Indemnities in Construction Contracts: Understanding the JCT Approach and the Distinction Between Debt and Breach Indemnities

Sophie Bennett, Associate at Holmes & Hills, explains the key differences between debt and breach indemnities in construction contracts and considers the JCT approach to allocating risk and liability.

Indemnities are a mechanism by which one party agrees to compensate another for specified losses, liabilities, or claims arising during or after the performance of works. While the concept appears straightforward, the legal effect of an indemnity clause can vary considerably depending on how it is drafted, and can even affect the ability of a contractor or consultant to take out and maintain insurance.

Understanding their function, and in particular the critical distinction between debt indemnities and breach indemnities, is essential for employers, contractors, and their advisors alike.

Indemnities in the JCT Suite

The JCT suite includes a number of indemnity provisions, most prominently in relation to personal injury, death, and damage to property. Under the JCT Design and Build Contract 2024 (DB 2024), for example, clause 6.1 requires the contractor to indemnify the employer against claims arising from personal injury or death caused by the carrying out of the works, except to the extent that the injury or death is attributable to any act or neglect of the employer or its agents. Indemnities are often added into the standard form contracts by a schedule of amendments, particularly in relation to losses stemming from the contractor’s breach of third party agreements, or from breach of copyright.

These indemnities serve a practical purpose as they clarify which party bears financial responsibility when third-party claims arise in connection with the works, reducing the scope for expensive disputes over liability. The JCT drafting typically ties the obligation to indemnify to the conduct of the indemnifying party, reflecting a broadly adversarial approach to risk allocation.

Insurance provisions in Section 6 of the JCT contracts sit alongside these indemnities, providing a complementary layer of protection. The interplay between indemnity and insurance is often raised in negotiation, particularly in bespoke amendments to the standard forms, as insurers are wary of indemnities in general.

Debt Indemnities vs Breach Indemnities

Perhaps one of the most misunderstood areas of drafting and law is the difference between a debt indemnity and a breach indemnity.

Debt Indemnities

A debt indemnity creates a standalone obligation to pay a fixed sum of money upon the occurrence of a specified event. It operates as a primary obligation, independent of any breach of contract. The indemnifying party's liability is triggered not by its own breach but simply by the occurrence of the defined event. The classic drafting is: "Party A shall indemnify Party B against all losses arising from [specified event]."

Because a debt indemnity gives rise to a debt rather than a claim for damages, it carries several important consequences:

• Remoteness of damage: The ordinary rules on remoteness that apply to claims for breach of contract do not apply. The indemnifier is liable for losses falling within the scope of the indemnity, regardless of foreseeability.
• Mitigation: It is suggested that the duty to mitigate does not apply in the same way to a debt claim as it does to a damages claim, although this point remains subject to some debate.
• Limitation periods: The limitation period for a debt indemnity runs from the date the loss is suffered (i.e., the date on which the indemnified party's liability to a third party is established), rather than from the date of any breach.

Due to these critical points reducing the indemnifying party’s ability to mitigate and the protection of remoteness defences, insurers are reluctant to accept debt indemnities in negotiation. However, due to the conflation of a debt indemnity and a breach indemnity, this reluctance often extends to breach indemnities. There are, however, important distinctions between the two.  

Breach Indemnities

A breach indemnity, by contrast, is dependent upon a breach of contract. It does not create a new or independent obligation but instead operates as a measure of the loss recoverable when the indemnifying party breaches a contractual term. In substance, a breach indemnity does not extensively add to the indemnified party's existing right to claim damages for breach of contract.

Because the underlying claim remains one for damages, the usual principles apply: the claimant must prove breach, causation, and loss, and the rules on remoteness and mitigation will govern the assessment of recoverable loss.

Practical Implications

The approach taken by the courts as to whether indemnities are drafted as debt indemnities or damages indemnities vary and turn based on the facts of the claim. This is due to the inherently complex nature of indemnities and the fact that there is no one avenue that the courts pursue in the interpretation of indemnities; instead, context and construction are important to the interpretation of those clauses. This does mean that claiming on an indemnity is unsure ground, as disputes relating to indemnities will hinge on the interpretation of the individual adjudicator or judge.

Key Takeaways

Indemnities in construction contracts are deceptively complex. Parties negotiating JCT contracts, or amending their indemnity provisions, should pay close attention to whether a clause creates a true debt indemnity or is a reinforcement of an existing right to damages for breach. The distinction affects limitation, remoteness, and mitigation and can ultimately determine whether a claim succeeds or fails.

If you require any support, our specialist construction solicitors are here to help.