This article is written by Pujari Dharani, a B.A. LL.B. student at Pendekanti Law College, affiliated to Osmania University, Hyderabad. The article talks about the indemnity clause, its meaning and definition, related legal framework, features, contents, benefits, and disadvantages, amongst other things.
This article has been published by Sneha Mahawar.
The word “indemnity”’ is derived from the Latin word “indemnis“, which means “to be uninjured” or “to suffer no harm or loss.” It also can be referred to as protection or security against monetary burden.
One of the crucial provisions that are typically included in all types of contracts is an indemnity clause. This provision is included in contracts because one of the parties guarantees to defend and indemnify the other party from harm or loss under specific conditions that have been agreed upon by the parties to the contract.
However, an indemnity clause in a contract must be carefully handled since there are several ways it could be handled erroneously, perhaps even to the detriment of the person making the contract.
As a result, indemnity clauses seem complex but are among the most important and helpful contractual provisions that help parties manage the risks associated with a contract. The parties’ intentions and the way the indemnity clause is written largely determine its extent and impact. This is why it requires numerous negotiations during the drafting stage. Read this article to learn everything there is to know about indemnity clauses, and then pay close attention to them when you sign a contract.
Indemnity clause defined
As we all know, the fundamental idea behind an indemnity or indemnification is to transfer some or all of the liability from one party to another. This means that one party to the contract—referred to as the “indemnifier” or “indemnifying party”—promises to protect another party—referred to as the “indemnity holder” or “indemnified party”—from not only loss, cost, expense, and damage but also from any legal consequences resulting from an act or omission by either the indemnifier or a third party or any other event. Section 124 of the Indian Contract Act, 1872 (from hereon referred to as the “Act”) incorporates this indemnity principle. Likewise, an indemnity clause in any contract or agreement serves this effect.
It is important to note that, according to Section 73 of the Act, the question of indemnity only arises where a loss was anticipated or foreseen as a result of a breach of contract. However, this condition does not apply to an indemnity clause in a contract. It is a separate contract, not something that results from a breach of the contract. Therefore, unless expressly excluded in the indemnity clause, an indemnity holder can claim remedy in the case of any consequential, remote, indirect, or third-party losses.
An insurance contract serves as the most common example of indemnity. For instance, in the case of home insurance, homeowners pay an insurance company for security in exchange for compensation in the case of the most unlikely event. The homeowner is the indemnity holder, and the insurance company is the indemnifier who agrees to pay out reimbursement upon certain conditions.
Examples of indemnity clauses
To be indemnified for any losses or damages which resulted because of an unfortunate event that occurred to the business, the owner of the business has been paying an insurance premium to a well-known insurance company. As a part of the contract between the business owner and the insurance company, if a mishap occurs, such as the building of the business underwent structural damages or the like, in such a case the insurance company will be liable for indemnity for those losses incurred by the owner through reimbursing the owner for repair amount or by rebuilding the damaged parts by employing its own designated contractors.
Another example is Mr. Ram booking a package holiday via a travel agent that has provisions for a hotel stay. As part of the holiday contract, there is an indemnity clause saying if Mr. Ram damages any amenity of the hotel room, he will have to compensate the hotel for the same.
When does the need for an indemnity clause arise
Almost all commercial contracts contain indemnity clauses. They are one of the most frequent and highly disputed clauses in a contract since they are a crucial means of allocating risk between the parties.
The objective of these clauses is to safeguard a party from third-party claims. To be more specific, in cases where the indemnity holder believes the indemnifier holds a greater share of responsibility for the loss or harm caused by a third party, the former includes the indemnity clause in the contract made with the latter, which states that the indemnifier should be liable for the third-party claims if any. However, the indemnifier can negotiate with the indemnity holder if the contents of the clause are not satisfactory and conclude with the final contract.
Therefore, once the indemnifier accepts an indemnity agreement as stated in his contract, the risk of future losses is transferred to the indemnifier, irrespective of who caused them. Here, acceptance of the indemnifier for the stated terms and conditions is crucial because the indemnification issue comes into play only when the loss or damages concern the prior acceptance by the indemnifier to protect the indemnity holder from the damage or injury. The general guideline is to look for an indemnity that will protect a party from obligations caused by the actions of another party to the maximum extent possible.
Take a situation where a manufacturer sells goods to a retailer. The retailer might be concerned that if the goods are defective, consumers may sue him for product liability. To avoid such situations, the retailer would typically ask the manufacturer for protection from those claims in the form of an indemnification clause in a contract so that they can be compensated if they occur.
There is no requirement that indemnity clauses include a component of monetary compensation. They can be used to simply absolve a party of liability, as in the preceding example. However, for financial reasons, indemnity clauses are frequently used in commercial contracts.
Reasons for insertion of an indemnity clause
The following points are the reasons for the inclusion of indemnity clauses in commercial contracts:
- Under Section 73 of the Act, a party may only be compensated for losses that occurred in the process; remote or indirect losses are expressly excluded. According to how it is typically drafted, an indemnity clause covers all damages, not just direct losses. As a result, an indemnity clause might allow for the recovery of remote, indirect, or consequential losses and damages. However, this claim is not without dispute.
- According to Section 73 of the Act, the loss must have naturally resulted from the breach in the ordinary course of events. As a result, it would be necessary to prove a direct connection between the loss and the breach. This criterion, however, may be relaxed if the indemnity clause in the contract is written with words like “arising out of”, “in connection with”, and “as a result of”.
- The methods available for resolving the hardship brought on by the non-performance of the contract must also be taken into account when evaluating the loss or damage resulting from a breach of contract. Unless expressly indicated in the indemnity provision, this obligation may not come from an indemnity. However, on this issue, Indian law is not particularly clear.
- Another major reason is that indemnification claims may be brought even before a party has sustained a loss (if the clause permits), whereas the claim for damages can be made only after the breach of the contract. The Bombay High Court observed this in Jet Airways (India) Limited v. Sahara Airlines Limited (2011).
- Claims for damages can only be made against the party who made the promise in the contract, and the contract in question must have been concluded for the claim to be valid. The indemnity holder, however, is free to claim for losses sustained as a result of the indemnifier’s conduct as well as those of any third party.
Exceptions to indemnify
There are many standard exclusions to indemnity. Typically, they deal with situations where the party being indemnified either directly or indirectly causes the harm that demands indemnification. For instance, actions may be excluded by an indemnity clause when indemnification for claims or losses resulting from the indemnified party’s:
- Gross negligence or carelessness;
- Incorrect product usage;
- Bad faith or non-compliance with the agreement’s requirements.
Apart from the above exceptions, the indemnity also does not apply, under English law, to those losses caused by acts that are not considered human conduct. That is, if the indemnity holder incurred damages due to natural forces that are not man-made, then the indemnifier is not liable to indemnify. However, by virtue of the 13th Report of the Law Commission in 1958, Section 124 of the Contract Act was amended and included all those losses or damages caused to the indemnity holder, irrespective of the involvement of human conduct.
Types of indemnity clauses
There are broadly six types of indemnity clauses based on their respective scope and applicability. Those are as follows:
In this kind of indemnity, there are no specific limitations or exceptions on the liability of the indemnifier mentioned in the indemnity clause. For example, X agreed to indemnify Y by including the indemnity clause in a contract signed by both parties. In the clause, there are no limitations or exceptions mentioned, and it is also silent on whether X is responsible to indemnify those losses too, which occurred due to the negligent acts of B. This conveys that the liability of X applies to all kinds of losses caused by specific acts or events as per the terms of the contract. This kind of indemnity gives blanket protection to the indemnity holder.
Reverse or reflexive indemnities
In this kind of indemnity, it was mentioned in the indemnity clause that the indemnifier would take liability for all those losses or damages incurred due to the acts or omissions of the negligent party. Here, the negligent party can also be the indemnity holder himself/herself. For instance, an insurance company agreed to indemnify a popular medical hospital. One day, due to the negligence of hospital staff, a patient suffered a few injuries. Here, the insurance company is liable to compensate the patient because it agreed to indemnify the harm arising out of the negligence of the hospital.
Limited or proportionate indemnities
Here, the indemnity clause mentions that the indemnifier would indemnify the indemnity holder for all losses except those that were incurred as a result of the act or omission of a negligent party. Hence, the indemnifier will not be responsible for paying for all the negligent activities of the party. This kind of indemnity is the antithesis of reverse indemnity.
The name itself conveys that, in these kinds of indemnities, the indemnifying party will pay for those claims of the other party who is not involved in the contract, i.e., a third party to the contract. Consumer product liability claims are the best example of this type of indemnity. For better understanding, let’s say there is a written contract between the manufacturer of a popular cold drink company and a restaurant owner. And the contract includes the third-party indemnity clause. If a consumer became sick because of the consumption of extraneous matter contained in that particular cold drink served by the waiter in that restaurant, he or she may have sued the restaurant for product liability. Because the manufacturer agreed to indemnify in the contract, which includes a third-party indemnity clause, the manufacturer will be obligated to pay the compensation on behalf of the restaurant.
According to these kinds of indemnity clauses, if a third party fails to fulfill a financial obligation to one of the parties to the contract, one party, i.e., the indemnifier, will indemnify the other party. That means when the third party breaches a fiduciary duty, financing indemnities come into the picture and take effect. For instance, in the event party C fails the primary commitment, i.e., a financial obligation that is owed to Party B (the indemnity holder), Party A (the indemnifier) indemnifies Party B against the losses suffered by him/her. These obligations are commonly accompanied by a guarantee.
Party indemnities allow both parties to the contract to indemnify each other for all losses or damages incurred arising out of a breach of contract. It is not specified that one party will be an indemnity holder and the other will be an indemnifier because the indemnity can flow both ways.
Applicability of Common Law
In the case of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942), the Bombay High Court stressed the need to keep in mind that the Contract Act is not all-inclusive and that common law standards should be applied while interpreting indemnification clauses. Until and unless there is a disagreement with the Contract Act or any judgments made by the Indian Courts, the common law principles controlling the applicability of indemnity clauses are enforceable.
Features of an indemnity clause
The features of an indemnity clause are as follows:
- It is a promise to shift the liability or risk against loss, harm, or damage.
- It is not a separate agreement. The risk of damages linked with a contract is managed through indemnity clauses by including it in the contract.
- By the structure and contents of the indemnity clause, the scope of any indemnification duties one party may have to another party is determined.
- Additionally, the indemnity cap, which will specify the limit above which indemnity cannot be sought, is also included in the clause.
- It serves as a tool for dividing up risks between contingent liabilities.
- Indemnity clauses should, among other things, be precise, clear, and, whenever possible, specify the circumstances under which they will apply. They should also take into account any other exclusion of liability clauses in the agreement and specify the damages that will be due if the clause is successfully invoked.
- The extent of losses must also be taken into account after carefully deciding whether to cover only direct losses or to account for any indirect or consequential losses.
- In commercial contracts, the indemnity clauses are drafted comprehensively to include the third parties by whose conduct, action or negligence any loss might occur, which are beyond the ordinary circumstances of a breach of contract. Indemnities in such cases extend into unintended obligations which the common law might not impose otherwise.
- It must be written in a way that considers all essential aspects.
Contents of an indemnity clause
To ensure that an indemnity clause in a contract is appropriately worded and to avoid unnecessary risks, the following contents must be considered:
Important contents to consider by indemnity holder
Carefully define the terms like “losses” or “liability”
Caution is required when defining phrases like “losses” or “liability” because, as was previously stated, indirect, consequential, and remote losses may also be claimed under indemnity clauses. Instead of using the word “losses means,” the definition must instead use “losses include” to make it exhaustive. Attention should also be given to the nature and type of breaches as well as whether or not they would result in losses that could be measured immediately.
Usage of the phrase “hold harmless”
The majority of indemnification clauses demand that the party providing the insurance “indemnify and hold harmless” the party being indemnified against certain obligations. It is best to use the phrase “hold harmless” rather than terms like “made good” or “compensate,” as the courts might presume that they only apply to claims involving actual losses incurred by the indemnity holder and do not apply in situations where liability has accrued but no payment has been made.
In the absence of a “hold harmless” clause, losses are not the responsibility of the indemnifying party until the indemnified party pays. Furthermore, the duty to hold harmless may absolve the party being indemnified of any associated claims or causes of action by the party providing the indemnity.
Usage of the phrase “protect from liability”
Furthermore, the insertion of the phrase “protect from liability” assures that the indemnifier has an additional duty of “defence” imposed upon him, which, depending on the language used in the clause, requires the indemnifying party to defend the indemnified against covered third-party claims. This must be ensured, as it is frequently the case that the indemnified party will spend a significant amount of time and effort defending any claim, rendering the recovery of damages or even the simple reimbursement of the fine, loss, or penalty amount worthless.
Defending indemnity holder from third-party claims
Since indemnity clauses are fair and unbiased remedies, they may stipulate that the indemnifier is obligated to defend the indemnity holder from any third-party claims from the moment such claims are made, regardless of whether a liability has been incurred or not.
It is crucial to construct an indemnity clause so that the payment responsibility for the indemnity starts when a claim notice is issued. The clause should expressly state that upon the indemnity holder giving the indemnifier notice of any claim that may result from an indemnity clause, the indemnifier’s responsibility to make the payment shall become due and payable either immediately upon receipt of such notice or within a specified number of days following receipt of such notice. The following should be dealt with caution:
- outstanding statutory dues,
- any fines or penalties mandated by law, or
- any authority’s demand for a deposit.
An indemnity payment is provided when a contract’s representations and warranties, or covenants, are breached. Any tax repercussions of any loss that is covered by an indemnity clause may be specified in the indemnity clause. Therefore, the indemnity payments must be made so that the actual payment equals the indemnity claim payment due plus any taxes that must be paid in connection with its receipt.
Important points to consider by indemnifier
Obligation to negotiate for mitigation
Initially, the party entering into a contract should try to exclude the indemnity clause from the contract. Despite doing this, the other party insists on including this indemnity clause. Then, the indemnifier should ensure that the losses, risks, and liabilities covered in the clause are narrower and exclude all the losses and liabilities that it feels are unfair, unreasonable, and irrelevant. For example, the indemnifier can exclude those damages that are the fault of a third party. In a nutshell, the scope of indemnity should be reduced by the indemnifier.
There may not be any particular obligation placed on the indemnity holder to mitigate losses unless it is expressly stated in the indemnity clause. Therefore, in the indemnity clause, the indemnifier must negotiate and include the duty to mitigate against the indemnity holder.
An indemnifier may demand the inclusion of such a clause to reduce its liability since losses under indemnity might not have to be accounted for by proper mitigation measures by the indemnity holder.
Using a limitation of remedy clause
As already mentioned above, contracts may contain limitations of liability clauses that restrict the indemnifier’s obligation but do not restrict the exercise of other contractual remedies against the indemnifier. To avoid any uncertainty in interpretation, an indemnifier must always choose “limitation of remedy” language that encompasses both the restriction of liability and exclusive remedy clauses.
Continuity of the indemnity clause
From the standpoint of an indemnifier, it’s crucial that the longevity clause be specifically written because, sometimes, parties may stipulate that the indemnity clause will remain in effect even after the agreement is terminated. For instance, it can be specified that any indemnity claim resulting from a violation of representations may only be valid for a short time after the agreement’s termination, such as two years.
Handling of third-party claims
Clearly describe the steps involved in resolving both third-party and statutory claims. It would be wise to have two distinct clauses for third-party claims and indemnity resulting from a breach of contract by the party. There may be no doubt as to the rights of the person who has been indemnified in defence of a third-party claim. As an indemnifier, you should seek protection from being allowed to settle or defend claims at the indemnified’s choice.
Indemnity clause in M&A transaction
Due to several aspects that are thought to be more advantageous than statutory claims for damages, indemnification clauses are a common component of commercial contracts and have come to dominate M&A transactions as well. An indemnity against breach of representations and warranties (from hereon referred to as “R&W”) is offered in M&A transactions. In other words, the promisors agree to protect the promisee from penalties resulting from any R&W breaches. R&W tries to explain the importance of the indemnity provision in M&A deals. Therefore, it is essential to create a strong indemnity clause for any M&A transaction, but especially for an outright acquisition.
The significance of R&W as a transaction security feature in M&A transactions is covered in this article. R&W is given as a compulsion to engage in a transaction, and their inaccuracy may entitle the promisee to relief under the terms of the contract as well as under the law. Indemnification is the preferred contractual remedy for R&W’s accuracy.
Reasons for inclusion of indemnity clause
Even if legal remedies in the form of damages are available for a breach of R&W, indemnity clauses are preferred for the following reasons:
- All the above-stated reasons which are mentioned under the head “reasons for insertion of indemnity clause”.
- By including a “sandbagging” clause, even if it is aware of information that makes a representation or warranty inaccurate, the indemnified party may still be entitled to relief because the indemnity, as a specific indemnity, is not subject to the restrictions of Section 19 of the Act (a “sandbagging clause” in a contract retains the buyer’s rights to bring indemnity claim, in case of breach of representation or warranty by seller, even if the buyer knew before terminating the transaction).
- In the case of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942), it was decided that the provisions of the Indian Contracts Act were not exhaustive of the law of indemnity and that courts would adopt the same equitable principles as those applied by English courts. Therefore, indemnities for the large R&W, which are prevalent in M&A transactions, would be enforceable.
Concerns that are covered by the indemnity clause
The indemnity clause generally addresses the following four concerns:
- contract misrepresentations;
- breach of warranties and covenants;
- acts or omissions committed before the closing date; and
- acts or omissions committed after the closing date.
In India, R&W and indemnities in M&A transactions adhere to well-established legal and practical principles. They have altered over time in line with evolving legal and commercial practises. India, being a vibrant jurisdiction, has witnessed increased M&A activity. However, this diversity comes with a lack of uniformity. To ensure a fair allocation of risk, which is the purpose of R&W and indemnities, a cautious and deliberate approach to these provisions is necessary.
Imposition of indemnity
- On legal heirs
The idea of indemnity also applies to the legal heirs of the parties to a contract. This solely depends on the wording of the indemnity clause, which states that the indemnifier and its legal heirs (only after the indemnifier’s death) are responsible for protecting and compensating the indemnity holder if the latter suffers loss or damage.
And that the indemnity holder, along with its legal heirs (only after the indemnity holder’s death), is protected from any such loss or damage. Legal heirs are not subject to liabilities unless expressly stated otherwise in the clause.
- On successors
If a company, which is an indemnifier, has agreed to compensate another company for the loss of damages and, during the time of the agreement, the indemnifier firm merges with another company, then the obligation to compensate the indemnity holder is extended to the merged company as well.
If an indemnity holder company merges with another, the newly merged company will be covered as well in the event of loss or damage. To bring such an issue under the purview of the indemnifier, the wording and drafting of the contract clause is also crucial.
Benefits of an indemnity clause
Both the indemnified and indemnifying parties gain from effectively drafting and negotiating an indemnity clause. An indemnification clause has the following benefits:
- Certain losses, such as legal expenses, which are normally not recoverable through a common law cause of action, that is through an action against breach of contract, may be recovered by the party who was indemnified.
- An indemnity is not always granted by repayment following payment, and an indemnity holder has the right to sue the indemnifier even before suffering any actual injury or loss. As a result, after the liability has arisen, the indemnified party may request payment from the indemnifier.
- The party providing indemnification shall limit its liability by including a cap on liability, materiality criteria and liability bucket.
Difference between an indemnity and a guarantee
|The basis for differentiation||Indemnity||Guarantee|
|Meaning||A contract of indemnity is one in which one party promises to protect the other from harm caused by the promisor’s or anyone else’s conduct.||A contract of guarantee is an agreement to fulfill a promise made by a third party or release them from their obligation in the event of a breach.|
|Section||It was given under Section 124 of the Indian Contract Act, 1872.||It was given under Section 126 of the Indian Contract Act, 1872.|
|The number of parties||There are just two parties in a contract of indemnity: the indemnifier and the indemnified.||A guarantee contract has three parties: the principal debtor, the creditor, and the surety.|
|The number of contracts||An indemnification contract contains just one promise: the promise to make a payment in the event of a loss.||In a contract of guarantee, there are three contracts. For example, a guarantee between the principal debtor and the borrower, the creditor and the surety, and an implicit contract between the principal debtor and the surety.|
|Nature||An indemnity contract is for the recovery of a liability.||A guarantee contract is for the protection or confirmation of the creditor.|
|Liability||In a contract of indemnity, the indemnifier’s liability is fundamental and exclusive.||The liability is subordinate in a contract of guarantee and only arises when the principal debtor defaults. The principal debtor is responsible for the majority of the obligation.|
|Arousal of liability||In a contract of indemnity, the indemnifier’s liability only arises upon the occurrence of a risk (event).||In a contract of guarantee, there is an existing duty or debt, the fulfillment of which is guaranteed by the surety.|
|Discharge of duty||The individuals for whom the indemnity was awarded must first be discharged before the indemnifier is released. After paying compensation, the fire insurance provider is not required to be released from all liability.||When the principal debtor is discharged from liability, such as when the guarantee pays the sum to the bank, the guarantee is also discharged from its duty.|
Difference between an indemnity clause and a limited liability clause
|The basis for differentiation||Indemnity clause||Limited liability clause|
|Meaning||An indemnity clause, also known as a limited indemnity clause, enables one party to a contract to sue the other for financial, emotional, or physical harm, even if the harm was the result of another party’s fault.||As the name suggests, a limited liability clause’s objective is to place a limit on the obligation of each party to a contract. Typically, the clause limits the amount of damages to a specific percentage of the payment or transaction.|
|Payment of damages||The parties also agree that whoever loses a case is obligated to cover the winning party’s legal costs, which ordinarily consist of legal expenses and other related expenses.||No such extra damages are paid.|
|Dealt with||The focus of an indemnification clause is on who will be responsible for paying the costs of the damage or loss caused.||In contrast, in a limited liability clause, the main concern is how much responsibility can be transferred to one party if a contract is breached.|
|Scope||The indemnity clause covers third-party claims.||The limited liability clause does not cover third-party claims.|
|Result||Indemnity clauses describe which party is liable for paying specified damages that result from a loss.||Limited liability clauses contain the maximum amount that may be recovered in the case of a breach of contract in some way.|
What if there is a poorly-worded indemnity clause in a contract
In particular, if the indemnification clause is disputed and must be relied upon, a poorly written indemnity clause may do more harm than good. Even if you are successful in defeating a poorly worded indemnity clause and collecting the agreed-upon amount of indemnification, you might discover that your legal costs were greater than the damages you were awarded. A lengthy legal dispute can also keep a sizable sum of money out of businesses that depend on strong cash flow for a lengthy period of time. The opposite is also true, and a properly drafted indemnity clause will help to safeguard your company.
It is also common for a party to demand indemnities from other partners if they have the most commercial influence and negotiation power over a project, especially if it is large or costly. Indemnity provisions are frequently written in the broadest possible terms. However, adopting broad-based indemnities is not necessarily the most effective method for allocating risk.
The risk of the indemnity not being held to cover losses that they intended it to cover exists when an indemnity clause is written ambiguously. The possibility of the indemnifier being forced to pay for losses they had not anticipated arises from ambiguity. Therefore, if there are any ambiguities in the clause regarding the coverage of losses, both parties may be exposed to serious consequences.
Because of this, any indemnity terms must be either written or evaluated by a skilled contract lawyer. In commercial negotiations, it is crucial to be careful to define precisely what is desired to be accomplished economically and to limit and record the intended scope of the indemnity being negotiated.
The indemnity clause is seen as being extremely significant since it governs both the rights of the indemnity holder and the risk that the indemnifier will bear. Therefore, if there are any discrepancies in the clause regarding the coverage of losses, both parties may be subject to repercussions. Before including indemnity clauses in a contract, appropriate negotiation is required.
The amount of indemnity that is granted when entering into a contract must be limited by the indemnifier. To reduce the loss, an unambiguous responsibility must be assumed, and the window of time in which a claim may be made must be restricted. On the other hand, an indemnity holder should take care to ensure that the indemnity clause is never written with loopholes or ambiguous terms, as this could risk excluding some anticipated liabilities.
The indemnity terms must be carefully written. They are quite significant since they transfer liability from one party to another. Therefore, when creating the indemnification clause and finalising the contracts, it is important to keep all of these consequences in mind.
Frequently Asked Questions (FAQs)
What can indemnity clauses cover?
The indemnity clause in a contract covers those terms that specify the amount of risk the indemnifier bears to indemnify the indemnified party. The majority of the risk is monetary. The clause also specifies the types of losses for which the indemnifier is liable. Whether an indemnifier is liable to indemnify against third-party claims is also stated in the clause. And this list is not exhaustive. The scope of an indemnity clause can be so wide. Nevertheless, it varies from case to case.
Who will be indemnified?
Only two parties—the indemnifier and the indemnity holder—may enter into an indemnity clause. Only the parties named as indemnity holders in the written agreement will be protected by the indemnity.
What kind of losses are covered under the indemnity clause?
According to how it is drafted, an indemnity clause covers all losses, not just direct losses. As a result, an indemnity clause might allow for the recovery of remote, indirect, or consequential losses and damages. The reason for that is that the indemnity clause in the contract is written with phrases like “arising out of,” “in connection with,” and “as a result of.” The loss could be caused by the actions of the indemnity holder or another person.
How does the Indian Contracts Act, 1872 apply?
Section 124 of the Indian Contract Act, 1872, provides the indemnity principle. The Section states that an indemnifier promises to pay the indemnity holder in case he suffers any losses. It can also be said that liability is transferred from one party to another. In this way, the Indian Contract Act speaks of indemnity. Thus, the Act applies and enforces the indemnity clause included in any contract.
Should I sign an indemnity agreement?
There is no problem or risk if you sign an indemnity agreement. However, make certain that you have read all of the contract’s clauses. Even a simple word like “include” can make you liable for all the losses. One must accept the clauses only when the terms are in your best interests; otherwise, negotiate with the party to reduce the amount of losses included or anything else that may be detrimental or against your best interests. It is always advisable to consult a lawyer, especially a contract lawyer, for advice before signing any such agreement.
Can the indemnifier be held liable for claims made by third parties?
Yes, the indemnifier may be held financially responsible if the third party suffers any loss or harm. It also depends on the details and content of the contract’s indemnity clause.
Should an indemnifier compensate even before the occurrence of the loss or damage?
Whether the indemnity holder in this situation can obtain indemnity before he has incurred any actual loss has always been a contentious issue.
Various high courts in India have expressed varying opinions on whether or not an indemnifier can be made to pay before the indemnity holder has experienced any damage. A person cannot be insured before he has experienced any loss, as held by the Nagpur High Court in the case of Ranganath v. Pachusao (1935). Whereas, according to the high courts of Bombay, Calcutta, Madras, and Allahabad, the indemnity holder may demand indemnity even before he has sustained a loss.
Is the indemnity clause still required even if there is a provision for making a damages claim?
Yes, given that it differs from a claim for damages, it is crucial to include this clause in a contract. Even in the absence of a contract breach, an indemnification claim may be made and include indirect damages as well as direct and actual damages in a claim for damages.
- Jet Airways (India) Limited v. Sahara Airlines Limited, 2011 SCC OnLine Bom 576.
- Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, AIR 1942 Bom 302.
- Ranganath v. Pachusao and others (NAGPUR JUDICIAL COMMISSIONER’S COURT March 7, 1935).
- Prafulla Kumar v. Gopee Ballabh Sen (Calcutta High Court 1944).
- Ramaligna v. Unnamolai, 791 (Madras High Court).
- Abdul Majeed v. Abdul Rashid, 598 (Allahabad High Court 1936).
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