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What an indemnity is
An indemnity is a contractual promise to compensate another party for a defined loss or liability. Unlike a guarantee — which is secondary and depends on the primary party's default — an indemnity creates an independent obligation. The indemnifier pays if the specified event occurs, whether or not the person they are indemnifying has done anything wrong or whether an underlying debt is recoverable.
This distinction matters enormously in enforcement. If the underlying loan agreement is void for some reason, a guarantee (being accessory to the debt) may also fall; an indemnity typically survives because it is a standalone primary undertaking.
Where indemnities appear in commercial finance
Indemnities are common in a wide range of lending and commercial documents:
- Facility agreements — borrowers typically indemnify lenders against regulatory, breakage, and increased costs.
- Acquisition finance — sellers indemnify buyers against known or disclosed risks in the target company.
- Asset finance — indemnities cover the lender against loss, damage, or tax liabilities on leased assets.
- Inter-company arrangements — parent companies issue indemnities to subsidiaries' lenders to support group borrowing.
Negotiating indemnity terms
Indemnities in commercial contracts are often heavily negotiated. Key points to address include: the cap on liability; exclusions for indirect or consequential loss; the period during which claims must be notified; and whether the indemnity covers gross negligence or wilful misconduct of the beneficiary. Standard lender indemnities in facility agreements are rarely negotiable for smaller borrowers, but in larger or bespoke transactions the scope can be refined.
Confirm the scope and implications of any indemnity you are asked to give with your solicitor before signing.
Frequently asked questions
Is an indemnity always enforceable even if the underlying contract fails?
Generally yes — that is the point of an indemnity. However, enforceability depends on the indemnity's own drafting: it must be clear, properly executed, and not vitiated by its own defects such as misrepresentation or illegality of the indemnity itself.
Can an indemnity be time-limited?
Yes. Parties frequently agree notification periods, longstop dates, and limitation periods for indemnity claims. Without express limits, the statutory limitation period (six years for a simple contract, twelve for a deed) applies.
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