Indemnification in Investment Transactions

Indemnification is a contractual undertaking to compensate the other Party. Being a contractual obligation, and in line with contracts laws and concepts, the Parties may shape its boundaries according to their agreements.  Hence, a party may assume liability that exceeds its legal liability under contract laws.

The main objective of indemnification provisions is to set and determine the allocation of risk and liability between the parties. The factors affecting such allocation may include information gaps, expertise gaps and the relationship between the parties. Usually in investment agreements in high-tech company, the founders possess the advantage in technology, information and expertise and the indemnification provisions are intended to balance such advantage by setting enhanced liability to the founders and the company.

Israeli case laws show that, in general, indemnification provisions will be effective and enforced as case law acknowledges freedom of contracts. Since enforcement of Indemnification provisions will be in accordance with the interpretation given by courts to the substance of such provisions, a careful review of the wording of indemnification provision is required.

It is important to state that insurers disclaim their liability and coverage to the extent that a party undertook to assume liability if without such undertaking to assume such party would not have been liable. In that case, if a party undertook to indemnify the other party for damages caused by the other party, the indemnifying party may remain without insurance coverage.  

In other cases the parties agree that indemnification provisions would be the sole remedy of the suffering party and ban the option to claim in torts or contracts.  Such determination may be proved problematic to the investor as he/she may find out that the limitations of indemnification render the compensation be lesser than the compensation he/she would be entitled to without the indemnification provisions. I believe that indemnification provisions should provide an advantage to the investor, therefore 'sole remedy' determination misses the concept of indemnification.