Article 23, Chapter 2: Human Relations

Main Topic: Chapter 2: Human Relations

Sub-topic: Indemmnification of Defendant for Benefits Received

Art. 23. Even when an act or event causing damage to another's property was not due to the fault or negligence of the defendant, the latter shall be made liable for indemnity if through the act or event he was benefited.

Discussion/Explanation:

1. Duty to Indemnify Because of Benefit Received

Unless there is a duty to indemnify, unjust enrichment will occur.

2. Example

Without A's knowledge, a flood drives his cattle to the cultivated highland of B. A's cattle are saved, but B's crops are destroyed. True, A was not at fault, but he was benefited. It is but right and equitable that he should indemnify B.

Indemnity is often used as a synonym for compensation or reparation. While it is true, that all three can be construed as obligations to act on an injured party's behalf given the occurrence of a contractually-specified event.

However, indemnity as a legal concept, has a much broader meaning than the other two terms; namely, an indemnity is to make a party to a contract "whole" again should that contractually-specified event occur.

While the event may be specified by the contract, the actions that must be taken to make the injured party "whole" again are largely fact-based and unknown to the parties until the event occurs, while the maximum liability is often expressly limited by the contract.

A car insurance policy is an example of indemnification. If a purchaser of car insurance policy is involved in an accident wherein the liability for the accident is undisputedly of their insured driver, then the insurance carrier has the duty to indemnify their insured driver in very specific ways to make them "whole" again.

The insurance carrier may pay them compensation (recompense for lost wages that would have normally occurred). Pay them for medical/legal/(pain and suffering) damages (i.e., those costs arising specifically as the result of the accident), reparations to tow and repair the vehicles involved in the accident returning them to their original condition, and the payment of rental vehicles while awaiting repairs.

It is in the breadth of the insurance carrier's obligations that we see the application of an indemnity; in other words, an indemnity is a "generalized promise of protection against a specific type of event by way of making the injured party whole again."

An indemnity should also be differentiated from a guarantee. A guarantee is the promise of a third party to honor the obligation of a party to a contract should that party be unable or unwilling to do so (usually a guarantee is limited to an obligation to pay a debt). This distinction between indemnity and guarantee was discussed as early as the eighteenth century in Birkmya v Darnell. In that case, concerned with a guarantee of payment for goods rather than payment of rent, the presiding judge explained that a guarantee effectively says "Let him have the goods; if he does not pay you, I will”.

Imagine for a moment that you rent a chainsaw from the local ABC rental company. Since your ability to use a chainsaw safely remains unproven to the ABC rental agent, he may ask you to sign a number of papers. One of those papers might read: "The renter of this equipment agrees to defend, indemnify and hold harmless ABC Rental Company and its staff for any third-party claims which may arise from the use of the equipment." This is considered indemnification, an agreement between two parties not to hold one of them liable for future legal action or fines. Indemnification usually only works in one direction; you as the renter agree not to hold ABC Rental Company employees responsible if you have an accident with their chainsaw.

Indemnification may not seem like a major consideration in most circumstances — the chances are pretty good that you won't be hit by a baseball at a game or suffer damages from faulty rental equipment. But, indemnification can be a very important consideration if you're a director of a medical equipment company, for example. There's always a possibility of a patient suing one of your client hospitals for damages suffered in a fall from one of your wheelchairs. An indemnification agreement with your company means that the hospital agrees to take financial responsibility if a patient prevails in a lawsuit. Without indemnification, you could be held personally liable for damage payments.

Indemnification clauses usually trump any other legal arguments, so it is important for both parties to understand precisely what actions are covered under the agreement. Some indemnification clauses can be worded too vaguely to be enforced, while other can be very specific about geographical limitations or eligible third-party participants. This is why many companies consult legal counsel before drafting an indemnification agreement for new employees and board members. The legal language must be solid or a company's executives could face major financial ruin from liability claims and lawsuits.

Indemnity Agreements:

• In order to use the company’s services, the investing person agrees to hold the company not liable for any money losses that might be incurred by investing. Occasionally one uses an indemnity agreement when intellectual property is leased. This is much like the tenant indemnification agreement.
• Whenever a ticket is purchased for a sporting event or concert, part of the condition of admission is an indemnity agreement between the ticketholder and the venue itself. If an errant baseball strikes a fan or a faulty pyrotechnic display burns a concert-goer, the indemnity agreement protects the stadium or hall from a major lawsuit.

Indemnification Clause:

A court can render an indemnification clause unenforceable or limit its interpretation for a variety of reasons including a lack of clarity or definiteness and unconscionablity. Indemnification clauses are usually unenforceable if they involve illegal subject matter.

• It is important to review all contracts carefully to confirm that they do not contain any surprises and if a contract contains a hold harmless clause, people should make sure that they understand when and how the clause may apply. In a simple example of a hold harmless clause, a homeowner might agree not to hold a contractor responsible if she or he is unable to complete work due to circumstances beyond control.

Indemnification Contracts :

• Over decades, insurance contract law has developed from court decisions concerning these provisions and these principles in countries around the world. The first principle of insurance contract law is the concept of indemnification, which is the act of making the policyholder whole again after a specifically named peril or loss occurs.
• If the court agrees that a condition is ambiguous or impossible to enforce legally, then the weaker party may prevail in a court proceeding. This is why many entities which use standard contracts employ legal professionals to make sure their terms are considered legal and reasonable.