Indemnity clauses can play a critical role by allocating liability and thus defining the parties’ bargain. However – despite their prevalence – the treatment of indemnities in English law is not always coherent, making it difficult to understand what they mean in practice.
The decision in FW Aviation v VietJet [2026] EWHC 1996 provides some insight into the trickier aspects of these clauses, such as the difference between a “damages” indemnity and a “true” indemnity, and the impact of causation and remoteness on any claim. We consider the practical implications.
Just a question of interpretation?
- 01Just a question of interpretation?
- 02The VietJet decision
- 03A lack of coherence in English law?
- 04Practical drafting tips
- 05Example clause – Clause 23.1
A commercial indemnity is just a contractual obligation to hold another party harmless against identified loss or liabilities. They are used in a huge variety of agreements, against different factual backgrounds and are drafted in wildly different ways. (For completeness, indemnities also perform an important function in guarantees and insurance contracts but that is outside the scope of this article.)
Given these are creatures of contract, it is unsurprising the courts often deal with them as a simple matter of contractual interpretation. After all, the leading case on the interpretation of contracts addresses the meaning of an indemnity (Wood v Capita [2017] UKSC 24) and the variety of circumstances in which indemnities arise makes it difficult to craft generally applicable rules.
The plain vanilla rules of contractual interpretation often provide a perfectly satisfactory resolution. For example, the £677 million dispute in AXA France v Santander Cards [2026] EWCA Civ 1185 turned on whether a 41-word indemnity clause covered PPI policies sold before an agency agreement came into force. The linguistic hints within the agreement, coupled with the fact the “default position is for agreements to govern what happens after they are agreed, not before”, were sufficient to decide the matter. There was no need for any ‘special rules’ to conclude the indemnity did not apply to historic policies.
The VietJet decision
- 01Just a question of interpretation?
- 02The VietJet decision
- 03A lack of coherence in English law?
- 04Practical drafting tips
- 05Example clause – Clause 23.1
However, some indemnity clauses – and claims – are less straightforward and require consideration of the particular properties of indemnities. The judgment in FW Aviation v VietJet [2026] EWHC 1996 illustrates some broader points.
It relates to four Airbus A321 aircraft leased under a JOLCO structure. The purpose of the leases was to provide tax savings to the parties financing the aircraft. However, they never wanted to take redelivery of the aircraft and so were protected by broad indemnities and significant early termination payments.
The background to the dispute is extremely complicated but the simplified version is that following the outbreak of Covid-19 VietJet defaulted, and initially refused to return the aircraft. This triggered a slew of claims, leading to seven High Court decisions and two decisions of the Court of Appeal. The finance parties had already recovered $181.8 million in early termination payments – this judgment marks the end of this process and focuses on whether the finance parties can use the indemnities in the JOLCO leases to recover a further ~ $140 million for the recovery, repair and loss of rental for the aircraft, alongside the costs of enforcement.
Mr Justice Birt’s 136-page judgment is very well written, but heavy going. It illustrates five key points.
1. Broad indemnities can be narrowed by their context
The first is how to interpret an indemnity drafted in extremely broad terms. Does it really apply to all possible liabilities?
Clause 23 of the JOLCO lease is a good example, and the torrential drafting is set out at the base of this article. The draftsman spared no effort and no synonyms. Interpreted literally, it appears to cover every loss or liability imaginable. Further, the background suggests that the indemnity should be interpreted broadly if the aircraft were returned – “it is entirely understandable why the contracts would include wide indemnities (even if overlapping to ensure full coverage) seeking to insulate [the finance parties] from costs should [the aircraft] end up with them” (para 129).
However, the scope of the indemnity was not unlimited. Due to the way the dispute developed, for a specific class of aircraft, the finance parties only had an interest in the financing arrangements. Accordingly, the indemnity in Clause 23.1 was similarly limited. Despite its broad wording, the indemnity only applied to the lessors in their capacity as financing parties, and did not allow them to recover losses that arose only because they subsequently took ownership of the aircraft (paras 94-97).
This contextual narrowing is consistent with many other authorities such as Petroleo Brasileiro v ENE Kos [2012] UKSC 17. In other cases, indemnities have been similarly cut down to size because they are inconsistent with the wider bargain. In Sahara Energy v Sonara [2026] EWCA Civ 54, the Court of Appeal approved the first instance decision to limit an indemnity because “if a generous reading is given to the application or breadth of the indemnity wording the result would truly cut across the contractual scheme”.
In practice, if an indemnity is intended to protect against a specific liability, that should be clear from the drafting. It is unwise to rely on open-ended and non-specific wording.
2. Indemnity claims can run in parallel with contractual claims, but not liquidated damages
The next question is the extent to which an indemnity claim can run in parallel with a contractual claim.
VietJet, the lessee, suggested where a loss was covered by specific contractual provisions, that excluded broader recovery under the more general indemnities. Birt J dismissed this novel argument. In a situation in which the indemnities were consistent with the overall contractual scheme, there is nothing objectionable in having more than one clause respond to the same loss. The contractual remedies were not exclusive, particularly given the indemnities covered a broader set of losses (paras 94-95).
However, the contract also used liquidated damages, e.g. to provide a fixed sum to compensate for the loss of rental between termination and redelivery. The finance parties could not make a further claim under the indemnities for a higher rent for that period.
3. Indemnities might (or might not) be limited to third party claims
A further question is whether an indemnity applies to just third party claims, or to just internal losses, or both.
VietJet made a further ambitious claim that Clause 23.1 only applied to third party claims and did not extend to costs “voluntarily incurred” by the finance parties. This was partly based on the decision in Pindell Ltd v AirAsia Bhd [2010] EWHC 2516 and the existence of a claims handling mechanism at the end of Clause 23.1 (see below).
This was roundly dismissed by Birt J who stated that it “is axiomatic that each contract is to be construed by reference to its own language and in its own context”. While the indemnity in Pindell was limited to third party claims, that was the product of the specific wording used in that indemnity. Pindell did not establish a general principle capable of overriding the broad words of Clause 23.1. Similarly, the claims mechanism in Clause 23.1 applied “if” a third party made a claim. It does not say, or suggest, that it is only a third-party claim that can lead to an indemnifiable loss (paras 114 -134).
4. What role does causation play?
There will typically be a trigger event for an indemnity. The question is how closely the liability must be connected to that trigger event. Must it be the only cause, the main cause or simply a cause? How are intervening events dealt with such as the negligence of the indemnitee?
This issue is also touched on briefly as VietJet sought to import the concept of “proximate cause” from insurance law. That is a narrow test. In contrast, the finance party suggested that the triggering event simply needed to be “a cause” (in the sense of a contributing factor).
The court decided that the use of “directly or indirectly” in Clause 23.1 is a strong indicator that the causative link may be more remote than a proximate cause, and so did not apply that test.
Disappointingly, the court did not then provide much further explanation about what the test should be and, despite citing Petroleo Brasileiro v ENE Kos, did not consider the “effective cause” test posited in that judgment.
5. Are indemnities limited by remoteness and mitigation?
A closely related question is the extent to which an indemnity claim is limited by concepts of remoteness and mitigation.
Decisions such as The Eurus and Royscot Commercial Leasing have created an urban myth that indemnities are never subject to a remoteness or mitigation limitation. However, this seems to be based on a mistaken conflation between indemnity claims and debt claims. The current approach to this issue appears to be to distinguish between “damages” indemnities and “true” indemnities, albeit what ultimately matters is the correct construction of the contractual provision in question (see Pullman Foods v The Welsh Ministers [2020] EWHC 2521 at paras 194-200).
In VietJet, the parties accepted that one indemnity (clause 23.7) was a breach-triggered “damages” indemnity and so attracted ordinary contractual remoteness and mitigation rules.
By contrast, Clause 23.1 was a “true” indemnity which operated independently of breach. It included losses “relating to, arising out of or resulting from (whether directly or indirectly)”. The breadth of that language was too great for any argument that it included a remoteness limitation (para 152). This was despite a range of other judgments, including Pindell, where broad indemnities were limited by remoteness.
A lack of coherence in English law?
- 01Just a question of interpretation?
- 02The VietJet decision
- 03A lack of coherence in English law?
- 04Practical drafting tips
- 05Example clause – Clause 23.1
Despite the important, and sometimes critical, role played by indemnities in commercial contracts, there is a lack of coherence in the way they are approached in English law.
Beyond applying the well-established principles of contractual interpretation, these clauses are often dealt with on a piecemeal basis without reference to other decisions or any serious attempt to build an identifiable corpus of precedent. This is perhaps understandable given the interpretation of indemnities also barely gets a mention in the leading texts, and has little wider academic scrutiny.
This is a problem for two reasons. First, it reduces the law’s predictability. Commercial parties faced with significant indemnity claims, such as the ~$140 million at stake in the VietJet litigation, should not need to go to court to determine many of the fundamental principles needed to understand the operation of the indemnities.
Second, it inhibits the principled development of the law. For example, there are questions about whether an indemnity should be capable of side-stepping the well-established controls of foreseeability and mitigation.
Practical drafting tips
- 01Just a question of interpretation?
- 02The VietJet decision
- 03A lack of coherence in English law?
- 04Practical drafting tips
- 05Example clause – Clause 23.1
In light of VietJet, those drafting and interpreting indemnities should consider:
- What losses or liabilities is the indemnity intended to address? Are they identified at the right level of specificity – in other words have you ensured the indemnity is not too narrow, but equally not too broad?
- Is the indemnity intended to cover internal losses and liabilities, third party claims or both?
- If the indemnity covers third party claims, does it have a claims handling mechanism?
- Who is the indemnity intended to benefit? Are they clearly identified and do they have third party rights?
- Should the concepts of remoteness and mitigation apply? Should express drafting be included to address these issues?
- How is causation dealt with? Does the indemnity simply capture any losses or liabilities arising “directly or indirectly” from the trigger event, or is something more specific needed?
- Should the indemnity be subject to a specific cap, or the general cap on liability, or no cap?
- Are any other rights needed? For example, should the trigger event also give rise to a right to terminate or other contractual remedy?
FW Aviation v VietJet [2026] EWHC 1996 is available here.
Example clause – Clause 23.1
- 01Just a question of interpretation?
- 02The VietJet decision
- 03A lack of coherence in English law?
- 04Practical drafting tips
- 05Example clause – Clause 23.1
“General Indemnity
Subject to Clause 23.2 (Exceptions to General Indemnity), the Sub-Lessee hereby agrees at all times to indemnify and hold the Sub-Lessor, the Lessor and the Lessee Parent and their respective successors, permitted transferees, permitted assigns, officers, directors, agents, affiliates and employees (collectively “Indemnitees” and each an “Indemnitee”) harmless from and against all and any Losses of whatsoever kind and nature and regardless of when the same shall arise (whether prior to, during, or after termination of, the Lease Period) which may from time to time or at any time be imposed on, suffered or incurred by or asserted against any Indemnitee (whether or not any such Losses are also indemnified or insured against by any other person) relating to, arising out of or resulting from (whether directly or indirectly):
- the purchase, ownership, title, registration, delivery, non-delivery, redelivery, performance, acceptance, non-acceptance, rejection, import, export, re-registration, de-registration, financing, certification, insurance, mortgaging, hypothecating, supply, lease, hire, charter, sub lease, sub-sublease, “wet lease”, possession, presence, location, stationing, use, operation, accident, damage, loss, transportation, management, assignment, control, manufacture, design, condition, maintenance, alteration, modification, improvement, refurbishment, repair, service, overhaul, testing, removal, replacement, repossession, foreclosure, substitution, pooling, interchange, storage, sale, remarketing, return, redelivery, exchange or disposition of the Aircraft, the Airframe, any Engine or any Part or any interest therein or any title thereto or the Technical Records or destruction of or damage to any property, or death or injury of, or other Loss of whatsoever nature suffered by, any person caused by, relating to or arising from or out of any of the foregoing matters (either in the air or on the ground) whether or not such Losses may be attributable to any defect (including, without limitation, latent or other defects whether or not discoverable) in the Aircraft, the Airframe, any Engine or any Part or any interest therein or any title thereto or the Technical Records or attributable to the design, testing or use thereof or from any maintenance, service, repair, overhaul, or to any other reason whatsoever (whether similar to any of the foregoing or not);
- any design, article or material in the Aircraft, the Airframe, any Engine or any Part or any interest therein or any title thereto or the Technical Records or the operation or use thereof constituting or being alleged to constitute an infringement of patent, trademark, copyright, design or any other proprietary right or a breach of any obligation of confidentiality owed to any person in respect of any of the matters referred to in this paragraph (b); or
- after the occurrence of a Potential Event, preventing or attempting to prevent the arrest, confiscation, seizure, taking in execution, impounding, forfeiture or detention of the Aircraft, any Engine or any Part, or in securing the release of the Aircraft, any Engine or any Part; or
- any Total Loss in relation to the Aircraft, the Airframe, any Engine or Part (excluding Losses incurred by any Indemnitee to the extent such Indemnitee is compensated from any insurance proceeds or if the A Line Termination Value has been paid in accordance with this Agreement); or
- any act or omission which invalidates or which renders voidable any of the Insurances,
If a claim is made against an Indemnitee (such Indemnitee, in each case, being the “Affected Indemnitee”) which is likely to result in Losses to such Affected Indemnitee in respect of which the Sub-Lessee is obliged to indemnify the Affected Indemnitee under this Clause 23.1 (General Indemnity), then, provided no Potential Event or Excepted Reason has occurred and is continuing, the Affected Indemnitee shall, if requested by the Sub-Lessee, consult with the Sub-Lessee to consider what action (if any) may properly be taken to contest such a claim. …”
For further information, please contact:
Richard Cumbley, Partner, Linklaters
