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Indemnities: What Are They?

Indemnities are commonly given by the party responsible for a loss, or in a position to prevent it, to the party who will suffer loss if it occurs. It is up to the parties to define the specified event. The specified event could include a breach of contract, a party’s fault or negligence, or a particular action. Our lead contract lawyer is Neil Williamson who has extensive experience in advising clients on a wide range of contract law matters. 

When should I use an indemnity?

There is no general rule about when to give an indemnity. Whether a party gives one will depend on the circumstances of the transaction and the party’s willingness to do so. However common areas where you may want to use such a clause include negligence, infringement of intellectual property rights and environmental issues such as contamination.

Why should I use an indemnity?

It is widely believed that an indemnity gives quicker, easier and fuller recovery than other claims – allowing greater damages recovery than would be the case if one was not included.

If an indemnity dictates payment of a fixed sum, then that arguably creates a debt claim rather than a claim for damages. The case of Royscot Commercial Leasing Limited v Ismail [1993] EWCA Civ J0429-4 supports this principle and states that the rules on causation, mitigation and remoteness do not apply. In other words, the claimant will not need to prove that its losses were foreseeable and could not have been avoided. This position was confirmed in the more recent case of ABN Amro Commercial Finance Plc v Ambrose McGinn & others [2014] EWHC 1674 (Comm) where Flaux J stated that “a party providing an indemnity cannot challenge his obligation to pay under the contract of indemnity which is a claim in debt, by reference to principles relating to the assessment of damages in contract which have no application to debts.”

However this generalisation is not always correct. If, for example, the indemnity is for an unspecified sum, the position is more ambivalent and can often depend on how the clause has been drafted. In the case of Durley House Limited v Firmdale Hotels plc [2014] EWHC 2608, it was concluded that the specific indemnity was in fact a claim for damages. This indemnity was “hold harmless”, where the true obligation of the indemnifier was to prevent the indemnified sustaining any loss in the first place, rather than merely to reimburse the indemnified. The way the clause is drafted is therefore crucial as to how it is subsequently interpreted.

It should also be noted that although the underlying concept of an indemnity is to recompense for any loss or liability which a party has incurred, not every indemnity gives 100% recovery of all loss caused. The parties may have expressly defined the payment in some other way or the clause may be interpreted as giving less than 100% recovery.

Another key difference between a damages claim and a debt claim is the statutory limitation period. With damages for breach of contract, the limitation period runs from the date of the breach that gives rise to the loss. However, if drafted properly, the limitation period for an indemnity will only start if the party giving the indemnity fails to respond to a claim under it, which could be much later.

Conclusion

An indemnity can therefore be an effective tool in any commercial contract. However the way in which it is drafted, and subsequently interpreted, is crucial.

If you have any questions around indemnities or you need support with drafting such a clause please contact Neil Williamson.


EM Law EMI Option Scheme

Option Scheme (EMI) - Do I qualify for one?

Suzy Giele is one of the UK's leading experts on EMI option schemes and other forms of employee share incentive schemes.

An Enterprise Management Incentive (EMI) scheme is an approved employee share scheme whereby qualifying companies can grant share options to qualifying employees up to the value of £250,000. An EMI option scheme  may be granted under a set of plan rules, or by way of stand-alone EMI option agreement however a company cannot grant EMI options over more than £3 million worth of shares at any time. Specifically aimed at small, growing companies, an EMI option scheme can provide significant advantages to both the employee option holder and the company.

Does my company qualify for an EMI Option  Scheme?

Most but not all companies can grant EMIs. Companies that work in ‘excluded activities’ are not permitted to offer EMIs. These activities include banking, farming, property development, provision of legal services, and ship building. In addition, the company must be an independent trading company with:

  • Assets of £30 million or less; and
  • Fewer than 250 full-time employees

Do I qualify for an EMI Option Scheme?

In order to qualify for an EMI option scheme, an individual must be an employee of a qualifying company, or one of its qualifying subsidiaries. The employee must spend at least 25 hours per week, or at least 75% of their working time, as an employee of the company and must not hold more than 30% of the company shares. EMI options cannot be granted to non-executive directors or consultants.

Do all shares qualify for an EMI Option Scheme?

Not all shares qualify for EMI options. EMI options can be satisfied by newly issued shares or by the transfer of existing shares from a shareholder. The shares must also meet certain requirements. The shares must be non-redeemable, fully paid up, ordinary shares.

Why should I consider an EMI Option Scheme?

An EMI option scheme can be beneficial to both an employee and a company. As well as being a valuable tool for recruiting employees and incentivising key staff, EMI option schemes can be very tax efficient.

Usually, an employee would pay income tax on the market value of any shares or options granted to them by a company. With EMI option schemes, an employee will not have to pay income tax or national insurance if they buy the shares for at least the market value they had when they were granted the option. When the option shares are sold, any uplift in the value of the shares will be subject to the lower rates of capital gains tax (in comparison to income tax rates). Shares acquired on the exercise of EMI options also qualify for entrepreneurs’ relief so provided the conditions are met, capital gains tax will only be charged at 10%. The employee can also use their annual capital gains tax exemption.

For companies, a corporation tax deduction may be available when the EMI options are exercised. Relief is given in the accounting year in which the options are exercised and should be claimed by the option holder's employer company (not the company whose shares are acquired, if different). The deduction is equal to the gain the employee makes.

If you have any questions or would like further information on an EMI option scheme please contact Suzy Giele.