What is an indemnification clause and how does it work in Ontario?
An indemnification clause (sometimes called an indemnity) is a contractual promise by one party to compensate the other for certain losses, claims, or damages that arise from the contract or from the indemnifying party's actions. In a vendor contract, for example, the vendor might agree to indemnify the client if a third party sues over the vendor's work.
In Ontario, indemnities are enforceable, but courts read them carefully. Very broad language — such as indemnifying a party for its own negligence — may be enforced, but only if the wording is explicit and clear. Ambiguous indemnity clauses tend to be interpreted against the party trying to rely on them.
Indemnities often work alongside limitation of liability clauses, which cap the total amount the indemnifying party can owe. Together, these two provisions define who bears the financial risk if something goes wrong. If you are on the receiving end of a broad indemnity demand, you want to understand your exposure before signing; if you are granting one, you want to ensure it is proportionate and insurable.
Getting a lawyer to review indemnity language before you sign is one of the most cost-effective steps in commercial contracting.
Key takeaways
- An indemnity is a promise to cover the other party's losses from specified events.
- Courts require explicit language before enforcing an indemnity for a party's own negligence.
- Indemnities and limitation of liability clauses work together to define financial risk.
- Broad indemnities can be insured against — check your coverage before agreeing.