By - King Stubb & Kasiva on February 1, 2023
An indemnity clause is a legal provision that shifts the responsibility for financial losses from one party to another. In an indemnity claim, one party, known as the Indemnifier, agrees to protect the other party, known as the Indemnity Holder, from any financial losses or expenses incurred due to the Indemnifier’s actions or those of a third party. This principle is commonly included in commercial contracts as a means of managing risk and protecting one party from the consequences of the other party’s actions.
The concept of an indemnity clause in India is defined in Section 124 of the Indian Contract Act, 1872, which states that it is a contract in which one party promises to protect the other from losses caused by the conduct of the promisor or any other person. Indemnification clauses play an important role in commercial transactions by protecting one party from the financial consequences of the other party’s actions.
The Indian courts have recognized that indemnity holders have the right to sue the indemnifier even before incurring any actual damage or loss and that indemnities are not limited to repayment after payment. However, parties need to ensure that the indemnity clause is well drafted so that it provides full-proof protection and balances the interests of both parties to the contract. Indemnity clauses in India can be broad, covering third parties and circumstances beyond the ordinary breach circumstances actionable under common law. Additionally, it’s important to note that indemnities can also extend into unintended onerous obligations, which the common law would not impose.
Several key components make up an indemnity clause in India. These include:
When drafting an indemnity clause in India, it’s important to clearly define the scope of losses and liabilities that are covered. The definition should use phrases like “losses include” to allow for flexibility in interpretation. Consideration should also be given to the party who may be in breach of the contract and the type of potential breaches and their immediate quantifiable losses.
A claim notice provision should be included in the indemnity clause and state the threshold for triggering an indemnifying party’s payment obligation. Lastly, indemnity payments may have tax consequences and the indemnity clause in India should address this. The indemnifying party should be responsible for absorbing the tax consequences and the indemnity payments should cover both the indemnity claim and any taxes due on receipt.
It is important to include indemnification clauses that specify the length of time an indemnity claim can be made after the termination of the agreement. As an Indemnifier, it is important to have protection against the ability of the Indemnified party to settle or defend cases without consent. There should be a limitation of the remedy clause to clearly outline the exclusive remedy in case of a breach. It is also important for Indemnifiers to tailor the survival clause in the indemnity clause, specifying a limited period for claims arising from breaches of representation.
In M&A transactions, indemnification clauses in share purchase agreements (“SPA”) are carefully negotiated to limit future liabilities for both buyers and sellers. To ensure protection, it is crucial to draft a strong indemnity agreement in any Mergers & Acquisition transaction, especially in cases of outright purchases. In M&A transactions, buyers often have more bargaining power than sellers, so the indemnity language in the SPA needs to include restrictions and exclusions that protect the seller’s interests.
Additionally, limitation of liability clauses can limit the amount of time and money spent in the case of an indemnity claim by specifying a period for filing claims and a proportion of the acquisition price for claims. To further protect the Indemnified, an escrow can be established to fulfill any potential obligations without the need for litigation or arbitration.
Indemnity clauses are commonly used in commercial contracts to shift the risk of potential losses from one party to another. These clauses are often negotiated to protect against specific risks and are essential for parties to carry out the agreement. However, it is important to draft indemnity clauses carefully and precisely to avoid ambiguity and ensure that they cover the expected losses. Negotiating indemnity clauses in India correctly is crucial as they can have significant consequences if not done properly. Parties should consider their specific needs and potential risks when drafting the indemnity clause to ensure that the indemnified party is protected from unforeseen losses.
The three methods of indemnity are:
1. Express Indemnity: This method involves a specific provision in a contract or agreement that clearly states the indemnifying party’s obligations and responsibilities in the event of a loss or liability.
2. Implied Indemnity: This method arises from the circumstances of the contract or agreement and is not explicitly stated in the contract. It is typically used in situations where one party has assumed a legal duty or responsibility to protect the other party from potential losses.
3. Contribution Indemnity: This method is used in situations where multiple parties are liable for a loss or liability, and each party contributes a portion of the indemnity to cover the loss or liability.
The purpose of an indemnity agreement is to shift the risk of loss from one party (the indemnified party) to another party (the indemnifying party) in the event of a specified event or occurrence. This can include losses arising from breaches of contract, third-party claims, or other unforeseen events. An indemnity agreement can help to protect the indemnified party from financial losses, and can also serve as a form of insurance for the indemnifying party. Additionally, indemnity agreements can be used to transfer risk between parties in situations where one party may be more able to bear the risk, such as in the case of a large corporation indemnifying a small business.
An indemnity clause is a provision in a contract that requires one party (the indemnifier) to take financial responsibility for any losses or liabilities that the other party (the indemnified) may incur as a result of a specific event or circumstances outlined in the contract. The indemnity clause is used to shift the risk of potential losses from one party to another and is commonly used in commercial contracts to protect against specific risks. The purpose of an indemnity clause is to provide financial protection for the indemnified party in case of any losses or liabilities that may arise due to the actions or inactions of the indemnifier. It is also used to protect parties from third-party claims and is commonly used in situations where one party is taking on a higher level of risk, such as in construction and real estate transactions.