costs and risks involved, as well as the consequences of a breach of the indemnity covenant.
Here are some key points to remember about indemnity covenants:
Purpose: Indemnity covenants are agreements between two parties in which one party agrees to compensate the other party for any losses or damages that may occur as a result of a specific event or occurrence.
Protection: Indemnity covenants are used to protect one party from financial losses, legal liabilities, or other potential harm that may arise from the performance of a contract.
Scope: The scope of the indemnity should be clearly defined and should be limited to specific events or occurrences that are reasonably foreseeable and related to the purpose of the contract.
Enforceability: Indemnity covenants should be carefully drafted to ensure that they are clear, enforceable, and that they provide the intended level of protection to the indemnified party.
Consideration: The parties should consider the potential costs and risks involved in the indemnity, as well as the consequences of a breach of the indemnity covenant.
Limitation of liability: Indemnity covenants should not be used to transfer all risk from one party to another and should be balanced with a limitation of liability clause, which sets limits on the maximum amount of damages that may be claimed by the indemnified party.
Insurance: The parties should consider whether insurance should be obtained to cover the potential costs of the indemnity, especially in cases where the risk is significant.
Review: The parties should periodically review the indemnity covenant to ensure that it remains appropriate and relevant in light of any changes in the circumstances of the contract as we know the law is always changing.
How are indemnity covenants used in the conveyance of land and property?
An indemnity covenant may be included in the title register to a property or transfer deed as a specific clause or provision. This is usually because previously agreed positive covenants exist, which require a person to do something, which do not automatically run with the land, due to the common law doctrine of Privity of Contract, which prevents a person who is not a party to a contract from enforcing a term of that contract. This is unlike restrictive covenants, which prevent an owner from doing something, which do in fact run with the land and will automatically bind each subsequent owner.
To ensure the next owner absolves the original covenantor of liability if a positive covenant is breached, an indemnity covenant is used. Moreover, to maintain the ‘chain of indemnity’ throughout each subsequent sale, indemnity covenants are used within each transaction. If the chain is ever broken, the liability will lie with the last person to give an indemnity, which may not be the person who owns and is in control of the property.
One case that supports the concept of indemnity covenants and the chain of indemnity is the case of Rhone v Stephens [1994] UKHL 3. The case concerned roof repairs and the House of Lords held, as the covenant to repair was positive, its burden did not pass to the subsequent owner. This decision reinforced the principle that whilst the burden of restrictive covenants pass, the burden of positive covenants do not, and thus highlights the importance of indemnity covenants within conveyancing transactions.
In conclusion, indemnity covenants are a useful tool for transferring the risk of loss from one party to another and for providing a measure of protection against financial losses or legal liabilities. They can be found in a variety of legal agreements, contracts, and documents, and are an important consideration for anyone involved in property transactions or activities. When reviewing an indemnity covenant, it is important to ensure that it is clear and enforceable, and to seek the advice of a legal professional. Here at CTT Law we offer bespoke legal advice to our clients, so please do not hesitate to get in contact with a member of the team who will be happy to assist.
