Contract of Indemnity: An Overview

 

Special Contract

Contract of Indemnity

A contract of indemnity is a legal agreement between two parties. In this agreement, one party commits to compensate the other for any prospective losses or damages.

The objective of entering into a contract of indemnity is to protect the indemnified from the losses.

Example:

An insurance firm in which the insurer and/or indemnifier undertakes to compensate for damages or losses that may be sustained by the insured or indemnifier.

Definitions of Indemnity:

First

Indemnity is a protection against loss, especially in the form of a promise to pay, or payment for loss of money, goods, etc.

Second

Indemnity is security against, or compensation for loss, etc.

Third

An indemnity is a contract expressed or implied to keep a person, who has entered into or who is about to enter, into, a contract or incur any other liability, indemnified against loss, independently of the question of whether a third person makes a default.

Definition of indemnity according to 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 “Contract of Indemnity”. 

A contract of indemnity is a direct engagement between two parties whereby one promises to save another harmless from the result of the conduct of the promisor himself or of any third person.  

Parties in Contract of Indemnity

There are mainly two parties in a contract of Indemnity:

1. Indemnifier

2. Indemnified 

Indemnifier

The person who promises to indemnify is called Indemnifier.

Indemnified i.e Indemnity Holder

The person in whose favor such a promise by indemnifier is made.

Illustration

Let, A is the insurance company and B is the insurance policyholder.

The insurance company promises B to provide his insurance in case, if any car accident happens to him, the insurance company will bear all the expenses of B’s car repairing.

Here, the insurance company is a promisor (Indemnifier).

Policy-holder is indemnified (indemnity holder/promisee).

Types of Indemnity

There are two types of indemnities:

1. Expressed indemnity

2. Implied indemnity

Expressed indemnity

This is a formal indemnification agreement that generally specifies the terms and circumstances that the parties must follow in written, documented, or in any other expressed form.

Example:

Contracts such as insurance indemnity, construction, and agency contracts are examples. 

Implied indemnity

This is an indemnification duty that emerges from circumstances or the actions of the parties concerned, rather than through a formal agreement.

Example:

A commercial connection between an agent and a principal is a good example. When the principal refuses to accept the commodities that the agent provides, the agent has the option to sell them to others; nevertheless, if the agency incurs a loss while selling, the principal is responsible for the loss. 

Insurance and Indemnity 

Contract of insurance is not covered by the definition of Section-124 of the Indian Contract Act 1872. 

Thus, if under a contract of insurance, and insurance promises to pay compensation in the event of loss by fire, such a contract does not come within the preview of Section-124 of the Indian Contract Act, 1872. 

Such contracts are valid contracts as being contingent contracts are defined in Section-31 of The Indian Contract Act, 1872. 

Case Law Example:

In United India Insurance Co. vs. M/s. Aman Singh Munshilal

The cover note stipulated delivery to the consigner. Moreover, on its way to the destination, the goods were to be stored in a godown and thereafter to be carried to the destination. While the goods were in the godown, the goods were destroyed by fire. It was held that the goods were destroyed during transit, and the insurer was liable as per the insurance contract.

Rights of Indemnity Holder

According to Section 125 of the Indian Contract Act, 1872

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

Damages

All damages which he may be compelled to pay in any suit in respect of any matter to which the promisee to indemnify applies.

The indemnity holder will cover those damages from the indemnifier.

Costs

All costs which he may be compelled to pay in any such suit if, in bringing or defending it, he didn't contravene 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 authorised him to bring or defend the suit.

Example:

If an agent spent for the agencies’ court case. Cost of filing the case, cost he spent in proceedings of the court, and cost he spent in defending that case, indemnity holder (agent) will cover them from the indemnifier(principal).

Sums

All sums which he may have 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 which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit. 

Example: 

All sums the promisee/ indemnity holder pays to the third person from his own pocket to compromise something for the principal( promisor/ indemnifier), then indemnifier I have to pay for it and indemnity holder can cover them from indemnifier. 

Rights of Indemnifier

It is a well-known principle of law that where one person has agreed to indemnify another, he will make good the loss and be entitled to all the ways and means by which the person indemnified might have protected himself against himself or reimbursed himself for the loss.

Essentials of Contract of Indemnity

A contract of indemnity is a special kind of contract, it is to protect someone from losses. The principles of the general law of contract contained in Section 1 to 75 of the Indian Contract Act, 1872 are applicable to them while making the contract of Indemnity. Therefore, it must possess all the essentials of a valid contract.

Essential elements for a contract

1. Presence of two or more parties

2. There must be an agreement (the agreement must not have been expressly declared to be void)

3. The agreement must be made for a lawful object

4. The agreement must be made for some consideration

5. Intention to create a legal relationship

6. The agreement must have been made by the free consent of the parties

7. Fulfillment of other legal requirements

Parties required for Contract

Promisor/indemnifier and promisee/indemnified/indemnity-holder are the two parties who must be present and should be competent for the contract.

Protection of loss

The promisee is protected against loss under an indemnity contract. The loss might be caused by the promisor's or someone else's actions.

Importance of Indemnity in Business

Most agreements involving an individual and a business include indemnity; nevertheless, it also applies to corporations and governments, as well as between governments of different nations. This offers financial protection to pay expenditures in the case of carelessness, blunders, accidents, or other unforeseen events that have a significant impact on the business's flow.

One approaches to protect himself from claims or litigation is to get indemnity insurance. Even if the holder is at fault, this insurance protects him from having to pay the whole amount of a settlement. Because litigation is widespread, many corporations need indemnification for their directors and executives. It covers legal bills, court costs, and settlements.

The writer is pursuing a degree of BA.LL.B (Bachelors of legislative law)

From, Department Of Law, Maharshi Dayanand University (Rohtak) Haryana, INDIA.

Reach her at Instagram @sakshiydv1108