Indemnity Clause in India

Indemnity or Indemnification is a contractual agreement between two parties that outlines insurance compensation for any kind of damage or loss. Under the indemnity clause or agreement, one party, usually the indemnifying party, agrees to pay financial compensation to another party for potential losses, damages or liabilities. 

The primary function of an indemnity clause in India is to act as a shield for the indemnity holder. It ensures that any potential damages or losses caused to the party are assumed by the party responsible for such potential damage or loss, providing a sense of security in business agreements.

The legal framework of the indemnity clause in India is laid out in Section 124 of the Indian Contract Act of 1872. This section defines the indemnity clause which protects one party from damage and losses caused by the other party. 

As per Section 124, there are two parties involved in the indemnity clause in India which are:

• Indemnifier: It is a party that is protected against or compensates for the loss of the damage. This is a party responsible for the damage or loss.
• Indemnity holder or Indemnified: It is a party who is compensated against the loss suffered.

This clause is basically a cornerstone of commercial or business transactions in India, which protects them from the financial consequences of one’s party actions. 

There are various key components of the indemnity clause sample in India, some of which are listed below:

Scope of indemnification: It defines the scope of indemnity under the clause, which refers to the specific type of damages and losses covered under the clause. This generally includes legal fees, property damage and other costs stemming from the indemnifying party's actions.

Indemnification period: This helps determine the indemnification period under which the indemnified party can make the claims under the indemnity clause.

Survival of Indemnity: This is another crucial component of the indemnity clause, which specifies the time period for which the indemnity clause remains active even after the contract between the parties is terminated.

Exclusion and limitations provisions: This section highlights the indemnity clause's exclusions or restrictions, such as the type of losses, claim amount and more.

There are different types of indemnity clauses in India, based on their applicability and respective scope.

•  Bare Indemnity 

This is the type of indemnity clause that offers blanket protection against liability and loss without limits for the indemnification event. It means there are no specific limitations or exceptions on the liability of indemnifiers specified in the indemnity clause. 

It means that liability applies to all kinds of damages caused by specific acts or events. Under this, the indemnifying party must be extremely careful before entering into the arrangement.

•  Limited Indemnity 

Limited indemnity is another type of indemnity clause, where there is some limit to the amount of losses that will be covered under this clause. Under this indemnity clause, an indemnifier would indemnify the indemnity holder for all losses except those that are the result of an act of omission of a negligent party. 

The negligent party, in this case, can be an indemnity holder. In simple words, an indemnifying party is only responsible for compensation for loss or damage caused by their negligence.

•  Third Party Indemnity

A third-party indemnity is a type of indemnity clause in which the indemnifying party pays for claims of a party that is not part of the agreement or contract. These parties are basically the third party to the contract. These claims generally arise in the form of third-party lawsuits.

The indemnity clause is written in a contract or agreement between the parties. This clause specifies what is covered under the contract and what is not, according to the specifics of each agreement.

Furthermore, some contracts or agreements also include a letter of indemnity. This guarantees that both parties will meet the terms and conditions of the contract. If the terms and conditions of the contract are not met, then the indemnified party needs to meet the repayment. 

However, the type of compensation, such as replacements, cash or repair, entirely depends on the terms of the agreement between the parties.

When drafting an indemnity clause, it is important to define the scope of liability or losses covered under the clause. The definition should be flexible; it is best to use phrases like “losses include” to allow various interpretations.

Furthermore, the clause should also include a provision for claim notice and determine the threshold for triggering the indemnifying party's payment obligation. The parties should also explain the tax consequences to another party who is responsible for absorbing all these costs.

The key consideration for indemnifiers should be including clauses during which the indemnity clause can be made after the contract’s termination. It is also crucial to protect against the indemnified party’s ability to defend or settle cases without consent. 

Furthermore, the clause should also include a remedy clause in case of breach. Additionally, the survival clause in the indemnity clause should be customised to define a limited period for claims arising from breaches of representation.

There are some exceptions to the indemnity clause, which are mentioned below:

• Bad faith: Indemnification can be excluded if the indemnified party acts in bad faith or fails to meet its obligation as per the agreements. Non-compliance or deliberate breaches can void indemnification for related losses or claims.
• Negligence: If the indemnified party shows gross negligence in causing damage or losses, the indemnify clause can exclude coverage for resulting losses or claims.
• Improper use: Another exception to the indemnity clause is if the indemnified party misuses the products or uses them against their intended purpose. In this case, the clause may not cover resulting losses or claims.

While drafting an indemnity clause sample in India, some points need to be considered to offer comprehensive coverage and clarity.

• It is crucial to define the extent of Indemnification by outlining the event or circumstances that trigger the indemnity. This will help address potential losses, liabilities and risks.
• Developing a clear timeframe for invoking indemnification helps with the timely notification and resolution of claims.
• Outlining the detailed step-by-step procedure for making a claim, which includes documentation, special requirements and more, will help enhance transparency and efficiency throughout the process.
• It is crucial to ensure that the clause's wording is unambiguous and clear to avoid any dispute or misunderstanding.
• The parties should also address the allocation of legal costs and determine whether the indemnity clause covers such expenses.
• The clause should specify clearly any kind of exception or exclusion to the indemnity clause. 
• Lastly, it is crucial to ensure compliance with regulations and laws. The indemnity clause should be fair and not unduly shift liability in a way that is unconscionable or void under Indian law.

The indemnity clause is an important component of an agreement or contract. It is a necessity for business or commercial agreements in India. The clause helps define financial responsibility in the event of losses or damage. Businesses that are making indemnity clauses part of their agreements should know about the clause, as it will help ensure fairness. 

Apart from this, businesses should keep themselves prepared against unforeseen situations such as damage, loss, etc., as these losses have financial implications. By investing in business or commercial insurance, they can protect their assets. There are various types of business insurance available in India, depending on the size and requirements of the business.

TATA AIG offers various SME insurance plans, such as fire insurance, marine insurance, etc, that are customised to meet the unique requirements of the business. Our plans are designed to safeguard business assets against various unforeseen circumstances.

For instance, our workmen's compensation policy online offers financial compensation and optional medical coverage to employees or workers who are injured due to accidents during their employment period. The policy will help mitigate employers' financial risk by safeguarding them in the event of work-related injuries. 

Is it compulsory to have indemnity clauses in commercial agreements? 

No, indemnity clauses are not compulsory in commercial agreements under Indian law. However, they are commonly included to allocate risk and liability between parties, particularly in contracts where one party may be exposed to potential claims, damages or losses arising from the actions or omissions of the other.

Can indemnifiers be held liable for third-party claims? 

Yes, indemnifiers can be held liable for third-party claims if the indemnity clause explicitly covers such claims.

What if the indemnity holder has violated the terms and conditions of the agreement? 

If the indemnity holder has violated the terms and conditions of the agreement, the indemnifier may not be liable to provide indemnity. Under Indian law, indemnity clauses generally do not cover losses resulting from the indemnity holder’s breach of contract, negligence, or willful misconduct.