Indemnity is a shield that protects investor interests in contracts including share purchase agreements or share subscription agreements. The presentation explores all safeguards that must be carefully negotiated in indemnity contracts.

1. Representation Of Investor Interest In
Indemnity Agreements : A Critique
Compiled & Presented by : Aditi Duggal (4th year)
Symbiosis Law School, Noida

2. Indemnity in India– An Overview
 Sections 124 and 125 of the Indian Contract Act, 1872 deal
with indemnity.
 The indemnifier undertakes an original and independent
obligation to indemnify. This obligation is distinct from that of
damages or guarantee. (refer Halsbury’s Laws of England, Krishnaswami Iyer v.
Thattia Raghaviah Chetty AIR 1928 Mad 43 and Punjab National Bank Limited v. Bikram Cotton
Mills & Anr. AIR 1970 SC 1973)
 Payment is not a condition precedent. Indemnifier may be sued
even before incurring any actual damage or loss. (refer Osman Jamal
and Sons v. Gopal AIR 1929 Cal 208)
 Sections 124 and 125 do not embody the whole law on subjects of
contracts of indemnity and recourse may be had to common law in
case of conflict. (refer Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri AIR 1942 Bom 302.)
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3. Types Of Indemnity
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 Bare/General Indemnity
A indemnifies B against all liabilities or losses incurred in connection with
a certain event or circumstance.
 Third Party Indemnity
A indemnifies B against claims or liabilities by third party.
 Financing Indemnity
A indemnifies B against C’s failure to perform as agreed in a contract
between B and C.
 Party Indemnity
A indemnifies B against loss caused by A’s breach of contract with B.

4. Representations & Warranties in SPA
and/or SSA
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 Indemnity mainly covers :
a) Breach of covenant or agreement in the purchase agreement;
b) Breach of any representation or warranty made by the
indemnifier in the purchase agreement.; and
c) Certain excluded liabilities or special indemnification claims.
 A “fundamental” representation goes to the root of the
contract and is so significant to the transaction that the
buyer would not have agreed to the deal if it knew that
the representation was false. It may include special
indemnification claims in respect of prospective liabilities.

5. Indemnity Agreements : Relevant
Safeguards
1) Indemnifier should be under an absolute obligation
which is triggered on accrual of liability.
2) Extent of losses must be unambiguously specified in
respect of intended inclusion of remote, indirect or
third party losses.
3) Obligation to mitigate loss should be avoided.
4) Negligence of indemnified party.
5) Set-Offs and Indemnification Escrow.
6) Indemnity for defending prospective claims.
7) Warranty & Indemnity Insurance.
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6. Absolute Obligation To Indemnify
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 An obligation to indemnify incorporates two separate obligations :
1.)The Primary preventive obligation to “hold harmless”.
2.) The secondary compensatory obligation to “make good” any loss or
damage.
 It is essential to draft the clause in a manner that the obligation to
indemnify accrues at the primary stage. The right to defend the
indemnified party shall kick in the moment any claim is made by any
third party.
 In a contrary circumstance, the courts may interpret the intended
obligation to arise subsequent to actual loss which may further
attract the tests of remoteness, reasonability and mitigation.

7. Obligation should be triggered on accrual of
liability
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 Indemnity is not necessarily given by repayment after payment.
Indemnity requires that the party to be indemnified shall never
be called upon to pay. (refer Osman Jamal and Sons v. Gopal AIR 1929 Cal 208)
 Therefore, the terms “make good” and “compensate” should
be avoided. Terminology such as “hold harmless”, “irrespective
of whether the liability has accrued or not” and “protect from
liability” should be encouraged to ensure that the right to be
indemnified is triggered prior to actual loss upon the serving
of claim notice by the indemnifier.
 The joint and several liability standard should be encouraged
which may alter on a case-to-case basis.

8. Extent of Losses
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 “Indemnity” may refer to all loss suffered which is attributable to a
specified cause, whether or not it was in the reasonable
contemplation of the parties. (refer Total Transport Corporation v. Arcadia Petroleum Limited,
[1998] 1 Lloyd’s Rep. 351)
 Consequential, indirect and remote losses can be claimed under the
indemnity clause. It is better to provide an inclusive definition to
losses as opposed to exhaustive. Use of the term “including but not
limited to” is recommended.
 A tipping basket clause with a materiality scrape – A minimum
monetary threshold is agreed and it is only when losses cross the
threshold that indemnifiers' liability arises. However, materiality is
“read out” of such a clause and it operates as an exception to the
basket amount. Materiality should also include exception for
negligence, fraud and material concealment.

9. Mitigation of Losses
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 Failure to mitigate is not a defense to indemnity action. (refer Am. States Ins. Co
v. Glover, 960 F. 2D (6th Circuit 1992))
 Indemnity Agreement terms determine nature of indemnifiers which
terms allow reimbursement of all payments made in good faith. (US
Fidelity & Guarantee Co. v. Napier Elec. & Constr. Co., 571 S.W.2.D 644)
 A contract to indemnify is a separate contract in itself and hence
the breach is refusal to indemnify itself rather than the specific event
which led the indemnified party to seek the indemnity. The
indemnity clause may therefore be construed as a claim for debt and
not as a claim for damages and hence the duty to mitigate does not
apply.
 Even if the obligation to mitigate has to be undertaken,
applicable standards (the best efforts / commercially reasonable
efforts) should be duly negotiated to safeguard the investor’s
interests.

10. Negligence of Indemnified Party
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 “Any liability, proceedings or loss whatsoever” does not
apply to cover the negligence of the indemnified party. (refer
Smith v. South Wales Switchgear Ltd. [1978] 1 WLR 165 and Canada Steamship Lines Ltd v Regem ([1952] 1 All
ER 305 at 310, [1952] AC 192]
 An appropriately worded indemnity clause can effectively
lead to a party compensating another for the negligence
of that other party is the ordinary meaning of the clause
clearly provides for the indemnity and the “commercial
and contractual context” supports such a construction.
(refer Samways v. Workcover Queensland and Ors. [2010] QSC 127.)

11. Set-Offs & Indemnification Escrow Account
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 Indemnification Escrow Account : It is similar to holding
back a certain amount of the purchase price for ensuring
availability of funds for indemnification purposes. In stead
of the buyer paying the entire purchase price to the sellers, it
will deposit a portion of the purchase price into an escrow
account (generally held by a neutral third-party bank) to cover
the sellers’ indemnification obligations.
 Set-offs against future payments : If the purchase price
includes certain future or milestone payments, the parties may
consider setoff as a mechanism for funding the indemnity.
Setoff is the reduction of future payments by the amount owed
under the party’s indemnification obligations.

12. Indemnity for defending prospective claims
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 If the intent of the parties was to cover the defense
costs of the Acquirer incurred against any claim that
involved an alleged breach of the representations, the
same must have been expressly provided for in the
Merger Agreement.
 Such an interpretation of “against any or all losses” in the
absence of an express language would lead to a peculiar
situation were the Sellers would have to defend the
Acquirer against frivolous claims. ( refer Walter A. Winshall v. Viacom
International Inc. C.A. No. 6074-CS (Del. Ch. Dec. 12, 2012))

13. Warranty & Indemnity Insurance
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 Although W&I insurance is not expressly approved by the
Insurance Regulatory and Development Authority of India
(IRDAI), the prevailing legal view is that it is covered
under the ambit of commercial liability insurance, which
has the approval of the IRDAI.
 In a buyer insurance policy, the buyer is indemnified from
loss arising from a breach of warranty by the seller, where
the buyer is unable to recover from the seller as a result
of the limited liability of the seller under the definitive
documents.

14. Recommended strategies for negotiation
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 The seller may resist to indemnifying for third party
losses which may or may not arise from the Seller’s
default. In such a case, a liberal timeframe can be provided
to the Seller to prevent such losses by any recourse that
he may have with the third party or otherwise. The
obligation will become absolute only if the losses are not
made up for within the timeframe.
 In the alternative, it can also be proposed that any costs
and expenses incurred by the buyer in any such recovery
will be a subject matter of Seller’s indemnification.

15. Proposed Draft
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[●] agrees to jointly and severally indemnify, defend and hold
[●] harmless against any and all present or future claims, costs,
suits, and damages, including attorneys fees arising out of the
performance of this agreement or in connection with the
management and operation of the Association, including [●],
excluding any claims or liabilities arising out of the sole
negligence, fraud or willful misconduct of Agent or its
employees, for which the [●] are jointly/severally liable. Upon
the arising of any dispute / submission of claim, such amount
shall be deposited with the [●] pending adjudication. The
indemnifier shall, at all times, have the right to set-off any
payable amount against payment of indemnity.The
indemnification language set forth above shall survive the
termination of the Agreement.

16. BIBLIOGRAPHY
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 Satish Padhi, Ruchir Sinha & Vyapak Desai, Nishith Desai Associates, “Revisiting the Indemnity v. Damages Debate”, May, 2017, Available at :
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/NDA%20Hotline/Deal-Destination-Revisiting_the_Indemnity_vs_Damages_Debate.pdf
[Accessed on Mar. 28, 2018].
 Tyle D. Petersen, Husch Blackwell LLP, “Indemnification Provisions in Acquisition Transactions”, November 2011, Available at :
https://www.huschblackwell.com/~/media/files/businessinsights/businessinsights/2011/11/business%20%20tax%20seminar/files/indemnification%20pr
ovisions%20in%20acquisition%20transa__/fileattachment/indemnification%20provisions.pdf [Accessed on Mar. 28, 2018].
 Tracy A. Belton & Danielle N. Rosato, Arnold & Potter, “Basics in M&A : Indemnification Provisions”, March, 2016 Available at
:https://www.arnoldporter.com/en/perspectives/publications/2016/03/20160323_basics_in_ma_indemnification_pr_12768 [Accessed on Mar. 28,
2018].
 Nishith Desai Associates, “Mergers & Acquisitions In India”, April, 2016, Available at :
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Mergers___Acquisitions_in_India.pdf [Accessed on Mar. 28, 2018].
 Minh Uong, The New York Times, “Behind Private Equity’s Curtain”, October, 2014, Available at :
https://www.nytimes.com/2014/10/19/business/retirement/behind-private-equitys-curtain.html [Accessed on Mar. 28, 2018]
 Roger Mattar, Kemp Strang Lawyers, “How to Negotiate and Draft an Effective Indemnity Clause”, September, 2014, Available at :
http://www.kempstrang.com.au/sites/default/files/text_item/pdf/How%20to%20Negotiate%20and%20Draft%20an%20Effective%20Indemnity%20Cla
use.pdf [Accessed on Mar. 28, 2018].
 Economic Times, “Cairn India has indemnity from Cairn Energy on Rs 20,000 crore tax”, April, 2016, Available at :
https://economictimes.indiatimes.com/industry/energy/oil-gas/cairn-india-has-indemnity-from-cairn-energy-on-rs-20000-crore-
tax/articleshow/51763753.cms [Accessed on Mar. 28, 2018].
 Ankit Mishra & Simone Reis, Nishith Desai Associates, “Post-acquisition Indemnity Does Not Cover Future Events Holds Delaware Chancery Court”,
January, 2013, Available at : http://www.nishithdesai.com/information/research-and-articles/nda-hotline/nda-hotline-single-view/article/post-
acquisition-indemnity-does-not-cover-future-events-holds-delaware-chancery-court.html?no_cache=1&cHash=fbcd3f7efd6070258652f348648edfe0
[Accessed on Mar. 28, 2018].
 Faraz Khan and Aishwaria S Iyer, Shardul Amarchand Mangaldas & Co., “Warranty and Indemnity Insurance : What can it do?” , December, 2017.
Available at : https://www.vantageasia.com/warranty-indemnity-insurance-can/ [Accessed on Mar. 28, 2018].
 NOTE : Kindly refer to Annexure 1 for list of authorities