 1. Primary Purpose [infinitely varied, but usually the provision of goods and or services in return for money  2. Secondary Purpose: regulate distribution of risk

 Risk lies where it falls  Where a party is at fault and causes harm to the other party then the party at fault must compensate the innocent party via damages payment  Contract can however be used to move the risk

 Exclusion clause: eliminate legal liability for fault  Limitation clause: limit liability for fault to a set amount  Indemnity clause: move liability away from “guilty” party to someone else.

 Indemnity – an indemnity is a legally binding promise where a party undertakes to accept the risk of loss or damage another party may suffer.

 Indemnity can be:  Simple: one party indemnifies the other  Mutual: each side indemnifies the other  The law in principle is suspicious of indemnity clauses and will only allow them where they satisfy the test of due notice and clear expression.

 Mutual indemnity clauses are comparatively unusual in commerce but they are common in the oil industry  Mutual indemnity clauses are also known as “mutual hold harmless” clauses

 Reasons why  1. Parties involved often of very varying size and wealth  2. Risks involved very high  3. No point imposing huge liabilities on a small company it will simply bankrupt them  4. Pursuing litigation as a result of harm suffered may be expensive.

 So general principle is “each party is best able to near its own loses regardless of who caused loss/was at fault.”

 The courts are generally suspicious of indemnity clauses and accordingly courts will carefully scrutinize the exact wording of an exemption clause and will normally apply the contra proferentem rule of interpretation:

 contra proferentem is Latin for "against (contra) the one bringing forth (the proferens)." i.e. against the one who drafted the contract.

 Contra proferentem is a rule of contractual interpretation which provides thatcontractual  an ambiguous term will be construed against the party that imposed its inclusion in the contract– or, more accurately, against (the interests of) the party who imposed it.term  Therefore, the interpretation will favour the party that did not insist on its inclusion.

 The rule only applies if, and to the extent that, the clause was included at the unilateral insistence of one party without having been subject to negotiation by the counter-party.  Additionally, the rule only applies if the court determines the term to be ambiguous, which often forms the substance of a contractual dispute.ambiguous

 Leading case on interpretation of indemnity clauses is :  Canada Steam Ship Lines v The King ** 1952 AC 192. (Privy Council)  [case is actually about exclusion clause not indemnity but exactly the same principles of interpretation apply, see Smith v UMB Chrysler (Scotland) Ltd, 1978 SC (HL) 1; 1978 SLT 21. ]

 The three rules laid down in Canada Steamship were: 1 If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called ‘the proferens’) from the consequence of the negligence of his own servants, effect must be given to that provision. 2 If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens. If a doubt arises at this point, it must be resolved against the proferens...

 The three rules laid down in Canada Steamship were: 1 If the clause contains language which expressly exempts the person in whose favour it is made (hereafter called ‘the proferens’) from the consequence of the negligence of his own servants, effect must be given to that provision. 2 If there is no express reference to negligence, the court must consider whether the words used are wide enough, in their ordinary meaning, to cover negligence on the part of the servants of the proferens. If a doubt arises at this point, it must be resolved against the proferens...

 3 If the words used are wide enough for the above purpose, the court must then consider ‘whether the head of damage may be based on some ground other than that of negligence’, to quote...Lord Greene in [Alderslade v Hendon Laundry Ld [1945] KB 189, 192]. The ‘other ground’ must not be so fanciful or remote that the proferens cannot be supposed to have desired protection against it; but subject to this qualification, which is no doubt to be implied from Lord Greene’s words, the existence of a possible head of damage other than that of negligence is fatal to the proferens even if the words used are prima facie wide enough to cover negligence on the part of his servants.

 These principles were applied in Smith v UMB Chrysler (Scotland) Ltd to an indemnity clause where it was held the clause was not drawn widely enough to exclude liability for a party’s own negligence.

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