Introduction:
The word “indemnity” comes from the Latin word” indemnis”, meaning “to be uninjured” or “to suffer no harm or loss”. It also refers to protection or security against financial losses.
The Indemnity clause is one of the significant provisions that should be included in every contract under the Indemnity clause. Under the provision of Indemnity, one party provides a guarantee and agrees to defend, or indemnify the other party from the injury, harm or financial losses under certain conditions occurred during the contracting period.
An indemnification clause refers to a contractual provision where one contracting party agrees to pay another party for certain specific losses or damages. This clause shifts a financial burden between the parties and provide a legal protection when there is something wrong under the contract terms.
This clause plays an essential role in commercial contracts because they clear define who is liable for a certain act going wrong. Under this clause, the contracting parties clearly define who is responsible for costs, damages, or legal charges if the problem arises.
Indemnity clause defined:
The basic concept of indemnification is to transfer a certain type of financial risk from one party to another. That means one contracting party, referred to as an indemnifier, or indemnifying, made a promise to another party, whom they refer to as an indemnity holder or indemnified party. Section 124 of the Indian Contract Act,1872 comes with the indemnify concept. An indemnity clause in any contract or agreement serves this purpose.
Here, one thing is to be noted that, as per the provision of section 73 of the Indian Contract Act,1872, the term of indemnify arises only when a loss is projected as an outcome of a breach of contract. This condition does not apply to a contract clause as an indemnity. Therefore, unless directly not included indemnity clause is not included in a contract, the injured party can claim remedies in the case of suffering from breach of contract.
Most of the insurance contracts are the best example of indemnity. Let’s understand with an example, suppose a house owner takes a home insurance policy, and pays the premium to the insurance company for security against the security from unlikely events. Here, the house owner is the indemnity holder, and the insurance company is the indemnifier.
Let’s understand with an example of indemnity clauses: Mr A booked a hotel room for a stay through a travel agent. As a term of booking a room, the indemnification clause is included in a contract that, if Mr A damages any utility of the room, he will be liable to pay to the hotel for the same.
When does the requirement of an indemnity clause arise in a contract?
The most probable indemnity clause is included in a business or commercial contract. It is true that this clause gives more protection and safety against financial risk to the contracting parties; however, sometimes it becomes a highly disputed clause in a contract.
The main objective of this clause is to provide a safeguard against the claim of a third party. However, this clause can be negotiated between the contracting parties before giving a final touch and included in a contract.
When the indemnifier accepts the indemnity terms as mentioned in a contract, then the future financial risks or losses are shifted to them. But the indemnity issue arises when losses or damages arise to the party.
Held, we can say that the general rules of the indemnity are to protect a contracting party from the wrongful acts of another party. There is no requirement that the indemnity clause consider only monetary compensation. The contracting parties can include a simple term to resolve liability as per the formal past terms. However, due to financial safeguard the indemnity clause is commonly included in commercial or financial contracts.
Why should you insert an indemnity clause in a contract?
There are the following reasons are listed below for inserting an indemnity clause in a contract:
The first reason for inserting an indemnity clause in a contract is to transfer financial liability for losses, damage or third-party claims from one contracting party to another. It works like a risk management tool and provides protection against financial responsibilities.
Risk sharing: It specifies which party is liable for particular risk, such as breach of contract terms, third-party claims, etc.
Provide financial protection: It provides potential financial protection; if a party surer loss, this clause enables them to force the other party to compensate them.
Avoiding Causation Issues: In a standard breach of contract, the party needs to prove the damages or losses to put a claim. But with an indemnity clause, there is no need to prove fault; it allows recovery for losses from another party without proving exact losses.
Provide Contractual Security: It provides a safeguard against losses or damages, via clarity on liabilities. It helps to reduce disputes between parties and ensure compliance with the terms and conditions of the contract.
Handle Third-party Claim: It provides a safeguard against third-party claims.
An indemnity clause is important to secure against financial losses or damages. It also ensures that if for any reason causes a financial loss, the responsible party has to bears that losses.
Exceptions to indemnity:
There are certain exceptions to the indemnification clause that are not covered under this preview, even if actual losses occur. Some specific circumstances where a party do not cover indemnification. Such as gross negligence, willful misconduct, breach of contract, improper use of services, etc.
Some of the key exceptions are listed below:
- Gross Negligence: The indemnifying party is not liable to pay to the indemnified party for lack of carelessness or gross negligence.
- Willful Misconduct: If a party commits wrongful acts with bad intention, looking for protection that generally not count under indemnity.
- Breach of Contract: When a party does not obey the agreement terms and breaches the contract rule, in that situation, this clause does not apply.
- Improper Use of Product or Service: If the party does not use the product or service as per the specify manner, and makes a claim resulting from using the product or service, then this clause does not apply.
- Unlawful acts: The action of the party is barred by the law, generally it is not counted as indemnification.
- Act of God: Some of event not created by human conduct may be excluded under this clause.
All the above key exceptions show that the indemnified party cannot act irresponsibly and then force another party to pay for that.
Standard terms used in indemnification clauses:
There are some standard terms that you need to understand, which help to craft a strong indemnification clause, listed below:
- Indemnification event: Under this section, define the circumstances or event that cover the indemnification obligation.
- Indemnifying party: Under this section, the party that party who receiving compensation from the indemnifying party.
- Amount of indemnification: Under this section mentions the amount is payable by the indemnifying party.
- Time limit for indemnification: under this section, the particular time limit for the indemnifying party to fulfil their obligation is specified.
- Scope of indemnification: This section specifies what types of damages or losses are covered under indemnification.
- Exclusions: under this section, set the outline, which types of obligation are not covered under this clause.
- Subrogation: under this section, the amount that the indemnifying party may be liable for third parties’ settlements
Types of Indemnity Clauses:
There are some common indemnity clauses which are listed below:
Bare indemnities:
There are no particular imitations or exceptions for the liabilities of the indemnifier specified under this clause. Let’s understand with an example, Mr A has agreed to indemnify Mr B, under the indemnity clause mentioned in a contract which is signed by both parties. In this clause, there are no particular limitations or exceptions specified. This clause also does not specify that Mr A is responsible for indemnity for any kind of losses, even if is occurred by Mr. B due carelessness or negligence. It shows that any kind of losses occurred are covered under this clause.
Reverse or reflexive indemnities:
This clause shows that the indemnifier is liable for those damages that are caused by the negligence of the party. In this situation, the negligent party is also be a indemnity holder. Let’s understand with an example, an insurance company deals with a hospital to indemnify, and due to any reason, if the negligence of the hospital’s staff, the patient falls injured, then the insurance company is bound to the patient and indemnifies him.
Limited or proportionate indemnities:
Under this indemnity clause, the indemnifier pays to the indemnity holderfor those losses or damages that are not covered under the negligent by the party. Thus, indemnity will not be payable for the negligence of the party.
Third-party indemnities:
Under this clasue the indemnifying party is liable to pay the third-party claim, which is not directly involved under the contract.
Financing indemnities:
Under this clause, it specifies that if the third party fails to complete their duties or obligations, at that time, this clause will operate.
Party indemnities:
Under this clause, appcet indemnity from each other, and agreed to pay for those losses or damages which not occur as a result of breach of contract.
Conclusion:
Having an indemnity clause is crucial. Because it protects against financial risk from losses or damages. The contracting party can shift their risk to another party. But it has certain exceptions that we must be aware of, such as this clause does not operate, for acts of god, gross negligence by the party or other uncontrolled events. That’s why if the contracting parties want to add this clause to the contract, they should discuss about this clause, and think before making the final touch.
