Explained: Indemnifier and indemnified

 Indemnity is an undertaking by one party (the indemnifying party) to compensate the other party (the indemnified party) for certain costs and expenses, typically stemming from third-party claims.

There are generally two parties in indemnity contracts. Someone who promises to protect or compensate another person if he suffers any loss or damage is the indemnifier (“Indemnitor”). On the other hand, the person whose losses the indemnifier promises to make good is the Indemnified (indemnitee ) party.

A more common example is in insurance contracts, in exchange for premiums paid by the insured to the insurer, the insurer offers to compensate the insured for any potential damages or losses.

Indemnity rights are contractual rights that are granted to the indemnifier, who agrees to compensate the indemnified/indemnity holder for any losses or damages suffered by the indemnity holder due to certain events or actions. Indemnity rights arise from a contract, usually in the form of an indemnity clause, which outlines the scope and extent of the indemnifier’s obligations.

Importance of Indemnity Rights in Contracts

Properly defining the scope of the indemnity and any exclusion to scope, the indemnified parties and the indemnified losses are especially critical.

The scope of indemnity rights is crucial in contracts, particularly in commercial and business transactions, as they provide a level of protection to the indemnified against potential losses or damages and any exclusion to scope. They also allocate risks and liabilities between the parties, allowing the indemnifier to assume responsibility for specific risks while protecting the indemnity holder from potential financial losses.

Indemnity Rights in India

The Indian Contract Act, of 1872, governs indemnity rights in India. Sections 124 and 125 of the Act deal with contracts of indemnity. These sections outline the rights, obligations, and limitations of the indemnifier and the indemnity holder, and provide a legal framework for indemnity agreements in India.

Section 124 of the Indian Contract Act defines the Contract of Indemnity. The term indemnity refers to protecting someone from losses and harm. As defined in Section 124, a Contract of Indemnity is a contract in which the Indemnifier, the promisor, promises to protect the indemnity holder from the losses caused to him either by the indemnifier himself or by any other third party. The person proposing is known as the promisor and the person accepting the proposal is known as the promisee.

Under Section 125 of the Indian Contract Act, of 1872, the rights of indemnity holders are classified into three categories which are:

1)  Damages: The holder of the indemnity agreement has a right to claim compensation from the duty-bearer in case there is damage to his property or he incurs losses as a consequence of acts and facts stated in the indemnity agreement.

2) Cost: The holder of the indemnity agreement has a right to claim payment of reasonable expenses from the amount stated in the contract.

3) Sums: The holder of the indemnity agreement has a right to claim payment of sums stated in the form of a tax, fine, or penalty.

Under Section 125 of the Indian Contract Act, of 1872, the rights and duties of the indemnity holder are governed by the following rules which are:

1) Must not conceal a loss: The duty-bearer must not conceal a loss that may occur. This is done to avoid misleading information given by the duty-bearer towards the indemnification claim. It is also done to avoid material changes occurring out of an indemnification claim and hidden losses being incurred by both parties involved in an indumentum contract.

2) Inform of a material change: If there is a material change that will affect the indemnity claim made by the indemnifying party, the duty-bearer must inform the other party.

3) Duty-bearer must provide evidence of losses: The duty-bearer must provide evidence for any losses that are incurred towards fulfilling an indemnification claim.

4) Provide assets in due time: The duty bearer should provide all available assets whenever an indemnity claim is made. This will enable the other party to claim indemnity effectively.

5) Should not depend on others: The duty-bearer should not depend on other parties or put all the burden of losses on them as it is against indemnity principles.

6) Must inform the other party: The duty-bearer must inform the indemnifying party about all material facts that may affect an indemnification claim.

7) Must not discriminate against the other party: The duty-bearer must not discriminate against an indemnification claim made by an indemnified party. He should give him justice and avail him of a reasonable amount of compensation for any loss he may incur.

8) Must not delay: The duty-bearer must not delay in fulfilling an indemnification claim. He must provide all required evidence of losses incurred by the indemnified party. He should also fulfil his duties towards the other party in a satisfactory manner and at a reasonable time.

9) Cannot challenge a material fact: A duty bearer cannot challenge any material fact that may affect an indemnification claim.

10) Must inform of any changes: If there is any change in the evidence or details related to an indemnification claim, then the duty-bearer must inform the other party making an indemnification claim.

Rights of indemnifier:

Contract Act is silent about the rights of the Indemnifier. In Jaswant Singh vs The State on 15 July 1965, it was held that the rights of indemnifier are the same as the rights of surety. After paying all damages the indemnifier takes the position of indemnity holder and has right over the property. He is required to indemnify the promisee up to the amount of losses as mentioned in the terms and conditions of the contract. He takes the position of the creditor after settling all his claims. The indemnifier has a right to get the title of the goods after the settlement and has the right to sue the third party claiming the damages. However, before paying damages to the indemnity holder, he cannot sue the third party.

Right to Control and Settle Claims

One of the key rights of an indemnifier is the right to control and settle any claims or lawsuits arising from the events or actions for which the indemnity is provided. The indemnifier has the authority to take necessary steps to defend against such claims, including hiring legal counsel, negotiating settlements, or initiating legal proceedings.  The indemnifier also has the right to decide whether to contest or settle a claim, subject to the terms and conditions of the indemnity agreement.

Right to Demand Contribution

In cases where there are multiple indemnifiers, the indemnifier who has compensated the indemnity holder may have the right to demand a contribution from the other indemnifiers. This right arises when two or more parties share the responsibility of indemnifying the same loss or damage. The indemnifier who has paid the indemnity may seek proportionate contribution from the other co-indemnifiers, based on their respective obligations under the indemnity agreement.

Right to Defend Legal Proceedings

The indemnifier has the right to defend any legal proceedings arising from the events or actions covered by the indemnity. This includes the right to represent themselves or appoint legal counsel to defend against any claims or lawsuits filed against the indemnified. The indemnifier has the authority to take necessary legal actions to protect their interests and fulfil their obligations under the indemnity agreement.

Right to Terminate the Indemnity Agreement

A termination clause outlines the conditions or grounds under which parties can terminate the contract. These grounds may include failure to meet performance expectations, contract breach or nonperformance, mutual agreement, insolvency, and change in circumstances. This may happen when the events or actions for which the indemnity was provided cease to exist, or when the indemnifier and indemnity holder mutually agree to terminate the agreement.

Limitations on the Scope of Indemnity

The indemnity rights of the indemnifier may be limited to a specific scope as defined in the indemnity agreement. Section 124 limits itself to losses caused by the indemnifier or any other person. It does not, within its scope, include indemnity to losses arising out of any natural event or any unexpected accident not caused by any person. The indemnity agreement may specify the events or actions for which the indemnifier is obligated to provide indemnity, and any losses or damages that fall outside of this scope may not be covered by the indemnity.

Limitations on the Timeframe for Indemnity Claims

A limitation period is normally specified in the indemnity contract, the period within which a party to a contract or a party who has suffered damages as a result of another party’s conduct, must bring a claim. If the indemnifier fails to make a timely claim, they may lose their right to seek indemnity for the losses or damages incurred by the indemnified.

Limitations on the Quantum of Indemnity

The indemnity may be capped at a certain amount, or the indemnifier may be liable only up to a certain percentage of the losses or damages suffered by the indemnity holder.

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