Compensation agreement: how to conclude it correctly and what to look out for?

What is an indemnity agreement

A compensation agreement is a legal document by which the person responsible for the damage undertakes to compensate for the damage and the injured party undertakes to accept the compensation. In practice, it is a very effective way to resolve the situation out of court, quickly and in relative peace. In many cases, an agreement on compensation with the injured party is the best option, especially if the parties agree that the damage has occurred and what is a reasonable amount.

People often enter into an agreement in situations where there has been minor damage to property (for example, a broken car, damaged furnishings in a rented home or a lost item). Similarly, an agreement can be used for larger damages if the parties want to avoid court proceedings. The agreement can be verbal, but it is always legally advisable to have it in writing – this is the only way you can prove later that it was actually made and what the obligations are.

An indemnity agreement also provides a certain psychological security: the injured party has the assurance that the harasser undertakes to compensate for the damage, and the harasser has the assurance that the injured party will not pursue the matter further in court if it receives the agreed amount or benefit.

In some cases (e.g. in employment law or criminal proceedings), the agreement may have other legal effects, such as affecting the amount of the penalty or the course of the proceedings.

When is an indemnity agreement most often used?

An indemnity agreement is an extremely flexible tool that can be used in a wide range of life situations. It is most often used when the damage is obvious, both parties want to resolve the situation quickly and do not intend to engage in lengthy litigation.

One typical case is damage to a rented apartment or its furnishings. The tenant may damage a door, break a light or otherwise disturb the landlord’s property when moving out. In such a situation, an indemnity agreement with the victim is often used because it will help avoid disputes and allow for quick reimbursement of repair costs.

Another common situation is a minor car accident. If, for example, a driver scrapes someone else’s car while parking and both parties agree on the extent of the damage, entering into a compensation agreement is a simple way to avoid the intervention of insurance companies or the police. The parties can agree on an amount equivalent to the repair and record it directly in the agreement.

The agreement is also often used in employer-employee relationships. Typically, this involves situations where an employee inadvertently damages a company phone, laptop or other work equipment. In order to avoid formal recovery or employment law penalties, the parties usually enter into a compensation agreement in which they set the amount of the damage (usually a maximum of 4.5 times the average monthly earnings in the case of negligent damage) and, where appropriate, the instalments of compensation.

Situations where the damage is caused by children or animals are also very common. A child may break a school apparatus, a neighbour’s shop window or someone else’s mobile phone, for example. A dog may damage a neighbour’s fence or a passer-by’s clothes. In such cases, parents or the dog owner often seek a quick and out-of-court solution, and a compensation agreement is the most practical route.

The agreement also finds application in commercial relations. If a supplier fails to deliver a service properly or on time, causing financial loss to the client, the parties may agree on a specific amount as compensation. Here, an indemnity agreement with the injured party helps to maintain good business relations and avoid litigation that would be costly for both parties.

A specific area where the conclusion of an agreement has significant implications is criminal proceedings. If the defendant makes good the damage caused and reaches an agreement with the victim, the court will often take this into account when deciding on the sentence. This is particularly true in cases of less serious offences, where active efforts to make amends can significantly mitigate sanctions.

All these examples show that a compensation agreement is a versatile and effective tool that can resolve conflicts simply and fairly. It is not just an administrative document – it is a tool that helps to restore trust and resolve unpleasant situations with a minimum of complications.

In criminal proceedings, a plea bargain can significantly reduce the threat of punishment – the courts generally value active efforts to repair the damage.

What must be included in the compensation agreement

In order for an indemnity agreement to be legally valid and, above all, enforceable, it must include several important elements. The first of these is the precise identification of the contracting parties, i.e. who caused the damage and who is the injured party. Next, the agreement must describe in detail what damage has been caused and how it has been quantified. This is essential, as a vague or unclear description can lead to disputes later on about the actual amount of compensation.

The next part of the agreement sets out the form and method of compensation. This is most often financial, but compensation can also be made by restoring the item to its original condition or in some other specifically described way. It is also advisable to set out the exact terms of performance and any penalties for non-compliance.

In practice, it is common to conclude a compensation agreement with the injured party with a lump sum payment, but an instalment plan is not excluded – however, it is important that it is sufficiently specific and clear.

A well-drafted agreement also includes a declaration by the injured party that, by accepting compensation, he or she considers the damage to be settled and will not make any further claims on it. This wording protects the plaintiff from later litigation and is recommended by just about every lawyer. Finally, the agreement should include the date, place of signing and the handwritten signatures of both parties. Without them, the existence of the agreement is very difficult to prove and enforcement becomes much more complicated.

What mistakes to avoid when entering into an agreement

People often make the mistake of treating the indemnity agreement as a simple document that just needs to be “somehow” drafted to put their minds at rest. But in reality, the agreement is a legally binding act that can have long-lasting consequences. One of the most common mistakes is an insufficiently specified description of the damages. If it is not clear exactly what was damaged and how the damage was calculated, the victim may later claim that the compensation did not reflect the actual value of the damage or that it was a different item.

Another error is the omission of a time limit for performance. If there is no agreed time for performance, the debt is due on demand from the creditor and should be provided without undue delay after the demand – this is why it is better to put a specific date or repayment schedule in the agreement. But this can lead to disputes – what is “without undue delay”? Each party may interpret this term differently. Therefore, we always recommend giving a specific date or payment schedule.

It also happens that the document does not contain a declaration of settlement of all claims. If the compensation agreement with the injured party does not include this part, the injured party may later demand additional amounts, which leads to conflicts and often litigation. Reliance on oral agreements, which are legally valid but difficult to prove in the event of non-compliance, is also very risky. A written form is therefore always safer. It is also advisable to add a witness or to provide proof of delivery by a receipt or bank statement.

Summary

A compensation agreement is an out-of-court instrument whereby the wrongdoer undertakes to compensate for the damage and the victim accepts this compensation; it is a quick, practical and fair solution to situations ranging from minor damages (damaged apartment, scratch on the car, broken phone) to commercial or employment relations and can also positively influence criminal proceedings. In order to be valid and enforceable, the agreement must include identification of the parties, a precise description and quantification of the damage, a clearly stated method and date of compensation, a payment schedule if applicable, penalties for delay and a full settlement clause. The most common mistakes are vague definitions of damages, lack of performance dates, absence of a statement of settlement of claims and reliance on oral agreements which are difficult to prove. Thus, a written agreement on damages with the injured party protects both parties, provides legal certainty and allows for effective conflict resolution without the need for litigation.