Under Indian Contract, section 124 defines a contract of indemnity. A legally binding agreement exists when one party guarantees the other that they will protect him from any harm that may come to him.
For example: the simplest way to understand the indemnity contract is to look at the insurance contract. The insurance company made a contract with their clients that they would suffer the loss on behalf of their clients. Like the car insurance.
Nature of indemnity
The nature of indemnity is contingent. The main purpose of the contract of indemnity is to protect from uncertain future events. The contract of indemnity is similar to all other contracts where you should follow all the requirements for a valid contract.
Types of indemnity
The indemnity contract has two categories of parties:
- Indemnifier-: The promise is the one who agrees to pay for the other party’s loss.
- Indemnified-: The person for whom the promise is made is considered as indemnified.
Condition for the contract of indemnity
Promise
Under this one party offers the condition and the other party accepts that condition is called acceptance. After accepting the condition it becomes a promise. The one who made the promise is known as the promisor and who accepted the promise becomes the promisee.
Promise to pay losses
Under the contract of indemnity, the promise must be made by the promisor who accepts to pay the losses of the promisee.
Express or implied
It is the type of contract given under contract law. The contract of indemnity can be expressed as well as implied. The term express refers to a written or verbal agreement whereas, “implied” refers to an agreement formed by parties’ action
There must be a loss incurred
Under this there is a condition where the loss must be incurred by the promise, if there is no loss the promise is not liable to pay.
Lawful objects and consideration
The contract of indemnity is only made for the lawful matter and lawful consideration. It is not done for the illegal act or any illegal conduct that is against the public policy. For the contract of indemnity, there must be lawful objects and lawful consideration.
Types of indemnity
There are 2 types of indemnity under the Indian Contract Act which are -:
Express indemnity
The express indemnity is known as written indemnity. In this, all the terms and conditions are mentioned in a contract and also the rights and liabilities of both the parties are made in an agreement. For example- insurance contracts, agency and construction contracts, etc.
Implied indemnity
The implied indemnity is not in written form it is based on the conduct of the parties. For example: the master-servant relationship. For the losses, the master is liable to indemnify on behalf of his servant.
Case law
There is a landmark Judgment, Adamson vs. Jarvis 1872
In this case, there is the plaintiff who is an auctioneer and sold goods on the instruction given by his master. Later on, it came to the knowledge that the owner was not the real owner. Then the real owner sued the plaintiff. After that, the plaintiff sued the master for the losses incurred by him. The court held that the master should be liable to pay the damages because the plaintiff was working on the instruction of his master and it was an implied agreement between them.
Special provision for implied indemnity
Section 69 of the Indian Contract Act, 1872. When a person pays the money on behalf of any other person (that person is legally bound to pay) then he is entitled to reimburse the money to them. For example-: A is a shopkeeper and that shop is on lease. Now when the time came to collect the monthly rent A was out of town and B paid the rent on his behalf. So A is liable to reimburse the money to B.
Under section 145 of the Indian Contract Act, it deals with the right of surety in a contract of guarantee. if the surety makes the payments on the principal debtor’s behalf, the debtor is responsible for covering the loss by repaying the sum. For example-: a takes a loan from a bank and B gives the guarantee. Now A fails to pay the dues and B pays the amount on his behalf now A is liable to pay B for the loss incurred by him.
Types of the contract of indemnity
Broad indemnification
When the indemnifier promises to bear the losses incurred to him by all the parties including the third party. He will pay for the loss incurred due to the third party’s fault.
Intermediate indemnification
Under this type of contract, the indemnifier promises to pay only if the losses are incurred due to the promisor or promise. He will not pay if the loss is incurred by the third party.
Limited indemnification
Under this type of contract, the indemnifier promises to pay only if the loss is incurred due to his act. He will not pay on behalf of Promise or any other third party.
Right of indemnity holder
Section 125 of the Indian Contract Act, covers the rights of the indemnity holder or indemnified. When he sued because of the conduct of promissory or by the other party. There are 3 rights-:
Right to receive all damages
Under this, the indemnity holder has to pay all the losses incurred due to the other party. He can file the plaint under the civil procedure code in the court with all the facts. After that, the court will decide based on the evidence.
Right to receive all cost
The indemnity holder can sue the indemnifier if he does not breach the terms and conditions and also if he proves that there is no loss on his end then the party providing indemnification is required to reimburse the indemnity holder for any damage that was sustained throughout the legal process.
Rights of indemnifier
When the indemnifier provided all the compensation for the losses caused to the indemnity holder. The indemnifier has all the rights to possess all the methods and resources that can save him.
Indemnity and damages
The indemnity and damages are very important remedies for the breach of contract. It is important in commercial contracts. There is some difference between them. These are-:
- The indemnity covers all the losses arising due to the conduct of the other party. However, the damages can only be claimed by the party at the time of breach of contract.
- The concept of indemnity is to restore the person from the losses. Profit and loss are not involved. The monetary losses can exceed or fall the actual loss that occurred.
Conclusion
The concept of indemnity plays an important role and safeguards against the losses arising from the various transactions and agreements. The indemnity provides a safeguard from uncertain future circumstances. The Indian Contract Act, of 1872 defined indemnity by three elements: promise to compensate when a loss is incurred by the party or by a third party. Whether it is expressed or implied a contract of indemnity lawfully provides the losses that occurred.
