Draft for the advantages - they are not automatic
The recurring lesson across the indemnity cases is that the advantages - escaping remoteness and mitigation, sitting outside the cap, recovering pound for pound - exist only where the drafting secures them. Start, therefore, by drafting the obligation as a covenant to pay: on the indemnified party incurring the specified costs or liabilities, the indemnifier shall pay on demand a sum equal to them, without any requirement to mitigate and whether or not the loss was foreseeable.
Then make the trigger precise (name each route to loss), state the cap relationship expressly (in or out), and decide whether notice is a condition precedent. Those four - debt wording, trigger, cap, notice - are where indemnities are won or lost; each has its own guide above.
"Hold harmless" probably adds nothing under English law
Almost every contract says "indemnify and hold harmless". Under English law the two are generally treated as synonymous, and using both adds little. The point is sometimes attributed to Farstad Supply v Enviroco [2011] UKSC 16, but the Supreme Court there used the terms together without drawing a distinction and did not definitively rule that they mean the same thing - so treat "hold harmless" as, at most, belt-and-braces rather than a source of extra protection.
That said, "hold harmless" is not always redundant. In Deepak Fertilisers & Petrochemical Corporation v Davy McKee (London) Ltd [1998] EWCA Civ 1753; [1999] 1 All ER (Comm) 69, the Court of Appeal accepted that an agreement to indemnify and hold harmless can carry, by necessary implication, a term not to sue the indemnified party for the covered losses. Whether it has that effect turns on the wording and context, so if you want a specific result - a waiver of claims, or protection against potential (not just incurred) liabilities - draft it expressly rather than relying on "hold harmless".
Tax: gross-up so the indemnity is not eroded
An indemnity payment can be taxable in the recipient's hands. Following Zim Properties Ltd v Procter [1985] STC 90, a right to sue is a chargeable asset, and receiving a payment for it can be a disposal with little or no base cost - so the receipt may be taxed, leaving the indemnified party short of the loss it suffered.
A gross-up clause solves this: the payer must increase the payment so the recipient receives the intended net amount after tax, with sums paid free and clear of deductions and withholdings. If the indemnity is meant to make the recipient whole, a gross-up is usually needed.
Cross-border: the US traps
English law's permissive approach to commercial indemnities diverges from US state law, and for cross-border deals that can make a carefully-drafted indemnity unenforceable. Two US features matter most. The express negligence doctrine (in Texas, Louisiana, and other states) requires that an intent to be indemnified against one's own negligence be stated specifically and conspicuously - generic indemnity wording is not enough (for example, Ethyl Corp v Daniel Construction Co (Tex. 1987)). And anti-indemnity statutes in many states (such as New York's General Obligations Law section 5-322.1) void certain indemnities, particularly in construction.
If the contract might be enforced in a US jurisdiction, draft for these: state any intent to cover the indemnitee's own negligence specifically and conspicuously, and include "to the fullest extent permitted by law" so the clause is cut down rather than struck out entirely. (This is US law, flagged for cross-border deals - take local advice.)
Pre-signature checklist
Before signing an indemnity, work through: What precisely triggers it - would self-reporting or voluntary remediation be covered? Does the causal language ("directly or indirectly") import remoteness, and are unforeseeable losses expressly covered if wanted? Does the cap include or exclude the indemnity, intentionally? Are notice provisions conditions precedent, and can you realistically comply? Do properly-notified claims survive to resolution? If it might be enforced in the US, does it satisfy express-negligence and anti-indemnity rules? And is there a tax gross-up?
The thread is the one running through this whole topic: an indemnity gives you what the words give you. Get the language right before signing, not after you are explaining why your protection did not reach the loss.
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Practical checklist
- Draft the indemnity as a covenant to pay on demand, without mitigation and whether or not foreseeable.
- Make the trigger precise, state the cap relationship expressly, and decide if notice is a condition precedent.
- Do not rely on "hold harmless" for a specific effect such as a waiver or a no-sue term - draft it expressly (Deepak Fertilisers & Petrochemical Corporation v Davy McKee (London) Ltd [1998] EWCA Civ 1753; [1999] 1 All ER (Comm) 69; Farstad v Enviroco [2011] UKSC 16).
- Add a tax gross-up so the indemnity is not eroded by tax (Zim Properties v Procter [1985] STC 90).
- For US-enforced deals, satisfy express-negligence requirements and add "to the fullest extent permitted by law".
- Run the pre-signature checklist (trigger, causal language, cap, notice, survival, US, tax) before signing.
This guide is informational only and is not legal advice. It does not replace advice from licensed counsel on the facts of a specific transaction.
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