Why IT contractors must check indemnity tenses

A fresh judgement underlines the importance of using the correct tense when referring to recoverable losses in a contract, writes Richard Nicholas, an IT lawyer at Browne Jacobson LLP.

Central to this are indemnities, the relevant contractual clauses that are usually read narrowly by the courts.

Indemnities and IT contractors

Indemnities concern IT contractors when, say, they pull out of an assignment early or terminate before its term. Leaving in the lurch the end-user, with whom you’ve made a commitment you now can’t keep, is grounds for you to expect to be liable for some damages, particularly where you signed up to an indemnity. But it is the wording of the indemnity that is likely to be the key in working out how much.

The High Court case

Looking at an indemnity for losses “incurred by” a bank, a High Court judge had to decide if it covered only losses incurred up to the point of termination, or losses up to that date and also extrapolated future losses.

Having deliberated, the court held that the indemnity could only cover losses incurred at the date of termination, meaning the bank couldn’t rely on it to recover future losses (that had not yet been incurred at the date of the breach).

Had the bank wanted to recover future losses, it could have instead used the words “incurred or to be incurred” or other similar wording. It’s a contractual drafting point that the bank must regret!    

Implications for the IT sector

For end-users, the judgement is further proof that indemnities will be read narrowly – so they may find it worthwhile to check which tense they have used, are using and are planning to use in indemnities.

For IT contractors, particularly before they take action that may result in a breach of contract, the case confirms the value in checking your position under your agreement. Even relatively innocuous wording could result in losses you haven’t accounted for.

Thursday 12th Apr 2012