Indemnification Through Contract vs. Common Law

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: available remedies flowing from an act or omission subject to an indemnity; and the enforceability of an indemnity clause as opposed to a common law claim.

This post summarizes (i) the remedies available through contract/tort and indemnity claims, and the steps required to enforce them, (ii) the effect of including indemnification rights in a contract, and (iii) the limitations of indemnity rights.

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: the plaintiff must prove that the defendant breached the standard of care expected of a reasonable person in similar circumstances; [4] the plaintiff must prove that the defendant had a proximate enough relationship to the plaintiff to be owed a duty of care; [5] the plaintiff must prove that the defendant breached that duty of care; the plaintiff must establish that it sustained loss resulting from said breach; and the plaintiff must establish that the loss sustained by the breach was reasonably foreseeable to the defendant. [6]

If a loss suffered by a party is not contemplated by an indemnity clause or due to a breach of a contract, the Tort Remedies Test will apply. For example, if Party A is contracted by Party B to conduct services at Party B's premises, and the agreement between these parties does not contemplate liability for damage caused to Party B's property in connection with the services, then if Party A causes damage to Party B's premises, Party B must seek damages through the Tort Remedies Test, since there is no contractual breach (or contractual indemnity clause covering a loss of such nature).

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: the award amount not representing the true damage suffered; litigation costs; delay in the damages being awarded; and receiving no damages if the court does not believe the required legal tests or analyses are satisfied.

Another benefit of an indemnity clause is that the indemnity can be owed in any scenario, irrespective of whether the indemnifying party triggered the indemnifying event. [13] Further, there is no requirement for a person/party to cause the loss, as the loss can result from natural or uncontrollable causes. [14] An example of this would be weather insurance. In this case, a party is indemnified for damages it sustained from intense weather conditions like tornados or floods, and not due to the actions of the other contracting parties.

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.

Endnotes

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.