The phrase “Indemnity” may be described as a form of financial security or protection. In an indemnity claim, one party (“Indemnifier”) agrees to protect another party (“Indemnity Holder”) from any loss, expenditure, cost, damage, or other legal consequences resulting from the Indemnifier’s or any third party’s or event’s act or omission [1]. The essential premise of an indemnification provision in a contract is to transfer obligation from one party to another, in whole or in part [2].
An indemnification clause in a business contract is heavily disputed and negotiated. It is one of the mandatory provisions since it guarantees that the Indemnity Holder will be compensated for any damages incurred. The notion of indemnity is codified in Indian law under section 124 of the Indian Contract Act, 1872, which defines it as “a contract by which one party promises to save the other from damage caused by the promisor’s or any other person’s action.”
Purpose of Indemnity Clause
According to Section 124 of the Indian Contract Act, the claim of indemnity arises when a person (indemnifier) agrees or gives assurance to another person (indemnity holder) to save them from any form of loss or damage that has been caused to them by any action of the indemnifier promising such indemnification, or the acts/omissions of any third party who may not be a party to the contract. The provision of indemnity comes into application only when a previous guarantee is made to safeguard a party from the loss, as shown by the preceding definition. Only when there was an expectation of loss and a guarantee was made to suffer the loss does the issue of compensation emerge [3].
When a suit is filed against the indemnity holder or the indemnified, they may be forced to pay damages, fees, or other expenses. Similarly, if the indemnifier has promised to repay or indemnify the indemnity holder for damages, fees, or other expenses paid by the indemnity holder himself, he might file such suit against the indemnifier.
The court decided in Gajan Moreshwar Parelkar vs. Moreshwar Madan Mantri that if the indemnity-holder has incurred a responsibility that is absolute, he may ask the indemnifier to cover it.[4]
Relevance of Indemnity Clause
In a commercial contract, an indemnity is somewhat different than in common law. The indemnity clause is a typical feature in commercial contracts. The goal of including an indemnification provision in a contract is to transfer risk or expense from one party to the other. More specifically, it may protect a commercial transaction between two parties by requiring one side to pay the other sides expenditures in certain conditions.
In commercial contracts, indemnification provisions are structured broadly to include third parties whose activity, action, or carelessness may result in a loss or unexpected situations that are outside the standard conditions of breach actionable at common law. Even if there has been no violation of contract, indemnification provisions may apply in certain particular events or circumstances. In such instances, indemnities extend to unanticipated responsibilities that the common law may not otherwise impose.
IP and Indemnification
Given the high expenses of litigation, an indemnity agreement or provision for intellectual property (IP) may be quite beneficial. IP indemnification agreements assist to restrict a party’s risk and liabilities if infringement concerns come into fruition. In agreements between parties that want to transfer the risk of loss, IP indemnification clauses are prevalent. An existing indemnity provision in an IP agreement establishes which party bears the weight of the infringement risk in IP indemnification. The responsibility to “defend” and/or “hold harmless” the other party may also be included in an IP indemnification clause. In general, an indemnification agreement for IP requires one party to reimburse the other for losses or damages covered by the indemnity provision.
Intellectual property agreements may take many different forms. To minimise indemnity conflicts, it is important to specify the exact kind of IP rights when designing IP indemnification agreements, like Patents, trademarks, copyrights, trade dress, and other related IP rights. The kind of IP rights, as well as the exact conditions under which a party is not responsible for certain losses, should be clearly stated in indemnification agreements. Parties may wind themselves in indemnity disputes or, worse, fighting one other in IP indemnification action if there is no explicit indemnity term. IP indemnification provisions or IP hold harmless agreements that are well-drafted may shield one from the actions of the other party’s workers. They may also defend one against third-party allegations of IP infringement of different kinds. In a lawsuit initiated against a seller of infringing products, for example, an indemnified seller may move the defence of the lawsuit to the supplier. As a result, IP indemnity provisions are often included in agreements concerning IP rights.
Other major variables that impact IP Indemnification Clause coverage and liability include:
- Limitations of use: When a buyer or licensee mixes or changes a product or technology in such a manner that it exposes the buyer to infringement claims, additional concerns emerge. Sellers often try to lessen this risk by restricting responsibility for combinations and changes, as well as the parties’ compliance or non-compliance with specifications or directions for usage.
- Limitations on liability: Sellers are increasingly attempting to mitigate at least some of the buyer’s legal risk. To reduce this risk, sellers often use deductibles, liability limitations, co-payments, and proportional caps, among other responsibility restriction measures.
- Geographic restrictions: These may be used to limit the types of IP that might result in an indemnity claim and to exclude coverage for claims that occur outside of the intended or anticipated area of use or sale. These are particularly crucial when a contract calls for sub-licensees or downstream buyers/sellers to be indemnified.
- Multiple Indemnitors: Patent infringement cases often include complicated systems made up of several, separate goods or technologies. Recognizing and resolving concerns such as the responsibility of defence, the responsibility of bearing costs involved in such litigation process, etc. before a disagreement starts, may assist to prevent future conflict.
- Remedial measures: These clauses enable the seller to lessen damages by supplying the customer with non-infringing replacement products or services that perform similarly. Buyers and sellers alike benefit from remedial actions clauses.
- Pre-existing lawsuit threats: Sellers may seek to have any pre-existing litigation threats excluded from coverage unless they are disclosed to the seller before the underlying agreement is signed.
Conclusion
In most cases, indemnification provisions are derived from business agreements and are intended to safeguard particular commercial risks. Indemnity provisions are sometimes appropriate for the contract’s conditions or even required for the parties to fulfil their obligations. Before including an indemnity provision in a contract, it must be carefully drafted. A badly written indemnification provision might have serious implications. Due to ambiguity in the drafting of an indemnity clause, the indemnifier may not be held liable for losses that they expected it to cover. It’s critical to write the indemnification terms correctly and accurately. They are significant because they move the loss from one party to another, which may have been caused by the former’s carelessness. A well-written intellectual property indemnification agreement helps to distribute the legal risk associated with claimed IP rights violation. A successful IP indemnification clause will address the parties, their duties, and the mechanisms for commencing and satisfying those obligations, while no “magic words” are necessary. Both parties may decrease ambiguity and prevent possible disputes and lawsuits by addressing these problems during contract discussions in a product manufacturer/customer relationship.
Author: Sumedha Vadhulas, Symbiosis Law School Hyderabad.
REFERENCES:
[1] Keshwar Sao v. Guni Singh, AIR 1938 Pat 275.
[2] Daw Nyun v. Maung Nyi Pu, AIR 1938 Rang 359.
[3] Krishnaswani Iyer v. Thathia Raghavian chetty, AIR 1928 Mad 43.
[4] (1942) 44 BomLR 703.
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