Ask for an indemnity.

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Commercial contracts are packed with risks. In fact the contract itself is one big risk. However, ironically, contracts are the safest way to conduct business; we need them! So, since we cannot avoid contracting with each other we have to ensure that we protect our interests in every contract that we sign. A key way to do this, is to ask for an indemnity clause.  An indemnity clause is a contractual transfer of risk between two contractual parties to prevent loss (you are not liable if X happens) or to ensure compensation for a loss (the other party reimburses you for any loss suffered if Y happens) which may occur as a result of a specified event (X or Y event). Let’s take a look at some examples of indemnity clauses:

  1. Basic Indemnities – Party A indemnifies Party B for all liabilities or losses incurred in connection with specified events or circumstances. For example, if you are contracting with a construction company to build your new store, you will want a basic indemnity saying that the construction company will compensate you for all losses if one of its subcontractors fails to do the job to the specification set out in the contract. If a subcontractor tiles the roof poorly, the construction company is liable for all losses ensuing from that subcontractor’s poor job. Pretty good right? However, basic indemnities can be troublesome as they do not set out any specific limitations on the indemnity. They are silent as to whether they indemnify losses arising out of YOUR own acts and/or omissions that cause the subcontractor to tile the roof poorly. What if you give the sub-contractor the wrong instructions or you don’t give the subcontractor access to the site on time?  This basic indemnity operates so that the construction company indemnifies you for the poor job of the subcontractor, even if the poor job was your fault. You may be thinking well, that’s great, but it’s only great if you are the party receiving such an indemnity. That’s why basic indemnities should be avoided where possible.
  2. Proportionate or Limited Indemnities – These indemnities rectify the potential unfairness of a basic indemnity (explained above) as they limit the indemnity. Sticking with the example above, say you obtain an indemnity from the construction company to the effect that the construction company is liable for all losses ensuing from a subcontractor’s poor job – a limited indemnity will go on to state “except those losses incurred as a result of [your] own acts and/or omissions”. If the subcontractor’s poor job is your fault you don’t get compensated. Seems fair.
  3. Third Party Indemnities – If third parties are involved in the operation of the contract, as in the example above, you may not want anything to do with them since you are contracting with them. Following on from the above example, what happens if a subcontractor isn’t paid for their work? You wouldn’t want to be liable for that. You can protect against this by asking the construction company to indemnify you for all liabilities relating to its subcontractors so that the subcontractors are always the construction company’s issue and not yours.

These are very high level examples which would make most lawyers (if they’re good) chuckle. Indemnities can be very complex and they should at the very least always be more than a basic indemnity. Here are some of the things your lawyer should consider when drafting an indemnity clause for you:

  1. Scope – The scope of the indemnity must be clear so that the intended protection is given.
  2. Context – An indemnity clause should always be drafted in consideration of the wider commercial context of the agreement. Is it applicable?
  3. Extent – Who does the indemnity cover and are there any limitations to the indemnity? If the indemnity is given by the other side but not its contractors or representatives, then the extent to which this offers protection will be limited.
  4. Insurance: There is no point in having an indemnity if the indemnifier cannot pay out in an event of breach. An obligation to insure to a level consistent with the indemnity obligation will provide comfort that the indemnifier has the means to back up the indemnity given.
  5. Caps: Indemnities can be capped but any such cap should be subject to careful consideration. Where an indemnity has a financial cap, the indemnified party may, depending on any other limitation clauses, still have an uncapped claim in contract law for any breach of contract.

As with many of my posts, this is a very simplified overview. You really need a lawyer to draft indemnity clauses because they are essentially financial obligations with very serious consequences. The aim of this post is to make you aware of them so that you can ask your lawyer about them. You may want receive indemnities as added protection or you may want to offer indemnities to show the other side that you mean business (they can be great for negotiation)!  So go ahead and ask your lawyer about them. Pick up one of your contracts and check to see if you have a few in there already.

I must also emphasise that an indemnity is a distinct right from the right to claim damages for breach of contract. If the construction company breaches a clause in the contract you still have your common law right to sue for damages. Any limitations under an indemnity will be for that indemnity only. This is important because limited indemnities often exclude any loss ensuing from your own negligence whereas a claim for breach of contract can be brought even where you too have been negligent. Ask your lawyer, they’ll break it down for you!

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BREXIT explained.

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Before you read this, just in case you didn’t know, BREXIT refers to the possibility of Great Britain (aka the United Kingdom) leaving the European Union after the referendum in June 2016. It’s a play on the words Britain and Exit. In this post, I am going to try and explain the Brexit debate, however, please know that thelegalknow is wholly against BREXIT. I will therefore TRY to be as neutral as possible in this post.

What is a referendum?

A referendum is a general vote by the electorate on a single political question which has been referred to them for a direct decision. In the UK, David  Cameron, the current Prime Minister has approved a referendum asking the British public whether or not it thinks that Britain should remain in the European Union. The big day is Thursday 23 June 2016.

The exact question will be “Should the UK remain a member of the EU or leave the EU”?

What is the European Union?

Five years after World War II ended, France and Germany came up with a plan to ensure that their two countries would never go to war against each other again. The result was a deal signed by six nations to pool their coal and steel resources in 1950. Seven years later a treaty signed in Rome created the European Economic Community (EEC) – the foundations of today’s European Union. The UK was one of three new members to join in the first wave of expansion in 1973. Today the EU has 28 member states with a total population of more than 500 million.

At the heart of the EU are laws designed to allow most goods, services, money and people to move freely within EU member states.

The four key institutions which work together to run the EU are as follows:

  • the European Commission – the EU’s administrative arm – is responsible for proposing and drafting EU legislation;
  • the European Parliament – represents EU citizens – is responsible for approving draft proposals, together with the European Council, from the European Commission and making them law;
  • the European Council – represents member states – is responsible for approving draft proposals, together with the European Parliament, from the European Commission and making them law; and
  • the European Court of Justice – is responsible for upholding EU law in member states to make sure EU law is applied in the same way in all EU member states. It also settles legal disputes between national governments and EU institutions. Member states are required to comply with the court’s rulings and may be fined if they do not do so. This is completely separate from the European Court of Human Rights in Strasbourg, which interprets the European Convention on Human Rights, the EU has its own Charter of Fundamental Rights.

Each member state effectively appoints representatives to each of these institutions.

Why is there a referendum?

The British government promised to hold a referendum on EU membership before the end of 2017. There have been growing calls for a vote on whether to stay or leave the union, as it has allegedly become more powerful and expensive. The BREXIT campaign worries that the UK is paying more in membership fees but gaining little in return other than increasing immigration.

Why does Brexit matter?

The Brexit campaign maintains that by breaking free from the EU, the UK could reduce taxes for its citizens and reduce the burden of immigration. However, those campaigning to stay in the EU contend that if the UK should decide to go off on its own, the move could create widespread job losses and economic uncertainty. Currently, the EU is the UK’s largest trading partner. If enterprises in the new EU are reluctant to do business with British companies, British companies could face substantial setbacks.

Additionally, if Brexit occurs, the UK, just like Norway and Switzerland, will still have to comply with EU rules without having any influence over them. The UK’s exports would be subject to EU export tariffs and they would have to meet EU production standards. It could be even more costly for UK exporters if they face EU legal arguments against UK standards – there could be a lot more court cases (LAWYERS will get richer, YAY). There is therefore a feeling that the UK is always likely to be better positioned to secure beneficial trade deals as a member of the EU than as an individual and isolated player.

What will be the impact on the EU if Brexit occurs?

The potential implications of Brexit are complex, as they hinge largely on what economic actions the UK takes after splitting off from the rest of the EU and how the rest of the world reacts to such a move. The impact would be widespread and drawn-out. The actual process of the UK leaving the partnership and establishing new agreements with remaining EU countries would take years. Many businesses would face immense uncertainty during this time.

In order to reduce this uncertainty, Brexit advocates are weighing potential options. They’re considering either supporting a second referendum on which model to pursue or making an effort to create a consensus behind what the UK’s trade deals would look like after the nation’s exit. Sounds like a political mess to me!

So there you have it. BREXIT in a nutshell. You should hopefully now have a vague idea of what’s going on. I tried to stay neutral but I love and care about business and the arguments to STAY in the EU make economic sense to me. The pennies we would save in domestic tax pail in comparison to the billions we could lose in trade with the EU and the world (President Obama made America’s view very clear). If you are a UK business owner/entrepreneur reading this, please make sure that you VOTE and vote for what you think will be GOOD for UK BUSINESS not UK AESTHETICS.

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One thing every business should do!

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As you know, I’m a lawyer so I cannot give financial advice. Even the legal tips that I give in this blog cannot be relied on in place of the lawyer/client relationship (I’m merely here to inform you so that you are legally empowered and not legally enslaved). HOWEVER I have no caveat for what I’m about to tell you. There is one thing that every business should most certainly do and that is …..GET INSURANCE!

Lawyers try to help you achieve good results but we also consider from the outset what could go wrong and often there is no better solution than being able to fall back on a good old insurance policy. Have a think about what your business/start up/trade is most at risk from and take a considered look in the market to see if you can get an insurance policy to protect against that risk.

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