Contract of Indemnity

INTRODUCTION

The term ‘indemnity’ literally means security against loss. Indemnification refers to the act of being held not liable or being protected from costs by shifting them to another party. If a person is promised by another that he will be protected or compensated in case of loss or damage, he is said to be indemnified.

A contract of indemnity is an express promise to compensate for defined loss or damage used to ensure that a contracting party has an express remedy to correct defects in goods or services delivered under the contract.

OBJECTIVE OF INDEMNITY

The objective of an indemnity clause is to get some work done, it protects the Indemnity Holder from loss or damage upon the happening of contingency. Indemnity is a mere motivational tool.

SECTION 124

As per section 124 of the Indian contract Act 1872- a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”.

Indemnity, in simple words, is protection against future loss.

INDEMNIFIER:The person who promises to save the other is called the Indemnifier

INDEMNITY HOLDER: The person who is compensated is the Indemnity-holder.

Illustration:

A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of ` 200. A is the indemnifier and B is the indemnity holder. When A pays B to cover damages that B had to pay C, and then A has indemnified B.

ESSENTIALS OF INDEMNITY

  1. Indemnity, in simple words, is protection against future loss.
  2. All Contracts of Insurance are Contracts of Indemnity except life insurance
  3. It protects the Indemnity Holder from loss or damage upon the happening of contingency.
  4. It is not a collateral but an independent contract.

The definition of contract of indemnity is not exhaustive. The section sets out a case of an express contract of indemnity but there are implied contracts too. Section 9 of the Indian Contract Act, 1872talks about implied promises which states that, In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied.  

The Indian Contract Act 1872 deals with cases of implied indemnity under Sections 69, 145 and 222. But implied indemnity was recognized for sure by the Privy Council in the case of Secretary of State vs., The Bank of India AIR [1938] PC 191It was held that Express indemnity clause is not necessary in face of implied right to indemnity already existing under the Indian laws.

It is a principle of law that when an act if done a person at the request of another and the act does not seem to be injurious to the knowledge of the person doing the act, the person doing the act has a right to indemnity from the man who requested such an act be done when the act in question turns out to be injurious to the rights of a third party.

Sections 10 and 13 of the Indian Partnership Act, 1932 also deal with principles of indemnity.

RIGHT OF INNDEMNITY HOLDER WHEN SUED

Section 125 of said Act deals with the Rights of Indemnity Holder which are as follows

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor –

  • All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies
  • all costs which he may be compelled to pay in any such suit, if in bringing of defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit
  • all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contract to the orders of the promisor, and was one which it would have been prudent for the promise to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.

RIGHTS OF INDEMNIFIER

After compensating the indemnity holder, indemnifier is entitled to all the ways and means by which the indemnifier might have protected himself from the loss.

CONCLUSION

Indemnity is a legal exemption from the penalties or liabilities incurred by any course of action.A Contract of Indemnity is required because during the performance of a promise a party may not be able to control all aspects of the performance of a promise. He can be sued for the actions of another where the conditions of performance were breached. A party can protect himself by providing that the culpable party will bear the costs and expense for damages, including the costs of a verdict, settlement, or defense of the suit in case of loss or damage. A Contract of Indemnity is merely a way of shifting risk to another by agreement.

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