Indemnity is a legal concept expressed in the form of a contract or mentioned as a clause in commercial contracts, in which a party promises to compensate the indemnified party for losses incurred as a result of the promisor’s or any third party’s actions. It can also be used to cover expenses incurred in legal proceedings if the indemnified person is sued by a third party. As a result, it is a contract that is contingent on losses occurring. As an example, “A agrees to compensate B for the consequences of any legal action taken by C against B about a specific sum of rupees.” This is an indemnification contract.”
In India, indemnity contracts are governed by the Indian Contract Act of 1872. The contract of indemnity is defined in Section 124[i] of the Indian Contract Act of 1872 as “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.” In the definition, indemnity is a term that can be broadly and broadly interpreted to mean any express or implied promise by one party not to allow the other party to suffer losses. The loss in question should have been caused solely by the actions of a “human agency.” In other words, it cannot include any loss resulting from unforeseeable circumstances, an unavoidable accident, or an act of God.
A contract of indemnity, according to English law, is “a promise to save a person harmless from the consequences of an act.” In English law, indemnity has a broader definition than it does in Indian law. It includes a contract to protect the promisee from any loss, whether caused by human agency or another event such as fire, accident, earthquake, or other natural calamities. Furthermore, insurance (other than life insurance) falls under the contract of indemnity under English law.
If the liability incurred is absolute and the contract of indemnity covers it, the indemnity holder has the right to sue the promisor for specific performance.
- Three Rights Granted To Indemnity Holders When Sued:
Section 125[ii] of the Indian Contract Act of 1872 outlines three rights granted to indemnity holders when sued. In an indemnity contract, the promisee has the right to recover from the promisor if he acts within the scope of his authority.
(1) any damage that he (or she) may be compelled to pay in any suit arising out of any matter to which the promise to indemnify applies;
(2) all costs which he (or she) may be compelled to pay in any such suit, if in bringing or defending it, he did not contravene the promisor’s orders, 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;
(3) all sums paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor and was one that the promisee would have made in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.
III. Rights of Indemnity Holder:
These rights can only be exercised if the indemnity holder is sued. These three rights are as follows:
- Damages: The indemnity holder has the right to sue for the damages he was forced to pay in a lawsuit. The indemnifier is then obligated to pay the legitimately agreed-upon damages. Furthermore, the indemnity-holder may recover all damages paid by the indemnity-holder to any third party or the indemnifier himself.
The court held in Parker vs. Lewis[iii] that “…if a person has agreed to indemnify another against a particular claim or a particular demand, and an action is brought on that demand, [indemnified] may then give notice to the [indemnifier] to come in and defend the action, and if he does not come in, and refuses to come in, [indemnified] may then compromise at once on the best terms he can, and then bring an, On the other hand, if [indemnifier] does not trust the [indemnified] with the defense to the action, he may, if he so desires, continues to defend it, and then, if the verdict is obtained against him, and judgment signed upon it…
This dictum, however, directed the defendant to be liable to indemnify in the case of an express indemnity contract. In other words, the court held that if the indemnified filed a claim for damages against the indemnifier or agreed to settle the suit, the indemnifier would be obligated to compensate regardless of whether the case was decided in his favor or not. Even if the suit is further appealed, the indemnifier is still obligated to pay as per the contract.
- Cost: The indemnified has the right to claim costs incurred while defending a lawsuit, provided that he/she acts prudently and not against the promisor’s order or authority.
- Sums: Amount paid in case of compromise of the suit can also be recovered, without contravening the orders of the indemnifier. For this arrangement, the indemnifier must act in good faith and his/her aim must not be to deceive the indemnifier. The bargain must also be reasonable and not immoral. In other words, anything more would be an undeserved windfall for one party and a penalty for the other.
To summarise, an indemnity contract is an effective tool for protecting and securing a party from losses. The indemnified party is given an advantage in that they do not need to prove the causation of the event or its proximity to the promisor’s or any third default; the party’s simple occurrence is sufficient to claim damages. The party may also seek damages for losses incurred as a result of the breach of contract. All of this has ensured that the indemnified party is unaffected by the consequences of any event that causes harm.
* Harshita Malviya, Final Year Law Student, Banasthali Vidyapeeth.
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