Compromise agreements: indemnities

A high profile Court of Appeal decision underlines the need for businesses to ensure that any compromise agreements they enter into are carefully drafted. The court overturned a High Court decision that an indemnity in a compromise agreement, to pay reasonable costs and expenses properly incurred by a former employee in defending criminal proceedings, was limited to the lawful responsibilities of the employee’s post and did not extend to allegations of personal misconduct. The court held that the indemnity would apply where the criminal allegations arose out of how the employee had gone about the performance of his job.

Businesses must be particularly careful when drafting terms under which they provide indemnification for costs incurred in relation to future legal proceedings. In most cases, such an indemnity will only be provided in return for the employee agreeing to act as a witness on behalf of their employer. Where this type of indemnification is necessary, both parties should clarify the circumstances in which they think the indemnity may be called upon and its scope. Businesses should also consider capping their financial exposure and carefully wording the clause to only cover specific types of fees and costs and only those that have been “reasonably and necessarily incurred.”

Our checklist sets out the key issues a business should consider before entering into a compromise agreement with an employee.