Indemnification

Indemnification (면책/免責, 배상/賠償, 구상/求償) means to make a party to a contract whole, or to make compensation so that the other party may not suffer any loss, if contractually-specified event occur.

An indemnity is a sum paid by A to B by way of compensation for a particular loss suffered by B. The indemnitor (A) may or may not be responsible for the loss suffered by the indemnitee (B). Forms of indemnity include cash payments, repairs, replacement, and reinstatement.

Key words
indemnification, right to indemnity, right of reimbursement, joint and several obligation, principal obligor, fiduciary surety

Right to indemnity
Under the Civil Act, the right to indemnity (구상권/求償權), or right of reimbursement, becomes to exist when: If one of the obligors jointly and severally liable (연대채무자/連帶債務者) has procured a discharge for common profit by performance of the obligation, he is entitled to reimbursement from the other obligors jointly and severally liable in proportion to their respective shares, which includes legal interest as from the day of discharge, and the expenses or unavoidable losses, etc. If a surety who has become such at the request of the principal obligor (수탁보증인/受託保證人) has, without regligence on his part, caused the principal obligation to be extinguished by performance or at his own expense, such surety shall have a right to be indemnified by the principal obligor. If a person, who has pledged his own property to secure a debt of another (물상보증인/物上保證人), discharges the debt or loses the ownership of the pledged article as a result of the enforcement of the pledge, he is entitled to the right of reimbursement. When a third party who acquired the real property on mortgage has discharged an obligation to the mortgagee (저당권자/抵當權者), he is entitled to the right of reimbursement from the original obligor. If the obligee has consumed or disposed of in good faith the thing which he had received by way of performance, the performance shall be effective. In this case (채권자의 선의소비/善意消費), if the obligee has been demanded by a third person to pay damages, the obligee may exercise the right of reimbursement against the obligor. In case where a person other than the obligor has discharged an obligation by mistake (타인채무 변제자/他人債務辨濟者), and the obligee has in good faith destroyed evidentiary documents, relinquished any security, or lost his claim rights by prescription, the person who has effected the performance may avail himself of the right to obtain reimbursement from the obligor. When a person who employs another to carry out an undertaking (사용자/使用者) has made compensation for damages done to a third person by the employee in the course of the execution of the undertaking, the employer is entitled to the right of reimbursement. When a person in possession of the structure, etc. (공작물 등 점유자/工作物占有者) which caused damages to another person by reason of any defect in the construction or maintenance of a structure, etc. has made compensation for damages done to the victim, the possessor or owner of structure, etc. with defect may exercise the right of reimbursement from the person to whom the damages are attributable. When a qualified acceptor (한정승인자/限定承認者), who neglected to give a public or peremptory notice (최고/催告) or effected performance to some obligees in inheritance or testamentary donees (유증/遺贈 받은 자), has redressed any damages arising therefrom, he may exercise the right of reimbursement from the person to whom the damages are attributable.
 * Right of Reimbursement of Obligor Who has Performed at His Own Expense. Article 425.
 * Right of Reimbursement of Fiduciary Surety. Articles 441 through 448.
 * Right to Indemnity of Person who Pledged One's Property to Secure Another's Obligation. Article 341.
 * A Third Acquisitor of Mortgaged Real Property
 * Consumption or Assignment in Good Faith by Obligee and Right of Reimbursement. Article 465.
 * Discharge of Another Person's Obligation. Article 745
 * Liability of Employer, Possessor or Owner of Structure, etc. Articles 756 and 758.
 * Liability arising from Unfair Performance, etc. Articles 1038, 1051, 1056

Indemnification relationship
There must be an indemnification relationship (구상관계/求償關係) between the indemnity right holder and the other party, as follows:
 * 1) The right holder has discharged a whole or part of obligation;
 * 2) Such discharge has been caused by cash payments or something; and
 * 3) Such cash payments, etc. are faultless.

Scope of indemnification
The scope of reimbursement depends on case by case as explained below:
 * With the request of the other party, the scope of reimbursement is, in line with claims for payment of expenses based on mandated affairs, the amount of cash payments, etc. up to the pricipal obligation, and legal interest from the date of discharge and unavoidable expenses and damages, if any.
 * Without the request of the other party, the scope of reimbursement is, in line with claims for payment of expenses based on dutiless management of affairs is to the extent that the other party was enriched as of the time of discharge of obligation or enrichment. Article 444 (1). Any legal interest from the date of discharge and unavoidable expenses and damages are not inlcluded.
 * Against the intention of the other party, the scope of reimbursement is limited only to the extent that the other party is still being enriched. Article 444 (2).

Indemnification guarantee
In banking practices, there are needs for indemnification guarantee (구상보증/求償保證) where a guarantor has obtained the right to indemnity by discharging the obligee on behalf of the principal obligor.

For example, in executing a loan agreement with a small business, the lender usually demands the letter of guarantee issued by the surety insurer, Korea Credit Guarantee Fund (KODIT) or the Korea Technology Finance Corporation (KIBO). Such a guarantor wants to enter into an indemnification guarantee agreement with a third party in preparation for the incident that the guarantor discharges the lender on behalf of the borrower, a principal obligor.

Indemnification guarantee is, in nature, same as ordinary guarantee.