What Do Indemnity for Breach of Contract Clauses Do?

What Are Indemnity for Breach of Contract Clauses?

While finding yourself in a breach-of-contract situation is never pleasant, it is common. That is why you need to get familiar with available solutions. Is it less expensive for you to give up on the agreed-upon goods, services, or payment than sue the breaching party?

Can an indemnity for breach of contract clause help you compensate for losses you have suffered? DoNotPay provides information to help you resolve the dispute.

What Is Indemnity?

An indemnity is a promise or contractual obligation of one party to compensate the other contractual party if the latter suffers harm or incurs a loss due to a certain event.

While this event needs to be specified in the contract, it can include, for instance, a:

  • Specific action
  • Breach of contract
  • Negligence or fault of one party

Indemnification vs. Breach of Contract

An indemnification occurs when a third party (not a contractual party):

  1. Suffers harm and injury
  2. Makes a claim against one or both contractual parties

Keep in mind that indemnity is not an appropriate remedy for breach of contract claims since they include only the parties to the contract.

Why Are Indemnity Clauses Useful?

Indemnity clauses manage the risks by protecting one contractual party from being liable for the other party’s actions.

Whether you should give indemnities depends on:

  • Different contractual circumstances—For instance, whether the agreement is of high risk
  • Willingness and positions of both parties—A contractual party with a stronger negotiation position tends to require an indemnity from the other party

You should ask for indemnity in case:

  • A (commercial) transaction is likely to cause harm or injury to you
  • Remedies associated with damage claims would be insufficient compensation for the suffered loss

When To Use Indemnity Clauses in Contracts

Here are some contracts where indemnity clauses are often used:

Type of ContractDetails
Share purchaseWhen purchasing shares, a buyer usually asks for an indemnity against the target company’s tax liabilities
Intellectual property rights assignmentIn contracts where intellectual property (IP) rights are assigned, the party transferring the IP rights can give the other party an indemnity in case the latter suffers loss from potential defects
Software licensingWhen companies get the right to use software, they often ask for an indemnity clause to protect themselves against potential liability, e.g., if it turns out that:
  1. A developer has copied the software from a third party
  2. The third party sues the company for the use of the software

When Is It Better To Avoid Indemnity Clauses?

Indemnities should not be part of the following types of contracts:

  • Consumer agreements—It is unfair and prohibited for consumers to pay indemnities to companies
  • Confidentiality contracts—In confidentiality agreements, an indemnity for breach of contract could:
    • Increase the liability of the party receiving confidential information
    • Make the other contractual party compensate for all liabilities, claims, and costs resulting from the breach

Liability Limitation Under Indemnity for Breach of Contract Clauses

Contractual parties should limit the liability of the indemnifying party—i.e., the contractual party that needs to pay for the suffered loss—since in some cases:

  • The risk of loss as a result of a breach of contract could be greater than the contract price
  • The indemnifying party might not be able to afford an uncapped indemnity amount

The amount of the indemnity should:

  1. Be reasonable
  2. Not exceed what state laws allow as damages for breach of contract

How To Claim Breach of Contract Damages

To compensate for the losses you have had because a party has not fulfilled the terms of the contract, you could:

  1. Sue them for the breach—You will have to prove the elements of the breach and prepare for lengthy and expensive proceedings if the other party raises affirmative defenses
  2. Reach an out-of-court settlement—While suing for damages is always an option you can resort to, you should try to sort out the problem by sending the breaching party a demand letter

Why Creating a Demand Letter Is Effective?

Drafting a breach of contract demand letter can be a good way to resolve the dispute since the letter serves to:

  • Formally remind the breaching party of the unperformed obligations
  • Show you will not give up on the agreed-upon contractual terms
  • Provide evidence that you have tried to settle the matter before initializing a lawsuit

If you are not sure how to draw up a convincing demand letter, register for DoNotPay—we can generate an airtight letter for you in a matter of minutes.

Create a Demand Letter With DoNotPay

Our AI-powered app knows what legal requirements you should meet when drafting a demand letter for a material, anticipatory, or any other type of breach. We also ensure the details of your contract are presented in the right way.

There is no need for you to consult lawyers or tailor undependable online templates to your case. Instead, subscribe to DoNotPay and:

  1. Access the Client Breach of Contract product
  2. Answer our chatbot’s questions about the contract and breaching party
  3. Insert the final payment or delivery deadline
  4. Describe the services that have been performed
  5. Upload photographic evidence to support your claim (if available)

In case the other party does not want to negotiate, we can help you sue them in small claims court.

Get the Specifics of Breach of Contract Procedures

If you would like to learn about your state legal requirements, you should consult the following table:

ColoradoNew YorkIllinois
VirginiaNew JerseyOhio
South CarolinaNorth CarolinaFlorida

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