Indemnification

How BC law treats it

An indemnity is a primary obligation: the indemnifier promises to cover a loss directly, whether or not anyone else has defaulted. That distinguishes it from a guarantee, which is secondary. Under section 59(6) of the Law and Equity Act, RSBC 1996, c 253, an indemnity, like a guarantee, must be evidenced in writing signed by the indemnifier, or shown by the indemnifier's conduct, to be enforceable. Courts interpret indemnity clauses like other contract terms, giving effect to their words in context. Key points are what losses are covered (third party claims only, or also the party's own losses), whether negligence of the indemnified party is covered, caps and deductibles, notice and defence of claims, and how long the indemnity survives. Limits on indemnities, like other exclusion clauses, are tested under Tercon Contractors Ltd v British Columbia (Transportation and Highways), 2010 SCC 4. Where several parties give a joint and several indemnity, the indemnified party may recover the full amount from any one of them. In share and asset purchase agreements, indemnities are the main remedy for breach of the seller's representations and warranties, often with a basket, a cap tied to the price and a survival period. In commercial leases, tenants usually indemnify landlords for claims arising from the tenant's use of the premises. Under the Business Corporations Act, SBC 2002, c 57 (BCBCA), ss. 159 to 165, a company may indemnify its directors and officers against judgments, penalties and expenses from proceedings tied to their role, and must pay expenses in some cases. It cannot indemnify someone who did not act honestly and in good faith with a view to the company's best interests. The company may also buy liability insurance for them.

What it means for your business

Indemnity clauses decide who pays when something goes wrong, and they often matter more than the price term. A broad, uncapped indemnity can expose a small BC supplier to losses many times the contract value. Buyers of businesses rely on indemnities to recover for hidden liabilities. Directors joining a board should ask for a written indemnity agreement and insurance rather than relying on the articles alone. Example: A buyer acquires a BC trucking company under a share purchase agreement where the seller indemnifies for pre-closing tax liabilities, capped at the price. When the CRA reassesses a pre-closing year, the buyer gives timely written notice and recovers the tax from the seller.

Risks and common mistakes

Agreeing to indemnify for all losses "howsoever arising" without a cap or a carve-out for the other party's negligence. Missing the notice deadline in an indemnity clause and losing the right to claim. Confusing an indemnity with a guarantee when deciding whether liability depends on someone else's default. Assuming a company can indemnify a director who acted dishonestly or in bad faith. Letting purchase agreement indemnity survival periods expire before investigating known issues.