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Written by Abdul Abbas
JD Candidate 2025 | UCalgary Law This blog outlines the legal effect of incorporating indemnification rights in a contract, as opposed to relying on a common law claim for breach of contract or tort, including:
1. Brief Summary Indemnity remedies are enforceable when the event stipulated in the indemnity clause occurs, regardless of the circumstances that led to the event. While remedies commonly take the form of monetary relief, an indemnity remedy can take whatever form the parties agree upon. When indemnity clauses are disputed, a court’s discretion is used to decide whether the terms of the indemnity clause have been fulfilled, rather than what the appropriate remedy is. In contrast, common law claims and remedies are typically determined at the court's discretion, through the application of established legal tests. Therefore, indemnity clauses streamline the remedial process by providing indemnified parties the right to obtain monetary reimbursement for demonstrated losses sustained. Indemnity clauses allow contracting parties to better manage what remedy each party will and will not be entitled to, so as to mitigate and allocate risk. 2. Analysis A. Available Remedies and Enforcement Without an Indemnity Clause Remedies Remedies available for breach of contract and tort claims at common law are generally limited to damages,[1] injunctions,[2] and, in rare circumstances, declarations.[3] The court may decide at its discretion what remedies it awards, in accordance with the common law. Enforcement Tort Claims A simplified version of the test for tort claim damages (the “Tort Remedies Test”) is:
Breach of Contract To receive damages for a claim in respect of a breach of contract, the plaintiff is required to prove the non-performance of a contractual provision by the defendant. Unlike tort claims, neither foreseeability nor proximity are considered when determining breach of contract claims.[7] Rather, “any award for contract damages is based on the undertakings or promises made by the defendant”.[8] The damages awarded are intended to represent “the losses that the promisee has already incurred and the court’s estimate of any future losses for which the promisee might be entitled to compensation”. [9] Enforcement of breach of contract remedies also involve the duty to mitigate, which requires plaintiffs to take all reasonable efforts to reduce their losses after a breach of contract.[10] An injured party that fails to mitigate may be awarded reduced damages by a court. Drawbacks of Not Including Indemnity Clauses Indemnity clauses allow contracting parties to mitigate the risk of extensive legal procedure. Plaintiffs must establish substantial deprivation of benefit[11] and reasonable mitigation efforts in order to be awarded damages for breach of contract claims, and must satisfy the Tort Remedies Test to be awarded tort claim damages. Both types of claims require extensive legal analysis and are ultimately decided at the discretion of the court, which leaves the parties in a state of uncertainty regarding the court’s final decision. A. Available Remedies and Enforcement With an Indemnity Clause Overview Indemnity clauses allow contracting parties to avoid having to satisfy common law requirements to claim contract/tort damages. Instead, indemnity clauses allow parties to agree in advance that one contracting party will owe another contracting party a specified amount of money (or be liable for a specified category of damages, which may be broadly defined) if a certain event takes place. Remedies The application of an indemnity remedy is more flexible than breach of contract or tort claim remedies since the parties have control over drafting the indemnity clause. Therefore, indemnity remedies can take any form, but commonly take the form of monetary relief. As long as the event stipulated in the indemnity clause takes place, the indemnified party is owed the agreed upon remedy, without having to satisfy common law tests for damages. Enforcement An indemnified party only needs to prove the loss specified in the indemnity clause occurred to receive the indemnity. Essentially, if a contracting party forgoes the inclusion of an indemnity clause, they also forego their ability to pursue remedies without having to prove fault or mitigation efforts (subject to the terms that the parties agree must be satisfied for such indemnity to be applicable in the first instance). The event that triggers an indemnity can be any event the parties agree upon and does not need to be a breach-of-contract-like event (e.g. non-performance of contract provision). Also, similar to common law claims, the extent to which indemnity-based damages are enforced is subject to the indemnified party’s duty to mitigate against losses.[12] Benefits of Indemnity Clauses Indemnity clauses provide contracting parties with greater control over undesired scenarios that often result from the common law awards process, such as:
Indemnity remedies are also not limited to the losses recognized at common law, as is the case with claims for breach of contract or in tort. For instance, legal costs on a solicitor-and-client basis do not generally fall within the scope of damages recognized by courts.[15] However, an indemnity clause can account for that type of loss, since it allows contracting parties to control not only the events that trigger the indemnity, but also the extent indemnified parties are compensated. A practical example of this is an indemnity clause that states compensation shall include all loss resulting from an event, rather than only reasonably foreseeable losses, as is the case for common law remedies. B. Limitations Limitations of Indemnity Clauses in Jurisprudence There are limitations to what can be included in indemnity clauses, as courts generally tend to read down “sweeping” [16] or overly broad contractual provisions. The interpretation of indemnity clauses is essentially consistent in this respect with general contractual interpretation considerations, with courts attempting to balance parties’ freedom of contract with overly broad or onerous provisions. A couple general rules to keep in mind in this respect are that courts (i) will interpret contractual provisions on a contextual basis,[17] and will read down a provision to give it a more context appropriate effect, and (ii) tend to read down contract provisions less frequently between parties it believes to be of “equal bargaining power”.[18] An example of a sweeping contractual provision that would be more likely to be read down absent express evidence of the parties’ intentions to the contrary is an indemnity clause that protects a party against its own negligence or deliberate wrongdoing.[19] As a general rule, when drafting indemnity clauses, a drafter should therefore consider the scope of the indemnity clause (how broad or narrow the language used is) and the perceived bargaining power between the contracting parties. [20] Exclusive Remedy Clauses It is not uncommon for "exclusive remedy" clauses to accompany indemnity clauses, so as to limit indemnified parties from pursuing any remedies other than those prescribed (whether in the contract as a whole, or in a particular provision, as applicable).[21] Exclusive remedy clauses act as a risk mitigation tool for the indemnifying party and eliminate the possibility of "incurring liability beyond the remedy specified in the agreement".[22] In such case, the drafter should pay particular attention to the scope of the indemnity – if the scope of the indemnity is broad (in terms of both the types of loss or damage it covers, as well as the extent of available damages), such indemnity being an “exclusive remedy” may be acceptable. However, drafters should not assume that having an indemnity within an agreement, as an exclusive remedy, is necessarily preferable to having access to other common law remedies, particularly if the indemnity applies narrowly. [1] Canadian Encyclopedic Digest [CED], Contracts at s 260. [2] Ibid. [3] CED, Torts at s 57. [4] Vaughan v Menlove (1837), 132 ER 490. [5] Cooper v Hobart, 2001 SCC 79. [6] Mustapha v. Culligan of Canada Ltd, 2008 SCC 27. [7] Canadian Contract Law, Angela Swan, Jakub Adamski, Annie Y. Na, LexisNexis, Fourth Edition [Canadian Contract Law] at 409. [8] Ibid. [9] Canadian Contract Law, supra note 7 at 407. [10] Southcott Estates Inc. v. Toronto Catholic District School Board, 2012 SCC 51. [11] Hong Kong Fir Shipping Co. Ltd. v Kawasaki Kisen Kaisha Ltd., [1962] 2 QB 29. [12] Parc Downsview Park Inc v Penguin Properties Inc, 2018 ONCA 666 at para 89. [13] CED, Guarantee, Indemnity and Standby Letters of Credit [“CED on Indemnities”], at s 116. [14] Ibid. [15] CED on Indemnities, supra note 13 at s 122. [16] The Law of Guarantee, Kevin McGuinness, 3rd ed, LexisNexis [“The Law of Guarantee”] at 8.12. [17] Rizzo & Rizzo Shoes Ltd, [1998] 1 SCR 27. [18] Globex Foreign Exchange Corp v Kelcher, 2005 ABCA 419 at para 28 [“Globex”]. [19] The Law of Guarantee, supra note 16. [20] Globex, supra note 18. [21] Risk Allocation in Commercial Contracts, Practical Law Canada, at Practice Note 3-617-7736. [22] Ibid.
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Standard Form Agreements – What are they and what is often in them?
Starting a business can be daunting and require a lot of time and energy. One of the last things a start-up may want to waste time on is drafting a standard form agreement, or even an agreement at all. A standard form agreement (“SFA”) can be either for services or widgets. The agreement is in essence a template agreement that has been drafted once with certain areas left blank, such as the effective date for example, or with alternatives that can be selected depending on the circumstances and the same agreement can be used for several different transactions. Think about how much effort would be consumed drafting a new form for every time your new start-up agreed to provide services to another company? Having an SFA can greatly reduce the amount of time and money spent on drafting. Often, people will try draft these agreements themselves by taking clauses from templates available on the internet. One may conclude that these clauses are in every contract and they should be in yours. But those templates are not specific to your business and including several clauses from different templates may result in those clauses contradicting one another. Further, the clauses that you have included may not actually reflect your intentions and the start-up may be left vulnerable. Depending on the nature of the start-up, an SFA can be a good starting point for negotiations. It is not uncommon for two parties wanting to enter into a contract to exchange several drafts with markups, eventually leading to the executable document. Additionally, if the other party provides you with their SFA, you will be able to contrast that against your own to determine where it is different and if it is agreeable. Below is a discussion about several clauses that are often included in SFAs. Often these clauses can be found on templates on the internet and one may be inclined to include them without really understanding what the clauses are or how they operate. Terms, Payment, Etc. SFAs will often include the term of the agreement, price, payment, and penalties. An SFA provides a great starting point for any negotiations regarding the aforementioned. Including term, price, payment, and penalties provides an anchoring point if any of these are negotiated. Further, it establishes a more efficient communication of the expectations of the party providing the SFA, which can have a better result than beginning the negotiation low balling each other. The term can be renewed automatically, can trigger the parties to negotiate at a certain date, or simply expire on a certain date. The SFA can also spell out the expectations of the parties in regard to payments, late payments, interest, and any other penalties. These provisions must be drafted carefully to ensure none of the provisions contradict one another. Representations and Warranties Familiar with representations and warranties? Without sufficient knowledge of what these are, a start-up may be at risk. Representations are statements of a party made before or at the time of entering into a contract that may form part of the contract if so intended, but if the representation is not part of the contract and is inaccurate, it could result in rescission of the contract.[1] Further, depending on the nature of the representation, it could give rise to damages if it was fraudulent or negligent.[2] Warranties can be statements within the contract, or can be implied into contracts, that are collateral to the main purpose of the contract and can give rise to damages if breached.[3] Templates found online may attempt to limit representations and warranties. However, if they are not specific to the start-up, attempting to limit them may be redundant or not actually place a limit on any representations and warranties. A proper understating of what representations and warranties are and how they operate will better serve the start-up. A lawyer will be able to assist the company in the drafting of these clauses. Liability and Indemnification A good SFA will accurately describe any limitations on liability and whether either party will indemnify the other in specific circumstances. These clauses can be difficult to draft, and the advice of a lawyer may more accurately reflect the drafting party’s intentions. Further, a well drafted clause will demonstrate to the other party what the expectations are regarding liability and it will provide a good starting point for any negotiations regarding limitations on liability, if the SFA is not “take it or leave it”. The parties can also choose to limit the penalties in certain circumstances. For example, the parties may agree that to any extent a party is liable for damages, those damages are limited to the amount paid for the services. Indemnity clauses can also be very difficult to draft depending on the situation. Indemnify means to compensate for harm or loss which is the legal consequence of an act or forbearance on the part of one of the parties or some third person.[4] In essence, the party indemnifying is assuming and guaranteeing to reimburse or compensate the indemnified party for any loss or harm that falls within the circumstances agreed to.[5] The historic use of indemnity clauses has resulted in specific terminology to accurately describe which party is indemnifying the other and in what circumstances. Again, discussing indemnification clauses with a legal professional can help ensure that the clause in your SFA meets your expectations. Taking clauses from the internet could result in accidentally switching the indemnifying and indemnified parties due to the complex language that is often found in these clauses. Force Majeure Clause Another common clause is a “force majeure” clause. Force Majeure clauses generally operate to discharge a contracting party when “a supervening, sometimes supernatural, event” beyond the control of either party makes performing the contract impossible.[6] Proper drafting of these clauses can outline the situations which would frustrate the contract and possibly relieve the party who is suffering from the force majeure event of their duties under the contract, or suspend them until the effects of the event are no longer causing issues. Every contract may not need to contain a force majeure clause, so you may want to discuss with a lawyer the particular situation and whether it is necessary. Dispute Resolution One of the most devastating things that could happen to a start-up is litigation. It can be a huge drain on capital and time which could be better spent on advancing the start-up. One possible way to reduce the amount of time and money spent is to include a dispute resolution clause in the SFA. The mechanisms can include how disputes are governed, what triggers a dispute, what the process is, who will be the mediator or arbitrator, where the meetings will occur, among others. Hopefully the clause will lead to a faster resolution than the traditional court process and possibly save the business relationship from degrading to a point that is beyond repair. Another clause that is often included in standard form agreements is a clause describing the governing law if there is a dispute. If you are dealing with parties that are located in other jurisdictions, this may be a clause you want to include in order to ensure the dispute will take place in your home jurisdiction. Further, some jurisdictions costs are assigned to the “loser” of the dispute, which is good news for the start-up if it comes out on the winning side. Additionally, some jurisdictions allow for the parties to agree to waive their rights to a jury trial which is also a benefit as they can be quicker and cheaper.[7] Confidentiality Clauses Confidentiality clauses are frequently found in SFAs. This is especially true when the sharing of sensitive or personal information is required. Several things may be overlooked in drafting these clauses such as how long they should last, what is covered under the clause, what occurs if there is a breach of the clause, etc. Compiling a clause from different templates off the internet can result in a piecemeal clause that may contradict itself, the law, or place the parties in a place with impossible obligations to fulfil. In relation to confidentiality clauses, a clause can be drafted to place an obligation on a party using your device or software to not reverse engineer your design. Again, consult with a legal professional to ascertain how to accurately incorporate this into your standard form agreement to protect your device or software. Conclusion An SFA can be a useful tool for any start-up that needs to either buy or sell services or widgets. Although initially there are some costs associated in having an SFA drafted, there are many advantages to having a well drafted SFA. This is a small investment compared to costs of the issues that can arise from a poorly drafted SFA. The internet can be a wonderful place for information but trying to decide what clauses to copy and paste might not be the best idea when a person is unsure what the clauses mean or how they are intended to be used. The information above may shed some light on how these typical clauses are typically used and in what scenarios. When in doubt, legal advice should be sought to ensure the start-up has what it needs to achieve the desired result. Sheldon McDonald is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary. [1] John Yogis et al, Barron’s Canadian Law Dictionary, (Hauppuge, NY: Barron’s Educational Series, 2009) (updated as necessary) sub verbo “representations”. [2] Ibid. [3] Ibid sub verbo “warranties”. [4] Axa Pacific Insurance Co. v Premium Insurance Co., 2003 ABQB 426 at para 11. [5] Yogis, supra note 1, sub verbo “Indemnity”. [6] Atlantic Paper Stock Ltd v St. Anne-Nackawic Pulp & Paper Co., [1975] 1 SCR 580 at 584, 10 NBR (2d) 513 (SCC). [7] A trial without a jury can proceed quicker because there is less time used on selecting the jury, informing the jury of their duties, and familiarizing the jury with the law. Additionally, if more time is spent in the court room, the costs will also increase. Protecting Directors from Civil Liability Through Indemnification A likely question an entrepreneur may ask themselves early in their venture is “how do I protect the directors of my company?” They may (or perhaps should) think about this because in all likelihood, they will be one of, if not the only director of their business during its early phases following incorporation. Please note: this post assumes that the company in question is incorporated under the Business Corporations Act of Alberta
Indemnifying Directors Indemnification refers to one party’s agreement to secure another against responsibility for their actions, or to give security for the reimbursement of a person in case of an anticipated loss[1]. In this case, it refers to a corporation’s agreement to make a director whole, should they be subject to legal proceedings as a result of their actions in their capacity as a director of the corporation. Generally speaking, the Business Corporations Act (the Act) allows corporations to indemnify their directors for both legal costs incurred, as well as any monetary damages that arise from a director’s conduct in relation to the business. In order to benefit from such indemnification, a director must have “acted honestly and in good faith with a view to the best interests of the corporation[2].” An Alberta corporation is not permitted to indemnify its directors for their actions if they have not acted honestly and in good faith with a view to the best interests of the corporation – that is, if they have breached their fiduciary duty to the corporation. If a director has breached his or her fiduciary duties to the corporation, any indemnity the corporation has offered will be void. The scope of conduct that may be indemnified under the Act is very broad. Section 124(1) of the Act states: “…a corporation may indemnify a director or officer of the corporation, a former director or officer of the corporation…against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by the director or officer in respect of any civil, criminal, or administrative action or proceeding to which the director or officer is made a party by reason of being or having been a director of that corporation or body corporate…” When Are Directors Entitled to Indemnification? In Alberta, a director is only entitled to indemnification by the corporation for all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment in a civil context if they (i) were substantially successful in defending the claim; (ii) acted honestly and in good faith with a view to the best interest of the corporation; and (iii) is fairly and reasonably entitled to indemnity[3]. A corporation that does not contain indemnity provisions in its by-laws will still be liable for any loss incurred so long as these criteria are met. If indemnification provisions found in either the corporation’s by-laws, or in an agreement between the corporation and a director impose mandatory indemnification, it will of course be liable to do so. How to Indemnify Directors Indemnification provisions can be found within a corporation’s by-laws. If a corporation seeks to provide its directors with a wide range of protection, these provisions do not need to be particularly robust. Any attempt to predict the types of conduct or liabilities that the corporation anticipates indemnifying its directors against may simply limit its ability to protect its directors. If the company’s bylaws do not provide indemnification provisions that are acceptable to a potential director, indemnification provisions may be included within a written agreement between the corporation and the director. This method provides the greatest flexibility as each agreement can be tailored to suit the needs of both the corporation and the individual director. Some things that indemnification provisions should contemplate include whether the corporation is required, or simply permitted to indemnify its directors (and in which circumstances), the timing of indemnity payments, and out of court settlement. Indemnification provisions that do not require the corporation to indemnify its directors should also consider a mechanism to oblige the corporation to do so such as arbitration. Corporations that provide the widest range of indemnity to their directors often simply state in its indemnification provisions that the corporation must indemnify the director to the greatest extent authorized under the relevant law. Where it is desirable to minimize the short-term financial impact of litigation on directors, indemnity provisions may require the corporation to advance defence costs as they are incurred. Such provisions should also contemplate whether the corporation is required to indemnify the director for out of court settlements, as opposed to simply court judgments. What Indemnification Provisions Do Not Cover Indemnification provisions do not cover directors’ actions when they are not made in good faith with a view to the best interests of the corporation. In cases where a director is being sued by the corporation or its shareholders, including in derivative actions, a corporation may only indemnify a director for their legal expenses. This leaves directors exposed to liability for corporate or shareholder damages arising from their action (or inaction as the case may be). Why is this? Most derivative actions against directors include a claim for breach of fiduciary duty. If this claim is successful, and a breach has been found, a director will have been found not to have acted in good faith with a view to the best interests of the corporation, and indemnity would not be available in any event. Hamish Gray is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary. REFERENCES: [1] Black’s Law Journal; 2nd ed; online, <a href="https://thelawdictionary.org/indemnify/" title="INDEMNIFY">INDEMNIFY</a> [2] Business Corporations Act, RSA 2000 cB-9 s124 [the Act] [3] Act supra note 2 s124(3) |
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