Introduction

When entering into a contract, parties are increasingly relying on indemnity clauses to allocate risks that may arise. However, generic or boilerplate indemnity clauses, which are not tailored to the relevant situation, may leave parties at a disadvantage.

In CIFG, a generic boilerplate indemnity was inserted into a series of agreements towards the end of the negotiations. The indemnified party believed the newly-inserted clauses provided unlimited and general indemnity and would allow it to claim the entirety of its losses arising from default.

The Singapore Court of Appeal, however, did not agree. After the Court took into account the relevant context against which that boilerplate indemnity was to be construed, it held that the boilerplate indemnity did not work as desired by the indemnified party and provided only limited protection.

Below, we discuss the background and holding of CIFG, the key lessons learnt, and the implications on your business.

Background and holding

In CIFG, the plaintiff (CIFG Special Assets Capital I Ltd) entered into a set of convertible bond subscription agreements (CBSAs) pursuant to which it provided funds to the first defendant (Polimet Pte Ltd) by subscribing for convertible bonds issued by the first defendant.

Apart from the plaintiff and the first defendant, the initial shareholders of the first defendant (Initial Shareholders), i.e. the second to fifth defendants, were also parties to the CBSAs. The first defendant eventually defaulted on the CBSAs and the plaintiff brought a claim against the defendants for the recovery of monies.

The issue before the Singapore Court of Appeal was whether the Initial Shareholders were liable to the plaintiff for the first defendant’s default, under the following indemnity clause (Clause 12.1) contained in the CBSAs:

12.1 General Indemnity. The Initial Shareholders and the Issuer hereby jointly and severally agree and undertake to fully indemnify and hold the Bondholder and its shareholders and their respective fund managers, directors, officers and employees (the Indemnified Parties) harmless from and against any claims, damages, deficiencies, losses, costs, liabilities and expenses (including legal fees and disbursements on a full indemnity basis) directly or indirectly caused to the Indemnified Parties and in particular, but without prejudice to the generality of the foregoing, for any short-fall, depletion or diminution in value of the assets of the Issuer, the Group or any Group Company resulting directly or indirectly from or arising out of any breach or alleged breach of any of the representations, warranties, undertakings and covenants given by the Initial Shareholders and/or the Issuer under this Agreement or for any breach or alleged breach of any term or condition of this Agreement.

The Court held that Clause 12.1 did not work as desired by the plaintiff, namely – it did not make the Initial Shareholders jointly and severally liable for its entire losses arising from the first defendant’s default.

The following reasons were critical to the Court’s decision:

First, the language of Clause 12.1 was extremely broad, particularly in terms of: (i) the class of beneficiaries and (ii) the matters conceivably covered by the indemnity. The extremely broad breadth of Clause 12.1 would therefore make it absurd to construe the clause on its plain terms without regard to its relevant context.

Second, a wide construction of Clause 12.1 would be inconsistent with the relevant context in this case, in particular:

1. the entirety of the CBSAs and the way the contracts as a whole was drafted, including the fact there were other obligations throughout the CBSAs that already provided for the specific allocation of risks variously to the first defendant, the Initial Shareholders or a combination of some or all of them;
2. the entirety of the commercial documents that were entered into as part of the transaction, including the various term sheets and other documents which indicated that the plaintiff pursued and obtained personal guarantees from only two of the Initial Shareholders and for only half of the total liability; and
3. the circumstances in which Clause 12.1 was admitted into the CBSAs, namely that it was inserted into the first draft CBSA (after the final term sheet had been signed) as a boilerplate provision to complete the document and that there was neither any mention of Clause 12.1 at the relevant time that it would change the commercial structure of the deal nor any discussion of its scope and effect.

It was therefore impossible to contend that a generic boilerplate provision, which made its way into the CBSAs at the last stages of discussion, could have the effect of overriding the commercial structure of the deal and the calibrated allocation of risk that is reflected elsewhere in the suite of agreements that were entered into by the parties

Key lessons and implications

There are several key lessons emerging from the CIFG decision, which should inform future efforts to incorporate an effective indemnity clause.

Namely, commercial parties should:

1. avoid generally the use of a boilerplate indemnity clause which is often broadly worded and generic in nature;
2. tailor the indemnity clause to suit the particular circumstances of the transaction;
3. set out clearly the scope and effect of the indemnity clause, particularly if there is a known or specific risk which the intended indemnified party requires protection;
4. ensure that the indemnity clause is consistent with the other contractual obligations and/or allocation of risks in the entirety of the related documents; and
5. negotiate the insertion of the indemnity clause in a manner that does not compromise its desired effect (for example, by avoiding the insertion of such a clause in a surreptitious and belated manner).

Conclusion

The CIFG decision serves as a timely reminder that special care must be given to the negotiating and drafting of an indemnity clause as they may affect the scope and effect of that indemnity.

To avoid any unintended and costly consequences, parties are advised to seek professional advice on the drafting of commercial clauses in order to, among other things, effectively allocate the risks as desired.

Current indemnified parties and indemnifiers are also advised to seek professional advice on the scope and effect of their indemnities in question. If you require such advice or would like to know how this decision might affect your business, we are happy to assist.

Dentons Rodyk acknowledges and thanks associate See Kwang Guan for his contribution to the article.