Contract Killers: Indemnification

INDEMNIFICATION

One of the keenly debated issues in contractual negotiation is that of "indemnity" or more specifically what are the indemnification obligations to be incurred by either party to a contract.

Let us proceed to take a detailed view of the same:

a) Definition:

S.124 of the Indian Contract Act states "A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a "contract of indemnity".

Some other generic definitions read as follows: I. An agreement whereby one party agrees to secure another against an anticipated loss or damage. For example, someone may agree to turn a business over to another person for a reduced price if they pay the debts and other obligations of the business. In a broad sense, insurance policies are indemnity contracts. A provision in a lease that requires a tenant to pay (indemnify) a landlord for damages. (lectlaw.com)

II. act of holding harmless, amends, assurance against loss, compensation, full satisfaction, lex oblivionis, payment, protection against loss, recompense, recoupment, redemption, refund, remuneration, repayment, requitement, restitution, restoration, return, security, security against damage, security against loss, setoff, vindication An indemnity contract arises when one individual takes on the obligation to pay for any loss or damage that has been or might be incurred by another individual. The right to indemnity and the duty to indemnify ordinarily stem from a contractual agreement, which generally protects against liability, loss, or damage. (legal-dictionary.the free-dictionary)

b) Debate:

Given that indemnification requires the defaulting party to compensate the aggrieved party for their losses, a keenly disputed issue is always whether indemnification obligations should be limited to third party claims only, supporters of this rationale elaborate that "direct indemnification" would place the indemnified at an unfair advantage, as all such party would be required to do is claim from the indemnifiying party for alleged losses. While it therefore seems pertinent to limit indemnification obligations to third party claims (and therefore logically to intellectual property related matters), one can consider that off-beat request where the indemnified party may request protection in terms of consequential/indirect losses, while the textbook approach is to exclude such losses, acceptance of the same would lead one to concur that such losses are "direct" in nature (i.e. entirely dependant on the indemnifying party) and therefore any indemnification in respect of indirect/consequential losses would be a "direct" indemnification as opposed to a third party indemnification.

c) Summary:

Any debate surrounding indemnity related obligations, has necessarily to consider the following:

i) The subject matter on which indemnification is offered (intellectual property, indirect claims etc.)

ii) The grounds on which indemnification is offered:

a) Whether the indemnifying party is entitled to a sufficient prior notice in respect of any claim
against the indemnified property,

b) Whether the indemnifying party can settle the claim on behalf of the indemnified
party

iii) The time period for which such indemnification obligations last ( in perpetuity, for a certain
period after the termination of the agreement).

In closing, it is enlightening to note, that S.125 of the Indian Contract Act, 1872 requires that any compensation amounts arising from indemnification obligations are subject to adjudication by a court of competent jurisdiction. In so prescribing, statute has in no small manner mitigated the risk of accepting an onerous indemnification obligation.

Let the debate begin: vkopikar@gmail.com

Till next time!

Vikram Koppikar

Contract Killers: The Importance of a Contract Lawyer

Hello,
While litigation related news manages to grab people's eyeballs on a day to day basis, the workings of those lawyers that are involved in contract negotiations are no less intriguing or complex. Given that an executed contract, is the foundation stone of a business relationship, it is imperative that the counsels involved in the negotiation, drafting and execution of a contract ensure that the said contract is ironclad to safegfuard either party's interests; at the same time; is flexible enough to allow variations in relations to changing market scenarios.

Such seemingly diverse requirements, are especially critical in outsourcing contracts, given that such contracts are: a) multi-jurisdictional, b) long-term c) required to account for change in resources utilised.

With this in view, future episodes of the "Contract Killers" series will focus on some of the key terminolgies that find place in such contracts.

As always, your comments and suggestions are welcome on vkopikar@gmail.com

Vikram Koppikar

The Blindfold comes off..

Hello!

This blog is an earnest attempt to ponder into the day-to-day legal issues that surround us. It is an effort to show that law (and violations thereof) are not just restricted to the judiciary but can be found all around us in day to day circumstances.
As a lawyer having previous experience in the IT/Retail/Financial Services Sectors, the blog is my attempt to interpret some of the contemporary issues thrown up in these sectors.

It is said that justice is blind; so wish me luck as I attemp to remove the blindfold!!

Vikram Koppikar