INDEMNITY AND LIMITATION OF INDEMNITY

1.1 DEFINITION
A contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other person, is called a
“contract of indemnity.”1

1.2 INDEMNITY
1. The indemnifier agrees to protect the indemnified party from any loss caused to it either by
the conduct of the indemnifier himself or by the conduct of any other person.
2. An indemnified party can sue the indemnifier even before suffering any actual loss,
provided the indemnified party is able to satisfy the court about the existence of a clear
enforceable claim
3. There can often arise a dispute between the right to claim damages (under section 73) and
the right under indemnity. Indemnification generally puts a person in the same position as
prior to the loss while the right to damages can be more than the actual loss.
4. The claim under indemnity can only be against the losses which the parties knew of or
contemplated while forming the contract. Every loss in this respect must checked if it could
have been reasonably foreseen or not.

1.3 REQUISITES OF AN INDEMNITY CLAUSE

1) Set out all the parties

The clause shall clearly set out all the parties that are being indemnified and are the
indemnifiers in the case.
2) Set indemnification procedures
The clause shall include how the indemnifier to be notified and what procedure the
indemnified party must follow to notify.
3) Claiming for a right to defend
This shall allow the indemnifier to contest the duty to indemnify when a claim has arisen
4) Setting out the baskets and deductibles
These are designed to provide an indemnifying party with an assurance that it will not be
bothered for frivolous claims.
Deductibles- A threshold (of money) is set out for a kind of indemnity, the indemnifying
party will only be liable if the amount is over & excess the deductible threshold.
Basket- A threshold (of money) is set out for a kind of indemnity (contingency), if the
threshold is touched even if it goes above the threshold, indemnifying party will be liable
for the entire amount.
5) Duty to Mitigate
Unless specifically stated in the indemnity clause, there may not be any specific obligation
cast upon the indemnified party to mitigate losses. Hence, the indemnifying party may
negotiate and provide for a duty to mitigate in the indemnity clause.
6) Limitation of Remedy clause
These are the kind of remedies which can be pursued eg. monetary damages, attorney's
fees and costs, cure first provision, binding arbitration, and injunctive relief etc

1
Section 124, Indian Contract Act, 1872.
 These do not rule out other contractual remedies to be pursued against the indemnifier.
However, if one is representing the indemnifier, it is advisable to go in for a ‘limitation of
remedy’ clause which takes into its ambit both the limitation of liability and exclusive
remedy clause and leaves no room for any ambiguity in interpretation.
7) Survival of Indemnity clause:
This shall entail that the contract will survive the termination of the agreement. From an
indemnified party’s perspective, it is important that the survival clause is tailor made. For
instance, it may be stated any indemnity claim arising out of breach of representations may
be valid for a limited period of three years post the closing of the agreement.
8) The Statutes of Limitation
All the statutes of limitations must be kept in mind when a cap is decided.

1.3 LIMITED LIABILITY

1. In order to contractually determine the extent of liability, parties may agree to limit their
exposure to a specific and limited indemnity provision largely immune from the discretion of
the courts.
The concept of reasonability, foreseeability and remoteness is not applicable once the liability
has been concretely demarcated.
1.4 CAPPING OF INDEMNITY CLAUSE
The parties must keep the following in consideration while putting a cap on the
indemnity.
a) Actual or Constructive knowledge qualifier:
The indemnifying party must consider excluding claims for breach of the agreement to the
extent the facts, matters, information or circumstances relating to the relevant claim being
known to the indemnified party.
b) Net Financial Benefit:
The Indemnifier must set out that the he will not be liable for any net quantifiable financial
benefit that could arise to the indemnified party from any loss suffered.
For instance, where the amount for which indemnified party would otherwise have been
accountable to be assessed for taxation is actually reduced or extinguished as a result of
the matter giving rise to such Loss, then the indemnifying party should not be liable for
such amount.
c) Contingent Liability exclusion:
The Indemnifier must state that the indemnifying party shall not be liable in respect of any
liability which is contingent unless and until such contingent liability becomes due and
payable.
d) Recovery only once for the same matter and Recovery covered under insurance policy:
Since indemnity is a continuity obligation, it must be clearly stated that the indemnified
party is not entitled to recover more than once in respect of the same event.
e) Exclusion where provisions have already been made:
It must be stated that the indemnifying party shall not be held liable in respect of any claim
if proper allowance, provisions or reserve is made in the accounts.
f) All other foreseeable losses
All other losses that can be foreseen by the parties while making the contract.