What does indemnity mean in legal terms?

What does indemnity mean in legal terms?

Indemnity is generally an agreement between two parties, where they enter a contract authorizing that one party will be liable or legally responsible for legal risk, damages, or losses that would be paid to another party during a case.

For example, if you are an account coordinator at a public relations firm and paid for advertising your client’s new brand, but the advertising is proven false by consumers, the PR firm doesn’t want to be responsible for the damages that have endured from the advertising of the new brand.

When parties are involved in this type of agreement, there will be a written agreement called an indemnity clause which will outline terms and conditions of the agreement specific to the case.

In this clause it will outline who is the indemnitor and indemnitee, and who will be responsible for the financial risk. An indemnitor will free a party from the financial risk of a matter and the indemnitee will receive the compensation for the losses that have been endured. In indemnity agreements, either the indemnitee will be the party that is compensated for losses, or they can be the party released from legal risk where the indemnifying party will be responsible for the defence in a claim between the indemnitor and indemnitee.

There are many different types of indemnity clauses that can take into effect. One type of indemnity clause protects a party from a third party’s risk, for example, Party A gives indemnity to Party B who is protected from Party C’s risk. There is also an indemnity clause for financial risk where Party A offers indemnity to Party B in the case Party C doesn’t compensate what is financially owed to Party B. Further, there is a mutual indemnification where indemnity is allocated to both parties that allocates the legal or financial responsibilities for damages to the party that violates the contract. There are many more types of situations that may occur to parties while under a contract, but in summary, indemnity clauses act as the protection for one party against another’s actions.

In certain cases, there is a possibility that an indemnity clause will not involve any payments for damages, but solely to protect legal responsibility for a party involved in the agreement. For example, a clothing company can draw up an indemnity clause between them and a manufacturer in case the product is incorrectly manufactured so that it doesn’t affect their costs for production, or they have the option to outsource to another manufacturer. The clothing company isn’t looking for financial compensation, but for financial protection.

If you are seeking legal counsel to help negotiate an indemnity clause, or to review one that has been outlined in a contractual agreement, please contact KCY at LAW by filling in an online consultation request or contact us by phone at 905-639-0999 to book your consultation today.