Indemnification

Indemnification is a legally binding promise by one party to accept responsibility for losses or damages that another party suffers or may be liable for. Treasury Board guidance defines it in these terms in its guidance on limiting contractor liability.

CanadaBuys describes the same idea in practical terms: one contract party must make the other whole when the other has suffered a loss. Its contractor liability guidance places indemnification within the wider question of how contractual risk is allocated between Canada and a supplier. Related terms include indemnity, limitation of liability, first-party liability, third-party liability and "save harmless" clauses.

Canada's default position: silence on indemnification

According to CanadaBuys, the default position in Canadian federal procurement is generally to remain silent on indemnification. Silence means the parties rely on their existing legal rights under the common law or the Civil Code, rather than adding a specific indemnity clause to the contract.

The guidance lists exceptions to this default:

• Relying on the common law or the Civil Code is not in Canada's financial interest.
• Canada agrees to indemnify a contractor in exceptional circumstances.
• The procurement is a foreign military sale.

When the contractor indemnifies the Crown

Where a contractor is responsible for losses or damage suffered by the Crown, or for liabilities imposed on the Crown, because of the contractor's acts or omissions, the contractor must indemnify the Crown. Treasury Board guidance explains that this protection can be comprehensive and unlimited for the specified losses or liabilities.

The Treasury Board Policy on Decision Making in Limiting Contractor Liability sets the framework. As published on the Treasury Board policy site, it applies to departments covered by section 2 of the Financial Administration Act, expressly including the Canadian Forces. It also applies to Crown procurement contracts subject to the Government Contracts Regulations and the Contracting Policy.

When Canada indemnifies a contractor

A department cannot simply transfer risk to Canada. The policy requires prior Treasury Board approval before a contractor is indemnified. Decisions about clauses that limit a contractor's liability or indemnify a contractor should normally be made before the RFP is released and no later than bid closing, so the approach is settled before suppliers submit final pricing.

Foreign military sales are one circumstance in which Canada may agree to indemnify a contractor. In that case the client must assume financial responsibility for the transferred risk and obtain approval from its chief financial officer, as set out in the CanadaBuys guidance.

Related liability terms in NATO procurement

NATO's published general terms and conditions for headquarters procurement contain supplier-liability provisions. They address loss or damage arising from the supplier's possession or use of NATO-furnished property or services. Suppliers pursuing NATO work should read these provisions as part of their risk review, separately from any Canadian federal clause.

What indemnification means for a supplier bidding on Canadian public contracts

The liability regime is determined for each procurement, so no single indemnification obligation applies to every solicitation. A bid team should read the solicitation and the draft contract to confirm whether the supplier must indemnify Canada, other parties or third parties.

• Identify the specific losses and liabilities that trigger the indemnity.
• Check for insurance, liability-cap, notice, defence and claims-handling requirements.
• Price and manage the risk the contract assigns to your company.
• Raise questions about indemnity wording during the question period, before bid closing, because the decision on these clauses is expected to be made by then.

Where Canada is silent on indemnification, the supplier's exposure rests on its general legal rights and duties. Where a clause is present, it sets out the allocation of risk in writing, and it belongs in your pricing and bid approval decisions.