To ensure staff and pupils have access to the latest opportunities and resources, academy trusts must frequently enter into contracts with third parties. Recent years have seen a growing trend for inclusion of financially unlimited indemnities within contracts. While granting indemnities is a commercial reality of entering into contracts, the Education and Skills Funding Agency (“ESFA”) has taken steps to regulate the extent of indemnities that may be granted.
An indemnity is an obligation by one party to compensate for loss suffered by another as a consequence of a specific event. Indemnity clauses are often included in contracts as a means of allocating risks between the contracting parties. The parties will usually set out the circumstances in which the indemnity will be “triggered”. Common examples include failure to meet contractual obligations; undertaking a specific action; or failure to take proper care (negligence).
In some cases, particularly for contracts relating to the licensing of technology or computer software to an academy trust, the indemnities included are worded very broadly to cover any loss stemming from the trigger event, no matter how indirect. These “uncapped” indemnities provide for unlimited financial liability on the part of the academy trust, which in a worst-case scenario could lead to insolvency.
Academy trusts are recipients of public money to use in running their academies. As a result, there are strict guidelines that academy trusts must follow to ensure effective financial management. The ESFA has placed a limit on the extent of indemnities that an academy trust may give on its own. Under the Academies Financial Handbook 2018 (“AFH”), an academy trust must first obtain consent from the ESFA before entering into a contract containing indemnities over the “delegated limits”.
The delegated limits are set out in the AHF as being:
- 1% of the total annual income or £45,000 (whichever is smaller);
- 2.5% of the total annual income for any academy trusts that have not submitted their audited accounts correctly for the previous two years (this includes new academy trusts); or
- 5% of the total annual income for any academy trusts that have submitted their audited accounts correctly for the previous two years.
The total annual income of an academy trust is defined as the sum of grant income as disclosed in the latest audited accounts. In all cases, the upper limit of indemnities that may be given is limited to £250,000. Imposing these limits allows the ESFA to regulate the circumstances in which indemnities are granted to protect the financial position of the academy trust.
Compliance with this requirement is mandatory for academy trusts. As a result, it is vital to review each contract an academy trust enters into to ensure that ESFA consent is sought where indemnities over the delegated limits are included.