In legal circles, the word "indemnity" is used in contracts. It means recompense for any loss or liability which one person has incurred. It has been defined as an obligation undertaken by a person called the indemnitor/indemnifier to provide compensation for a particular loss suffered by another person called the indemnitee/indemnity holder.
A claim to an indemnity can arise by either by operation of law or by contract. It must also be noted that an indemnity can be made subject to the rules of damages. The indemnifier bears the primary obligation with regard to the amount of the indemnity.
This means that, even if the underlying transaction is set aside for any reason, the indemnity will remain valid. Overtime there have been several propositions as to the nature of a contractual indemnity. These propositions include:
That an indemnity against “loss” may by nature apply to loss occasioned by financial damage or loss of or damage to physical property. under certain contracts, the indemnity may refer to loss suffered as a consequence of a third party making a claim against the beneficiary of the indemnity.
By nature, liability pursuant to an indemnity will only exist in respect of an ascertained amount, but an action may be brought under an indemnity prior to the ascertainment of liability. accordingly the obligation to indemnify may arise prior to when any loss or damage has been suffered by the beneficiary.
Indemnities are contractual in nature and must therefore be supported by consideration, unless contained in the form of a deed.
The benefits of an indemnity clause as a mechanism for a negotiated compensation include the following:
The measure of compensation is indemnification which may be greater than damages for breach of contract.
Proof of damages may be more difficult than proving “out of pocket” losses and expenses for indemnification
Mitigation of loss probably does not apply in indemnities
Remoteness of damage issues ought not apply; and
In indemnities risk can be transferred.
In property transactions, maximum risk is carried by the buyer because upon sale, ownership including unknown risk and liability is passed from the seller to the buyer. A lot of properties in the metro cities are under litigation which have been ongoing for decades due to common reasons such as:
The property being transferred was under force, influence or coercion; or
The legal heirs of the sellers claim their right to the property.
In such case, the indemnity clause in the sale agreement protects the buyer against any legal dispute or defect in the property or in the title to be transferred and compensate him for any loss incurred.
The indemnity clause is inserted in the sale agreement as a matter of precaution by the buyer against the seller in order to safeguard his interest in respect of any future claims by any third party or the revenue against the said property. It also takes care of unknown liabilities and strengthens the agreement as you know your liability limitation.
Indemnity clauses are common in contracts and purchase receipts which are often buried deep in small prints in the form or document. It is also rarely discussed or negotiated by parties unless the parties to the contract are represented by their lawyers to review the contract on their behalf.
The non-inclusion of the indemnity clause exposes business to known and unknown risks according to the terms of the contract.