Legal right to seek damages and the need for indemnity

In any contract the parties deploy various risk allocation methods to ensure that no party ends up facing more liability than it bargained for. If one party commits a breach of its war- ranties or obligations, as a principle of law, the other party should be put in the same position it would have been in had the breach not occurred.

The non-breaching party can achieve monetary compensation in two ways: (1) through a claim for damages – a statutory remedy available to the non-breaching party; or (2) through a claim for indemnity, provided the non- breaching party has negotiated such a right under the contract.

For example, if Company A proposes to buy the business of Company B, Company A would rely on the repre- sentations and warranties provided by Company B in relation to its busi- ness. If any of those representations and warranties were to be untrue, to get compensated for the resultant loss, Company A can either choose to claim damages or, if under a contract Company B has agreed to indemnify Company A, it can choose to raise an indemnity claim against Company B.

While both remedies can achieve the same objective, the contractual right of indemnity has certain advantages over the right to seek damages under gen- eral provisions of contract law.

Darshan Upadhyay is a partner and Amruta Kelkar is an associate manager at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.