A contractual obligation to “accept responsibility” for harm to another party — that is, to reimburse, or in legalese, “indemnify” that other party — can have serious financial implications. Even with only an implied indemnity obligation, the extent of liability could be significantly greater than anticipated. Example An English couple contracted with a tour operator for a 15-day vacation package in Sri Lanka, including airfare and hotel. During their stay at the hotel, the wife was raped by a hotel maintenance worker. The UK Supreme Court held that the tour operator was liable for breach of contract: the contract said, in relevant part:
[W]e [the tour operator] will accept responsibility if due to fault on our part, or that of our agents or suppliers, any part of your holiday arrangements booked before your departure from the UK is not as described in the brochure, or not of a reasonable standard, or if you or any member of your party is killed or injured as a result of an activity forming part of those holiday arrangements.
X v. Kuoni Travel Ltd.,  UKSC 34, para. 2 (reversing judgment of court of appeal) (emphasis added, citations omitted).
Notably, the supreme court held that the tour operator was directly liable for breach of contract, and that vicarious liability was not relevant. See id. at para. 50.
Drafting lessons for suppliers:
- Be very careful when agreeing to accept responsibility for the actions of others — subcontractors, whatever — when asked to agree to language such as “we will indemnify you ….”
- Consider trying to cap your aggregate financial exposure for indemnity obligations, the way insurance coverage is subject to policy limits. Keep in mind that liability for indemnity might not ordinarily be subject to foreseeability limitations, nor to a duty to mitigate (although the case law is unclear on this point). See generally Glenn D. West, Consequential Damages Redux …, 70 Bus. Lawyer 971, 975 (Weil.com 2015) (“III. A Basic Primer on Contract Damages”), archived at https://perma.cc/D2HC-Z5XD; id. at 998-99: “[I]t bears repeating that there is, in fact, a very clear distinction (whether or not there is an ultimate difference) between a claim for indemnification and a claim for damages for breach of a representation and warranty in an acquisition agreement.”
- Consider offering to commit to maintaining a specific level of insurance coverage, with the customer/client as an additional insured, and limit your financial exposure for indemnity to the policy limits of the insurance coverage.