Contract of Indemnity means doing good to the person who has suffered loss or putting the person back into the same position as if no loss has occurred. The word indemnity has been derived from the Latin word ‘indemnis’which means unharmed or undamaged. Section 124 of Indian Contract Act, 1872 defines Contract of Indemnity as a contract where one party promises to save the other party from the loss which might arise from the conduct of promisor himself or by the conduct of any other person. The person promising or assuring the payment of compensation is called indemnifier or promisor and the person in whose favour such promise or compensation is made is called promisee or indemnity holder or indemnified. The essentials of the contract of indemnity are:
- There shall be two parties, indemnifier and indemnified.
- There shall be a contract or promise to compensate the loss.
- Loss shall arise from the conduct of indemnifier or any other person.
The principle of indemnity originated in the case of Adamson v. Jarvis[1], In this case, the plaintiff on the instructions of the defendant sold the livestock to some person. Later, it was realized that the defendant was not the real owner of the livestock and the plaintiff had to pay damages for such sale. Plaintiff claimed indemnity from the defendant. The court held that the actions of the plaintiff were according to the directions of the defendant, therefore the defendant was liable to indemnify the plaintiff.
According to the circumstances of a particular case, it is decided whether the promise is expressed or implied. Expressed Contracts of Indemnity are the ones which are consented in oral or written form. Whereas Implied Contracts of Indemnity are the ones that come into existence by statute and therefore are also known as the promise by operation of law.
The best example of the contract of indemnity is every contract of insurance apart from life insurance. The definition of Contract of Indemnity is restricted only to those cases which arise due to the conduct of some human agency and not otherwise[2].
Rights of Indemnity Holder
Section 125 of Indian Contract entitles the Indemnity Holder who acts within his authority with following rights:
Right to recover Damages
The indemnity holder can recover all the damages from the indemnifier which he is forced to pay in a suit proceeding. But only those damages will be indemnified against which promise is made.
Right to recover Costs
Costs incurred due to an institution or defending of suit shall be indemnified by the Indemnifier. But indemnified shall not act against the order of the promisor. He shall act as a prudent person would have acted in the absence of such a contract.
Rights to recover sums paid under Compromise
Amount paid in case of compromise of the suit can also be recovered from the indemnifier without violating the orders of indemnifier.
It is pertinent to mention that in order to claim right of indemnity the indemnity holder shall have a bona fide intention without any deceit or without an aim to defraud the indemnifier.However, the right cannot be refuted in case of oversight[3].
Rights of Indemnifier
As per the Indian Contract Act, 1872 indemnifier does not have any right. But in the case of Jaswant Singh v Section of State[4] the court has held that the indemnifier shall be entitled with all the securities of indemnified in the same manner as the creditor is against its principal debtor whether or not he is aware of the same.
Contract of Insurance and Contract of Indemnity
By Contract of Insurance, we mean a contract in which one person in order to save himself from the future contingencies pays a premium as consideration to another. And another person on receiving such premium promises to indemnify him from the loss arising from such contingencies.
Whereas Contract of Indemnity means where one person enters into a contract with another to save him from losses which might arise due to the conduct of the person himself or any other person.
Similarities between Contract of Insurance and Contract of Indemnity
- Both the contracts are contingent contracts i.e. both the contracts depend upon the happening and not happening of the future events.
- Both being special contracts, have applicability to general principles.
- Under both the contracts a promise is made.
- Both the contracts consist of consideration.
Differences between Contract of Insurance and Contract of Indemnity
- Contract of Indemnity has a wider scope since all the contracts of insurance are contracts of indemnity except Life Insurance whereas vice versa is not there.
- In case of Contract of Insurance, a premium sum is to be paid whereas same is absent in the case of Contract of Indemnity.
- Contract of Insurance consists of the Element of Uberrimae Fides(Utmost Good Faith) whereas the same is missing in Contract of Indemnity.
Provisions & Enforceability in the United Kingdom on Indemnity
In order to define the contract of indemnity in U.K., the English Law uses a maxim “you must be damnified before you can claim to be indemnified”[5]. By this, we mean that until and unless promisee has not undergone any injury, he cannot claim indemnity. The injury is one of the main essential of indemnity under English law. The English rule of indemnity is that the indemnifier will compensate to indemnity holder only after the later has faced any loss or has worked as per the instructions of indemnifier or has incurred cost during suit proceedings or has paid any amount in compromise. In the absence of loss, contract of indemnity cannot be invoked by indemnity holder. Earlier the indemnity was enforceable once the losses were paid by the indemnity holder. After paying of losses he could seek relief of indemnity from indemnifier.
But such provisions were causing trouble to the indemnity holder where he cannot pay the claim from his pockets. The Court of Equity in order to sort relief removed the principle of being damnified in order to be indemnified. The indemnifier in such a situation is liable to indemnify for the promise made without the happening of actual loss.
Later the enforceability of indemnity shifted with the judgment of Buckley LJ in the case Richardson Re, ex parte The Governors of St. Thomas Hospital where he stated, “Indemnity is not necessarily given by repayment after payment. Indemnity requires that the party to be indemnified in the first occurrence shall never be called upon to pay”[6].
In another landmark judgement of Re Law Guarantee & Accidental case it was rightly observed by Kennedy LJ “that indemnity does not merely mean to reimburse in respect of the money paid, but to save from the loss in respect of the liability against which the indemnity has been given because otherwise, indemnity may be worth very little if the indemnity-holder is not able to pay in the first instance”[7].
The contract of indemnity in U.K. has a much wider scope than Indian Law since the loss may be due to the conduct of an individual or it can also arise from some event or accident, like in case of fire. But in India, only the former condition applies. In U.K., life insurance is not considered as the contract of indemnity. This is because the value of an individual’s life cannot be determined and where the loss is not a certain contract of indemnity does not arise. Moreover, U.K. accepts both implied and expressed contract of indemnity.
Provisions & Enforceability in India on Indemnity
In India, Law of indemnity has a narrower scope in comparison to English Law. As per the definition of indemnity under section 124 of Indian Contract Act, 1872 indemnity has a limited scope since indemnity holder is only compensated in case loss occurred due to human agency. It does not include any other event or accident for the same.
Unlike U.K., India does not have a specific provision for enforceability of the contract of indemnity. There have been conflicting judgements regarding the same. But now the opinion of Equity Courts are been followed. The first Indian case to provide indemnity before payment was Osman Jamal And Sons Ltd. v Gopal Purshottam[8], In this case, the Plaintiff Company was a commission agent for the defendant firm for buying and selling of Hessian and Gunnies and the defendant will also indemnify in case of any loss. Plaintiff bought Hessian from one MaliramRamjidas. Defendant failed to make payment or take delivery of the same and later MaliramRamjidas sold the same to another at a lesser price. MaliramRamjidas sued plaintiff for damages for the loss occurred. Plaintiff was winding up and asked the defendant to indemnify the same to which the defendant refused to state that the plaintiff at the foremost defaulted in making payment. But the court held that the defendant was liable to indemnify the plaintiff.
Also in the case of The New India Assurance Company Ltd. v The State Trading Corporation of India Ltd. and Anr[9], The Gujarat High Court upheld the view of Gajanan Moreshwar v Moreshwar Madan by stating that indemnifier or the defendant is liable to pay in case of breach of promise irrespective of actual loss. Indemnity does not mean reimbursing the amount but it means to protect the indemnifier from the liability.
There is no specific mention of an implied contract of indemnity in Indian Contract Act, 1872. But the Privy Council has given recognition to an implied contract of indemnity as well[10]. In the 13th report of Law Commission of India, 1958, it has recommended two amendments in Indian Contract Act, 1872 regarding loss to compensated from both caused by human conduct as well as any event or accident. Moreover, it has also demanded the inclusion of implied contracts of indemnity. Indian law only covers express contract of indemnity whereas implied contracts are left at the mercy of judicial decisions.
The basic difference between English Law and Indian law is that losses are compensated against both human conduct and events in English Law whereas in Indian Law it is limited only to the extent of human conduct.
Illustrations
Illustration 1: Mr A is a teacher and one Mr B offers him a job at his school in the middle of the session and asks him to join immediately. Mr. B also assures Mr. A to compensate him with any loss that occurs from his resignation from the previous school. Such a contract will be a contract of indemnity.
Illustration 2: Mr X offers to sell goods to Mr Y. Mr Y accepts the offer but at the time of delivery he refuses to make payment and denies the delivery as well. In such a case Mr X sells goods to Mr Z at a lower price rate. Mr X can now ask for the indemnification from Mr Y for the loss occurred due to him. This is an implied contract of indemnity. (In India there is no provision for an implied contract of indemnity, but its application depends upon judicial decisions.)
Illustration 3: A & B enter into a contract where B promises A that he will do good of any loss borne by A. This is an expressed contract of indemnity.
Illustration 4: X & Y enter into a contract wherein X promises to indemnify Y in consequences where Z initiates a suit proceeding against Y. Such a contract will be a contract of indemnity.
Illustration 5: A promises to indemnify B against the cost which B has borne due to initiating the suit proceedings or defending the suit against C on instructions of A. This is a contract of indemnity.
Illustration 6: X & Y undergo a compromise where X faces certain losses. In a pre-existing contract between X & Z, it was decided that if X ever undergoes a compromise and faces losses, then such loss will be borne by Z. Such a pre-existing contract between X & Z is a contract of indemnity.
Illustration 7: A is an insurance company and B is his client who has taken the insurance policy of his house from A. B’s house catches fire due to gas leakage and B faces a huge loss. The insurance company i.e. A shall indemnify B with such loss against the policy taken by B. Such an insurance contract will be a contract of indemnity.
Frequently Asked Questions
Ques 1. What is the difference between Indemnity and Guarantee?
| Basis | Indemnity | Guarantee |
| Number of Parties | There are only two parties i.e. indemnity holder and indemnifier. | There are three parties i.e. creditor, principal debtor and surety. |
| Number of Contracts | There is only one contract between indemnity holder and indemnifier. | There are three sub-
contracts in guarantee |
| Nature | It is of simple nature as it has only one contract. | It is of a complex nature as it has more than one contract. |
| Liability | There is an only absolute liability in indemnity which rests with the indemnifier. | There are two types of liability i.e. primary and secondary which rests with the principal debtor and surety respectively. |
| Recovery | Once the indemnifier has paid the amount he cannot recover the same. | The surety can recover the amount from the principal debtor. |
Ques 2. What is the difference between Contract of Indemnity and Contract of Insurance?
| Basis | Contract of Indemnity | Contract of Insurance |
| Scope | It has a wider scope since all contracts of insurance are the contract of indemnity except life insurance. | It has a narrow scope since all contracts of indemnity are not contracts of insurance. |
| The element of Uberrimae Fides(Utmost Good Faith) | The element of
Uberrimae Fides is absent in contract of indemnity. |
The element of
Uberrimae Fides is essential for a contract of insurance. |
| Premium Paid | No premium is to be paid to make good of losses. | Continuous premium is to be paid to make good of losses. |
Ques 3 . What is the difference between Contract of Indemnity in Indian Law and English Law?
| Basis | Indian Law | English Law |
| Types of Contracts | Indian law only accepts expressed contracts of indemnity. | English law accepts both expressed and implied contracts of indemnity. |
| Cause of Loss | In Indian Law cause of loss can be only via a human agency and not otherwise. | In English Law, the cause of loss could be both human agencies as well as events and accidents. |
| Enforceability | Indian laws are silent about the enforceability of indemnity contracts. | In English, Law enforceability depends upon the payment of losses. |
Ques 4. Who is the Indemnifier & Indemnity Holder?
Indemnifier is the person who promises to compensate for the loss if any. Indemnifier is also known as promisor. Indemnity Holder is the person in whose favour indemnifier makes the promise. Indemnity Holder is also known as a promise or indemnified.
Ques 5. When is the Contract of Indemnity Enforceable?
The enforceability of Contract of Indemnity depends upon the payment of losses. Earlier, the indemnity holder was indemnified only after the payment of loss. But with the review of Court of Equity, it has provided certain relief to the indemnified. It has stated that the main purpose of indemnity is to protect the person from loss and not to look for reimbursement. The indemnifier shall indemnify the indemnity holder as soon as the liability occurs and shall not wait for the loss to him. Indemnifier shall not for the indemnity holder to ask for it at the very first place.
Ques 6. What are the rights of Indemnity Holder?
In order to protect the interest of indemnity holder, section 125 of the Indian Contract Act, 1872 has made mention of certain rights in their favour. The indemnity holder has the following right:
- Right to recover damages during court proceedings;
- Right to recover the cost of a suit initiated or defended on the instructions of indemnifier;
- Right to recover amount lost in compromise.
Ques 7. Why is Life Insurance not a Contract of Indemnity?
Life Insurance is basically a contract under which an individual pays a premium during his life to the insurer who makes the reimbursement at the time of death or maturity. But Life Insurance is not a Contract of Indemnity since under indemnity actual loss is estimated whereas the loss of an individual on death cannot be estimated. The main essential for the contract of indemnity i.e. the existence of loss is absent. Therefore, Life Insurance is not the Contract of Indemnity.
[Reference]
[1] [1827] 4 BING 66.
[2]Gajanan Moreshwar v MoreshwarMadan (1942) 44 BOMLR 703.
[3]Yeung v HSBC.
[4] 14 BOM 299.
[5] Yash Arya, Contract of Indemnity & Guarantee, Academia. Retrieved from <http://www.academia.edu/9012692/Contract_of_Indemnity_and_Guarantee>
[6] (1911)2KB 705, 715 (CA).
[7] (1914) 2 Ch 617, 638: (1914-1915) All ER Rep 1158 (CA).
[8] AIR 1929 Cal 208.
[9] AIR 1969 Guj.18.
[10] Secretary of State v. The Bank of India Ltd. AIR 1938 P.C 191.
