What indemnity means
An indemnity is one party agreeing to carry a risk that would otherwise fall on the other.
If this particular thing happens and it costs you money, I will cover it. That is the whole idea, and its power is that it does not depend on anybody being in breach. The trigger is the event, not the fault.
That is what separates it from a claim for damages, where you would have to prove a breach, prove loss, prove causation, and watch the court reduce your award for remoteness and failure to mitigate. An indemnity shortcuts all of that.
How it is used
Indemnities appear wherever one side is asking the other to carry a specific risk. A supplier indemnifying a client against intellectual property claims arising from what they supplied. A contractor indemnifying a site owner against injury to their workers. A seller of a business indemnifying the buyer against tax liabilities from before completion.
In Nigerian commercial contracts they are also common in service agreements, franchise agreements and construction, and they are frequently the most heavily negotiated clause in the document.
Key features
- Primary obligation, so it does not depend on proving breach
- Triggered by defined events, which should be listed precisely
- Often covers legal costs as well as the underlying loss
- Can and should be capped by amount and limited in time
- Usually paired with a right to control or participate in defending the claim
How this works in Nigeria
The clause is enforceable as written, so the drafting is the whole battle. An uncapped indemnity covering all losses howsoever arising is an open ended liability, and small Nigerian suppliers sign them routinely without appreciating that a single claim could exceed the value of the entire contract.
The practical protections are familiar. Cap the liability by reference to fees paid, exclude indirect and consequential loss, set a time limit for claims, and require prompt notice so you are not indemnifying a claim somebody sat on for a year.
Indemnity vs guarantee vs warranty
A warranty is a statement of fact. If it turns out to be untrue, the other side claims damages, and the usual limits on damages apply.
A guarantee is secondary. It only bites when a principal debtor fails, and it generally falls away if the main obligation is unenforceable.
An indemnity is primary and direct. The party giving it pays on the occurrence of the specified event, without anybody needing to establish breach or work through remoteness rules. That is why parties fight hardest over indemnities and why they should be the clause you read most carefully.
Limits and risks
An indemnity is only as good as the party giving it. An unlimited promise from a company with no assets is worth nothing, which is why substantial contracts pair indemnities with insurance requirements.
It also only covers what it describes. A narrowly drafted indemnity covering third party intellectual property claims does nothing for a data breach, however painful.
Worth knowing
Never sign an uncapped indemnity. Cap it by amount, exclude consequential loss, and put a deadline on when claims can be brought.