Indemnity means “to make good the loss” or “to compensate for the loss”. In section 124 of the Indian Contract Act 1872, contract of indemnity is defined as the contractual duty of one person to indemnify or compensate for the loss or damage caused by himself or the other party in future. It is also known as indemnification. Contract of indemnity is a form of contingent contract. The whole concept of contract of indemnity depends upon the contingency of the happening of the loss or damage.
An indemnity is like saying, “ Let him have the goods, I will be your paymaster”.
1. If P purchases some goods from S’s shop. Q promises to pay in case P will not be able to pay S in future. This is the Contract of indemnity.
1. Suppose, S contracts with T. According to which S has to sell a plot to T after 6 months. A week later T approached S and insisted on selling him the same plot to him(T). Now, T promises to compensate for all loss occurring to S, due to the selling of the plot.
Here, the contract forming between S and T is called contract of indemnity, where S stands as indemnifier and T as indemnity holder or indemnified.
Parties to contract of indemnity
Indemnifier is the person who indemnifies or compensates in case of loss by himself or the other party in contract of indemnity.
Indemnified or the indemnity holder is the person to whom the compensation is given by the indemnifier in case of loss or damage in contract of indemnity.
Section 124 of the Indian contract act deals with the definition of contract of indemnity and the section 125 of the Indian contract act deals with the rights of indemnity holder when sued.
The primary liability will be on the indemnifier in the contract of indemnity.
One most common example of contract of indemnity is between a tenant and a landlord.
Essentials of contract of indemnity
· There must be a loss or damage.
· The loss must be caused by the promiser or any other person.
· there must be two parties
2. indemnified or indemnity holder.
· According to section 10 of the Indian Contract Act 1872, it must contain all the essentials of a valid contract.
· The contract may be expressed or implied depending on the circumstances of the case.
If the promises are made in terms of written or spoken words then the promises are expressed. Example, insurance indemnity contracts, construction contracts, agency contracts, etc.
If the promise is made otherwise then the promise is implied. Example, principal agent relationship.
Implied contracts are not covered under the section 124 of the Indian Contract Act, 1982.
In the case of Secretary of State v. The Bank of India, the concept of implied indemnity was identified, it was held that if a person doing the act is requested by another person of tortious mind to injure someone and if the doer is innocent and doesn’t know the intention of the person then he will be entitled to be indemnified by the person who requested the act for compensation.
In the case of Adamson v. Jarvis, The plaintiff is an auctioneer of cattle who sold them on the instructions of defendant. Later it was found that, the cattle, the auctioneer was selling doesn’t belong to the defendant who was giving instructions. Then the plaintiff sued the defendant. It was held after defendant was liable for the losses of the plaintiff and has to compensate to the plaintiff.
In the case of G. Moreshwar v. M. Madan (1942) 44 BOM LR 703, It was held that the contract of insurance covers under the contract of indemnity, although not clearly mentioned about insurance in section 124 of the Indian Contract Act 1872.
Under English law, the definition of contract of indemnity covers the damages or losses done by fire or by some other accidents beyond one’s control along with the damages or loss caused by the indemnifier or the third party. Contract of indemnity has wider scope in the English law. The Indian law only covers the loss caused by human agency and not by the non human like fire, flood, etc.
The life insurance is not covered under the contract of indemnity either in the Indian law or the English law.
Some special cases of implied indemnity
· Under Section 69, “a person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to reimbursed by the other”.
· Section 145, provides “in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully”.
· Section 222, given that “the employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him”.
Benefits of the contract of indemnity
· Risk can be shifted.
· Sometimes the indemnification is greater than the actual loss.
· sometimes it’s more difficult to prove the damage than proving “out of pocket” losses for indemnification.
Contract of indemnity is a source to run away from the risk of any course of action. Except for life insurance, all the other insurances are covered under contract of indemnity although it’s not clearly mentioned in the Indian Contract Act , 1872. Indemnification is a promise by one to the other in case of any financial losses occurs to the other. One party hold harmless the other in simple words in indemnification. indemnification is a type of insurance when one party saves the other from losses or damages. Some examples are corporate officers, public officials and board members, who often requires protection by the contract of indemnity when they perform their work. In insurance the liability has a wider scope than that of the liability of the indemnity.
· The Indian Contract Act, 1982.
· Secretary of State v. The Bank of India, (1938) 40 BOMLR 868.
· Adamson v. Jarvis, (1827) 4 Bing 66.
· Oriental fire and general insurance co. V. Savoy solvent oil extracted ltd. (1997) 6 ALD 1.
· G. Moreshwar v. M. Madan (1942) 44 BOMLR 703.
· Contract and Specific Relief, Eastern Book Company, 12th Edition, Avtar Singh.