Introduction: In the intricate world of contractual agreements, the indemnity clause stands out as a critical component, designed to protect parties from potential losses or damages. Originating from the Latin word “indemnis,” meaning uninjured or without loss, indemnity serves as a promise to safeguard one party against harm caused by either their own actions or those of others. Defined under Section 124 of the Contract Act, a contract of indemnity binds one party to compensate the other for any incurred losses, establishing a foundation of trust and security within business dealings. As businesses navigate through agreements, understanding the nuances of indemnity provisions and their implications becomes essential for ensuring robust legal protection and mitigating financial risks.
Significance of Indemnity
The indemnity clause in generally acts as a protection to the parties and it creates trust between them. It is quite debatable and negotiated among the parties in an agreement. Its purpose to safeguard the party in case there are any losses, damages, etc and if any losses and damages happen in the future, the other party will bear the consequences for a limited period of time.
Indemnification in M&A
Indemnification in the M&A clause plays a very important role, especially in the Share Purchase Agreements (SPA). In the Share Purchase Agreement, there are two parties i.e. buyer and seller and it is very important to protect the agreement. Buyers have more negotiating power which is why the indemnity clause in the Share Purchase Agreement needs to include restrictions and exclusions to protect the seller’s interest.
Moreover, the indemnification clause under the Share Purchase Agreement also regulates a limited amount of time and money in a case when any indemnity claim arises.
Indemnification Arrangements
When buyers and sellers make deals, they have to decide who will be responsible if something goes wrong and unexpected. This can get complicated, especially for sellers in bigger deals. Sellers try to make things clearer and limit their liability by setting indemnification arrangements and prevent unfair claims. The arrangements should be made carefully as it can also cause a huge difference.
The following provision is negotiated in indemnification arrangements especially while representing a seller:
1. De Minimis Amount- The de minimis amount specifies the minimum value the claim which must reach before the party can ask for compensation.
2. Tipping Basket- A tipping basket specifies the threshold which is the total amount of all claims must exceed before a party can bring any claim for indemnification. Once the amount is exceeded, the indemnifying party will be liable for the entire amount of losses.
3. Indemnity Cap- This is the maximum amount the indemnifying party has to pay for compensation. It’s usually a percentage of the purchase price but it can also be a specific amount.
4. Survival Period- This is the time frame during which you can claim compensation. After this period, you can’t make any more claims, so it’s negotiated based on the terms of the agreement.
Enforceability of Indemnity Provision
The drafting of an Indemnity clause requires a lot of time and ability. The courts carefully examine the language written in an agreement to determine its validity.
In the case of Adamson vs Jarvis, 1872 an auctioneer (plaintiff), sold certain goods upon the instructions of a person. It turned out that the goods did not belong to the defendant and the true owner held the auctioneer liable for the goods. The plaintiff sued the defendant for indemnity for the loss suffered by the defendant.
The court held that according to the defendant’s promise, the plaintiff acted upon the defendant’s request. The court opined that the defendant was responsible for the compensation.
The Indian courts have recognized that parties may sue the other party even before incurring any actual damage or loss and that indemnities are not limited to repayment after payment. That is why the clauses must be drafted very well and should not contain ambiguous words that will not create any problems in the future.
Conclusion
Indemnity clauses are very important tools in the case of negotiation in the business and transactional world, especially for the buyers. This clause ensures that if the seller does not keep their promise under the agreement, the buyer is still safe with the help of this clause. At the same time, this clause also protects the seller. They have certain limits and arrangements on how long they are responsible and how much they have to compensate the respective party if things are not according to their promise. This clause is very important that parties take a lot of time arguing before making a deal. The buyer and the seller both want to get the best deal out of this so they negotiate until they get the best out of it.
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