You should always make it clear to a client that any indemnity from a third party is only as good as that third party’s ability to pay.

In a recent professional indemnity claim, a partner acted for two sellers of a printing company. The partner noticed that one of the sellers was a guarantor of the company’s lease, and negotiated an agreement by the buyer to provide a deed of indemnity in respect of those potential obligations. That indemnity was to ‘continue in full force and effect for as long as the buyer... shall be T or be in occupation’. However, a few years later, the buyer sold the company to a third party, but that third party then went into liquidation and defaulted on the lease obligation. The lease was forfeited and L called on the original seller of the printer service as guarantor. He, in turn, relied on the indemnity negotiated with the original buyer but he argued that he was no longer in occupation. Accordingly, L succeeded against the original seller of the business – which was many years after the sale of the business, when the client was elderly and in retirement. Not surprisingly, he blamed the partner who had acted for him on the sale, since he had been advised that the indemnity would completely relieve him of all liability under the lease. As such, it is a simple reminder to always make it clear to clients that any indemnity from a third party is only as good as that third party’s ability to pay. Do tell the client of the risks of relying on an indemnity. Source: Zurich solicitors@risk.