![]() A look at indemnities, warranties and breach of contract claims. Indemnities in particular are the domain of lawyers, but even they struggle to explain the full significance of these obligations in a clear and simple manner to their clients. After having attempted numerous times myself, with varied success, here comes another attempt. 1. Let’s Start with what we know: Warranties. Most of us are familiar with the idea of a warranty. It is an understood principle that if you buy a product, use it as intended, and that product breaks within a specified period, (usually 12 months), you can return that item to the seller or manufacturer and receive a shiny new product in return. This is because the manufacturer has made a promise to the buyer that the product will not break within that specified period. This specific promise is known as a ‘warranty’. Strictly speaking, a warranty claim is a claim for damages (i.e. compensation for the loss suffered as a result of product failure). However, often the option to replace the affected product is expressly agreed between the parties. Warranties can be given in a variety of contexts, not just when buying consumer goods. For example: a warranty can ensure that the information provided is accurate or that a company is permitted to enter into a contract. 2. Comparing breach of contract claims and warranty claims A breach of warranty claim is the same in relation to conditions (1), (3) and (4). However, the difference is that under (2) there is no need for the claimant to show how the defendant breached their duty. The approach here is more akin to strict liability i.e. the product stopped working, but the reasons why are irrelevant. Of course limitations (if any) on the particular warranty would need to be considered. For example: most manufacturers will expressly say that the product warranty will be invalidated if the product is not used for its intended purpose. Warranties and warranty periods are important to understand as they directly impact issues such as price and insurance cover. Many jurisdictions imply into consumer contracts warranties and minimum warranty periods (for example: the Sale of Goods Act 1979 in England and Wales). In a business context, parties usually have more leeway to exclude implied obligations and can negotiate bespoke warranties and warranty periods. For example: the parties must agree whether the warranty period is to be fixed, (regardless of whether any replacement product is provided during that period) or whether the replacement product will be subject to its own warranty period, as though it were a new product (known as a ‘revolving warranty’). 3. Indemnities An indemnity is either a claim: (i) for damages; or (ii) for a debt. The difference is important. Where the indemnity is a claim for damages, the claimant will be expected to mitigate the loss and will only then be able to claim foreseeable loss. If the indemnity is a claim for a debt then, depending on the wording of the indemnity, the rules on remoteness and the duty to mitigate do not apply. Is the particular indemnity a claim for (i) damages or (ii) for a debt? An indemnity for a specific sum means it is more likely to be held as a claim for a debt rather than a claim for damages. However, the courts have also stated that the decision is, in part, a question of fact and determined on the basis of the drafting. 1 In White and Carter (Councils) Ltd v McGregor [1962], the court held that an indemnity from the defendant to pay the full contract sum if any payment was late was enforceable and because this was a debt claim, it would not be subject to mitigation. 2 If, therefore, an indemnity is specific e.g. “in the event delivery is late you will indemnify me £20,000”, it will be treated as a claim for a debt, and therefore the sum of £20,000 will not be subject to mitigation. The fact that, for example, no loss has been suffered at all, is irrelevant as to the application of the indemnity. A party can, therefore, be liable under an indemnity despite not having been responsible for the indemnifying event occurring and despite the claimant having suffered no loss. Indemnity event arises due to claimant conduct In Askey v Golden Wine Company and others [1948], Denning J (as he was then) set out the general principle in relation to indemnities for criminal liability: “It is, I think, a principle of our law that the punishment inflicted by a criminal court is personal to the offender, and that the civil courts will not entertain an action by the offender to recover an indemnity against the consequences of that punishment.” However, in Osman v J Ralph Moss [1970], the court held that a party could be indemnified for a fine or penalty for a strict liability offence (in this case driving without valid insurance), provided that there was no degree of intention or culpable negligence. Similarly, in Drake v Morgan (1978), it was held that a union could indemnify its members for fines imposed for criminal offences, provided the indemnity was for fines after the offence had been committed. This was further confirmed in Transport for London v Griffin, Addison Lee and others [2012], where it was held that an indemnity to pay for traffic fines was lawful if the indemnity was to pay the fines after their occurrence. Courts interpret indemnities strictly in accordance with the contra proferentem principle.;While an indemnity for the consequence of any illegal conduct is not permitted, it is possible to be indemnified for any fine from a criminal offence after that fine has been imposed. Statutory limitation Who must be indemnified? The court held that the claimant was entitled to be indemnified the unpaid rent sum from the defendant. Note that the court did not order or require the claimant to use the recovered sum for the payment of the outstanding rent. The case highlights the importance of drafting indemnity clauses to make sure it is clear (i) who will be indemnified, (ii) what specific matter the indemnity is for and (iii) whether there are any preconditions to payment. For example: if the intent had been to ensure the property rent remained paid to avoid the property becoming subject to repossession, the indemnity should have been worded to clarify that it was the landlord who would be indemnified for the claimant’s rental costs. If, on the other hand, the indemnity was for the benefit of the claimant for their rental costs, then the indemnity should have been specific that it would be conditional on proof that the rent had been paid. Whilst it is clear under most indemnities that an obligation to pay is owed on the occurrence of an event, it is important to clarify the mechanics of who gets paid, in what circumstances and subject to which preconditions. Indemnities for 3rd party claims It is important that the party providing the third party indemnity ensures it will retain control over the handling of the claim and any settlement thereof (even if it is not a party to the claim). Generally speaking, the right to indemnity should also be limited to reasonable legal costs. Without a clear ‘conduct of claims’ clause, there is a real risk of a disconnect between the indemnifying and the indemnified party. For example: the indemnified party could settle the claim and engage expensive lawyers and the indemnifying party would be responsible for these costs. Is there nothing to stop these indemnities? 4. Conclusion In an indemnity case, it is important to define whether it should be treated as a damages claim or as a debt claim. An indemnity for a prescribed amount or a fine (as opposed to a generic claim for ‘losses’) is more likely to be treated as a debt claim. Indemnities and their application do arise in other jurisdictions and it is therefore advisable to beware of specific statutory or other rules that may apply to indemnities. –––––––– 1 See Total Transport Corp. v Arcadia Petroleum Ltd (The Eurus) [1998] |
Bio:
Chris Nillesen is a Durham University graduate and qualified lawyer in both UK and New York law, with over 12 years of experience working in a variety of jurisdictions including the UK, New York and the UAE in corporate finance and M&A. His previous employers include Serco plc and Kilpatrick Townsend & Stockton LLP
Email: chris_nillesen@yahoo.co.uk