Indemnity by Anuradha R. Chowdhary

An indemnity clause in an agreement is one of the most basic yet dangerous provisions that exist. The purpose of an indemnity clause is to prevent loss resulting from specific circumstances. The clause operates to protect the party taking indemnity (the indemnified party) from the other party (the indemnifying party) against any and/or all losses caused to the former that may arise from an act or omission of the latter. The circumstances that trigger indemnities usually include a breach of contract, negligence, default in performance of a specific obligation or a specific action. 

Indemnity clauses are versatile and can be mutual or one-sided. However, in a contract where one party is at a stronger negotiating position, an indemnity provision can be negotiated by the stronger party to protect its own interests in indemnity-triggering situations. 

In an investment deal, the investor usually seeks an indemnity to protect itself against the liabilities of the investee company. 

For example:

Reisa decides to invest in XYZ Company that operates an app called X Musica on mobile devices, which allows subscribers to stream music that is available on X Musica and licensed to XYZ Company from third parties. XYZ Company has an outstanding claim from Alphatronica Ltd., which had asserted that it never gave XYZ Company a license to include songs owned by Alphatronica Ltd. on X Musica. This claim is still pending litigation when Reisa invests in XYZ Company. An indemnity taken by Reisa in her investment agreement with XYZ Company would protect her against suffering any future losses with regard to the outcome of such claim in the event XYZ Company loses to Alphatronica Ltd. in court.

Indemnity provisions should be bargained for when one party is at a higher risk of suffering a loss, and are common in most arrangements such as assignment/license of intellectual property rights, software-licensing agreements, confidentiality agreements, commercial contracts and investment related agreements.