Indemnity Agreement

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Indemnity Agreement

what is an indemnity agreement?

Indemnity Agreement is a contract by which one party promises to save the other from loss caused to him by the conduct of the promiser himself or by the conduct of any other person. Thus, an indemnity is a contractual obligation of one party (indemnifier) to compensate for the loss that occurred to the other party (indemnity holder) due to the act of the Indemnitor or any other party. 

For example, A and B enter into a contract whereby A promises to provide housekeeping services to B. While, A’s personnel were working on B’s promises, they by mistake damaged some wires and caused losses to B. If they have an indemnity contract, then A will be liable to make good the loss caused to B.

Purpose of Indemnity Agreement?

Businesses use the contract of indemnity to reduce their liability for unforeseen damages or losses that might take place during a transaction or engagement. Without an indemnification agreement, the business can be subject to legal claims, suits, actions, and judgments arising from mishaps or misfortune.  

Inclusions in an Indemnity Agreement?

An indemnity contract should include the name of the parties, the effective date, should refer to the main contract or the purpose for which it is entered, and other standard boilerplate clauses such as dispute resolution, waiver, remedies, notices, and severability. Please note, that by virtue of inclusion, an indemnification agreement may also contain the responsibility of indemnifying third parties.

Key Terms in an Indemnity Agreement?

The key terms of an indemnity contract are as follows:

  • Making good the loss:  An indemnity serves the main purpose of making good the loss caused. The first responsibility cast on the Indemnitor or indemnifier should be to make good the loss caused to the indemnitee.
  • Cost Recovery: All costs incurred by the indemnitee in pursuing legal proceedings or other such legal remedies, should be reimbursed by the Indemnitor.
  • Hold Harmless: The third limb of an indemnity contract is the practice of holding harmless. Holding harmless basically means that the Indemnitor will not challenge the indemnitee regarding the quantum of loss caused.
  • Third-party indemnity: contract of indemnity may contain an obligation for the indemnifier to indemnify third parties in the event of a loss caused. For instance, in an infringement suit, the indemnifier to indemnify the party alleging infringement.
  • Remedies: These are important in an indemnification agreement’s context. Injunctive remedies should be provided for.

How to Draft the Indemnity Agreement?

While drafting an indemnification agreement, the following key issues must be kept in mind:

  • Typically, the entity that is selling the stock or assets will have a duty to indemnify the buyer. However, mutual indemnification may also be included in the agreement based on negotiations.
  •  The duty to indemnify often is triggered by losses arising from different categories such as non-compliance of applicable law, breach of confidentiality, or intellectual property provisions. These categories should be drafted, keeping the background of the agreement in context.
  • Defining what ‘losses’ are subject to reimbursement is critical. Covered losses may be defined to include damages, legal fees spent defending a third-party claim, and potentially legal fees enforcing indemnification rights.
  • Indemnification clauses may contain limits as to both the amount and timing of indemnification. With regard to timing, the provision may limit the duration of the duty to indemnify.
  • Always include the phrases, ‘make good the loss’ and ‘hold harmless’ both in the contract.

Types of an Indemnity Agreement?

There are three forms of indemnity contracts, namely:

  • Broad Form Indemnity: In such an indemnity contract, the Indemnifier shall be responsible for his or her own negligence, as well as any negligence from a third-party.
  • Intermediate Form Indemnity: This absolves the Indemnitor to indemnify on proving that the indemnitee was at fault.
  • Comparative Form Indemnity:   In this contract, the Indemnifier shall be held responsible for any losses, which are a direct cause of their actions. 

Benefits of an Indemnity Agreement?

Following are the benefits of an indemnity agreement form:

  • Indemnity contract renders redundant the proving of the quantum of loss. All that needs to be proved is that loss is caused. Causation, too, need not be proved.
  • An indemnity contract does not provide for the mitigation of losses.
  • It also leads to the normal limitation period of six years extending, as the limitation period here, starts on account of the Indemnitor failing to respond to a claim made by the indemnitee.

Cons of an Indemnity Agreement?

If the indemnification form is not closely and strictly worded, it may be taken advantage of by one of the parties of the same, in terms of what is to be covered, how much is to be compensated, whose fault will discharge the indemnifier from doing.

An indemnification form is essential to be entered into either by way of a separate agreement or by way of a clause embedded in the master agreement. It mitigates the risk of the parties. Negotiating a mutual indemnity clause may be a tough task. Typically, buyers require sellers to indemnify them. Arbitration should be resorted to in order to resolves disputes arising out of an indemnity contract.

Sample Indemnity Agreement

You can download the indemnity agreement sample from below.

Download Indemnity Agreement Template

Indemnity Agreement

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