Developments in contract: Indemnities

Principles

• Parties are free to draft contractual terms that capture the precise nature of their agreement as to the procedural requirements that must be met before a claim can be made under contractual warranties and indemnities, and the scope of such indemnities.
• While the English courts may consider the factual background to a contract when interpreting its requirements, the starting point will always be the wording of the document. Contractual indemnity provisions tend to be construed literally and absolute compliance with them will be required in order for a claim upon the indemnity to be valid.

Recent developments

• In the recent case of Towergate Financial v Hopkinson, the Commercial Court considered a notice provision requiring a claim under a contractual indemnity to be given “as soon as possible and in any event prior to…on or before the seventh anniversary of the date of this Agreement”.
• The Court held that this procedural requirement was twofold, such that any notification must be given both as soon as possible and before the seventh anniversary of the agreement. Accordingly, notice that had been given within the seven-year timeframe, but that had not been given as soon as possible, was invalid.
• Separately, in Gwynt Y Mor Ofto v Gwynt Y Mor Offshore, the Commercial Court considered an indemnity clause that applied where the asset that was the subject of the sale and purchase agreement was “destroyed or damaged prior to Completion”. In particular, the Court was required to examine whether the indemnity clause covered damage that occurred after execution of the sale agreement but before completion or whether the clause covered any damaged that occurred prior to the completion (whether prior to or after execution).
• On review of the specific wording of the indemnity clause and the sale agreement as a whole, the Court found that the indemnity clause should be interpreted as being limited to damage occurring after the execution of the sale and purchase agreement, even though this was not explicit in the clause itself.

What this means

• When drafting notice provisions, parties should ensure that the procedural requirements that must be met before a claim can be made under contractual indemnities are clear. Where multiple requirements or timeframes must be satisfied before notice is considered to have been given, this should be unequivocal.
• Similarly, parties should ensure that indemnity clauses are precisely worded so that there is no ambiguity about what the indemnity clause is intended to cover. If an indemnity clause is designed to cover damage caused prior to completion but after execution, this should be explicit.