Earlier this year, the ESFA published the academies trust handbook for 2022. There were minimal changes to this however one notable exception was the changing guidance around indemnities, with academy trusts now able to enter into indemnities which are in the normal course of business without seeking approval.
So, what does this mean for Trusts? Firstly, we need to look at what an indemnity is.
The ESFA defines an indemnity as “a contractual agreement of one party (indemnifier) to compensate a loss to the other party (indemnity holder), due to the actions of the indemnitor or any other party. Indemnities are included in agreements usually to offer protection to one party in the agreeing to the contract if one party cannot fulfil their contractual obligations.”
Essentially, this is about protecting one party (the indemnity holder) against a loss by paying compensation should a specified event happen. For example, schools have building insurance in place to indemnify them against any damage to the building. The insurer is the indemnifier who will reimburse the school as the indemnity holder.
An indemnity is written into a contract using something called an ‘indemnity clause’. What is covered will vary and depend on the specifics of each agreement.
Supplier contracts with indemnities are common within academy trusts. Some examples are:
- catering contracts
- utility contracts
- data-sharing contracts
- commercial IT and other professional service contracts
What should schools do?
Trusts no longer have to obtain consent for the ESFA to enter into contracts with indemnity clauses, however trusts need to be ensure that they continue to obtain legal advice on these contracts and are fully aware of the terms.
It is recommended that trusts:
- Add details of indemnity clauses to the contract registrar
- Give trustees an opportunity to challenge and review these contracts
- Decide whether a contract and any subsequent indemnities are within the normal course of business in which case the school can procure this contract within their own procurement guidelines
- if a contract can be considered ‘novel, contentious, or repercussive’, prior approval from the ESFA is essential. Further guidance can be found in the Academy Trust Handbook - Part 5: Delegated authorities
- when looking at new contracts, it is important to look at details of the indemnity contract and any protection this offers. Does this offer value for money? All the terms and conditions should be considered. It may be that the flexibility offered by a break clause e.g. exiting the contract early may add to the contract costs but this may be advantageous to the business need of the school or trust
- importance of independent legal advice – for contracts with a high value or more unusual clauses it may be advantageous to seek legal advice to ensure the contract is suited to the school’s needs
Issuing contracts with indemnity clauses
An example is school lettings agreements; a well written contract here will protect the school and their assets.
Some things to think about here:
- break clauses may be used here to allow flexibility for either party to terminate a contract early
- a common indemnity clause will ask a hirer to obtain public liability insurance with a minimum indemnity of a sum (agreed with the school) which is enough to cover legal liability for incidents resulting in injuries to persons and/or damage or loss of property
In conclusion:
All the terms and conditions including indemnity details needs to be considered before deciding whether to agree to the contract terms. If there are any doubts, legal advice should be sought.
