Indemnity

A promise to compensate another contractual party (‘the indemnified’ or ‘indemnitee’) for the consequences of a possible event, for example, to pay any intellectual property infringement damages that might be awarded against a purchaser for use of a vendor’s products. An indemnity is a form of insurance and indeed an insurance policy is in effect an indemnity agreement. Indemnities are either open or capped. That is to say there may be no ceiling on the amount of the indemnity (open) or more sensibly the grantor of the indemnity (‘the indemnifier’) will limit its liability (‘capped’). Usually indemnity policies will require prompt notice by the indemnitee to the indemnifier of any claims and will typically provide that the indemnifier can control the legal defense of any claims.

In many legal systems an indemnity cannot be granted before-the-event (i.e., prospectively), that would shield the indemnified from the consequences of any illegal or prohibited acts by it, and even further in some an indemnity also cannot prospectively cover willful misconduct or gross negligence (which will often be excluded in any event, though it may pay damages to third parties over and above what the indemnified can pay); in other words you cannot indemnify someone for criminal acts, intentional damage or extreme negligence (because to do so would encourage or sponsor such conduct.)  An indemnity is different from a warranty, though the legal consequences for an indemnifier or a warrantor may ultimately be the same. See Warranty, Representations.

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