Limitation Period for Indemnity Claims in Contracts

Indemnity clauses are widely used in commercial contracts to allocate risk between parties. They require one party to compensate the other for specified losses, often on a pound-for-pound basis, once defined events occur. Indemnities are common in share purchase agreements, construction contracts, outsourcing arrangements, and commercial supply agreements.

In England and Wales, indemnity claims are subject to statutory limitation rules under the Limitation Act 1980. Although indemnities are contractual in nature, the limitation period depends on how the indemnity is drafted and when the obligation to pay arises. This makes limitation analysis more complex than for standard breach of contract claims.

What Is a Contractual Indemnity?

A contractual indemnity is a promise by one party to:

• Compensate the other for specified losses or liabilities
• Cover defined risks or events
• Reimburse costs arising from third-party claims or direct losses

Indemnities may cover:

• Tax liabilities
• Breach of warranty losses
• Third-party litigation claims
• Regulatory penalties
• Intellectual property infringement claims

Indemnities differ from damages because:

• They operate as a primary obligation, not a secondary remedy
• They may apply even without breach of contract
• Liability depends on contractual trigger wording

Legal Nature of Indemnity Claims

Indemnity claims are generally treated as:

• Claims in contract

However, they are distinct from ordinary breach of contract claims because:

• The obligation to pay arises from the indemnity clause itself
• Liability may arise upon occurrence of a defined event, not breach
• Some indemnities are triggered by third-party claims or losses

This distinction affects when limitation begins to run.

Core Limitation Period: Six Years

General rule under the Limitation Act 1980

The standard limitation period for indemnity claims is:

• Six years from the date the cause of action accrues

This is governed by section 5 of the Limitation Act 1980, which applies to simple contract claims.

In most commercial indemnity disputes, the key question is not the length of the period, but when the cause of action arises.

When Does Time Start Running?

The starting point depends on how the indemnity is structured.

1. Indemnity triggered by loss

Where the clause indemnifies against actual loss:

• Time begins when the loss is suffered or paid
• The cause of action accrues once liability is established

Example:

• A company pays a regulatory fine on 1 January 2020
• Indemnity claim accrues on that date

2. Indemnity triggered by liability

Some indemnities apply when liability arises, even before payment.

• Time begins when liability becomes fixed or certain
• This may occur upon judgment or settlement agreement

3. Indemnity triggered by demand or notice

Where the clause requires a demand:

• Time may start when a valid contractual demand is made
• The wording of the contract is critical

4. Third-party claim indemnities

Common in commercial contracts:

• Indemnity triggered when a third-party claim is made or resolved
• Time usually runs from payment or final liability determination

Accrual in Complex Commercial Transactions

Indemnities are common in structured commercial deals, such as:

• Mergers and acquisitions
• Share purchase agreements
• Asset transfers

In these contexts:

• Multiple indemnity triggers may exist
• Each trigger may create a separate limitation period
• Loss may arise at different transactional stages

Careful analysis of contractual wording is essential.

Continuing Loss and Indemnity Claims

Some indemnities involve ongoing exposure:

Examples:

• Tax indemnities over multi-year assessments
• Environmental liability claims
• Long-term regulatory penalties

In such cases:

• Limitation runs from each discrete loss event
• It does not remain indefinitely open unless a new loss occurs

Courts focus on:

• When loss crystallises
• Whether the obligation is continuous or episodic

Deeds and Extended Limitation Periods

If the contract containing the indemnity is executed as a deed:

• The limitation period is 12 years

This applies to many:

• Share purchase agreements
• Property transactions
• High-value commercial contracts

The classification depends on execution formalities, not commercial label.

Interaction with Breach of Contract Claims

Indemnity claims may overlap with breach of contract claims, but they differ in key respects:

• Breach claims require proof of contractual breach
• Indemnities may operate without breach
• Limitation for breach runs from breach date
• Limitation for indemnity runs from trigger event or loss

This means a single dispute may involve multiple limitation analyses.

Effect of Expiry of Limitation Period

If limitation expires:

• The claim becomes statute-barred
• The defendant can rely on limitation as a complete defence
• Courts will typically refuse enforcement

However:

• Indemnities may still be relevant for set-off or contractual negotiation
• Liability may remain morally or commercially significant

Court Proceedings and Commencement of Claims

For limitation purposes:

• A claim is brought when the claim form is issued by the court

Not when:

• The indemnity is first invoked
• A demand is made
• Negotiations take place

This distinction is critical where indemnity claims are time-sensitive.

Common Commercial Indemnity Scenarios

Tax indemnities in acquisitions

• Buyer discovers tax liability post-completion
• Seller indemnifies buyer for assessed tax
• Limitation runs from payment or liability crystallisation

Litigation indemnities

• Company incurs legal costs defending third-party claim
• Indemnity triggered upon settlement or judgment

IP infringement indemnities

• Licensee sued for infringement
• Licensor indemnifies defence costs and damages

Key Risks in Indemnity Claims

Common issues include:

• Misidentifying trigger date for liability
• Confusing indemnity claims with breach claims
• Overlooking deed-based 12-year limitation periods
• Failure to track staged or multiple losses
• Delayed notification of indemnity claims
• Unclear drafting of demand requirements

Practical Considerations

When assessing limitation in indemnity disputes:

• Identify precise contractual trigger wording
• Establish when loss, liability, or payment occurred
• Determine whether the clause requires notice or demand
• Confirm whether the contract is a deed
• Assess whether losses are single or recurring
• Review related breach or warranty claims

Key Takeaways

The limitation period for indemnity claims in contracts in England and Wales is generally six years from the date the cause of action accrues under the Limitation Act 1980, or twelve years if the contract is executed as a deed. Unlike standard breach of contract claims, indemnity limitation analysis depends heavily on contractual wording and the trigger event, which may be loss, liability, payment, or demand.

Because indemnities are independent contractual obligations, identifying the correct accrual date is essential. Once the limitation period expires, the claim becomes unenforceable in court, although related commercial or contractual remedies may still be relevant.