THE CONCEPT OF INDEMNITY UNDER INDIAN CONTRACT ACT

Meaning of Indemnity

The term Indemnity is derived from the Latin word’ indemni’s which means “without loss” or “uninjured”.

According to the Section 124 of Indian Contract Act, 1872, indemnity means where one party promises to another party to save the other party from any damages, loss or by the conduct of any other person caused to him by the contract of the promisor himself. In short, an agreement to pay on behalf of another party under specified circumstances.

Contract of insurance is the best example of contract of indemnity, where companies assure clients while making agreement that they will suffer the loss or bear the loss.

There are 2 parties involved in the Contract of Indemnity, the parties are:

  1. Indemnifier- Somebody who compensate for the loss or damages received.

  2. Indemnity-holder/indemnified- the other party who is recompense against the loss suffered.

In the case of Mangladha Ram v. Ganda Mal, the lender's promise to the vendee to be answerable if the land’s title was disturbed was held to be one of indemnity.


Essentials in the contract of indemnity

Two parties

There must be more than one party in the contract of indemnity. Other parties must have the ability to contract; it means the other parties should not be minor, unbalanced or lunatic.there can be multiple parties according to the situation.


A Promise

The one party must offer the prerequisite to the other party and the same should be accepted by another party. When the offer is accepted by the party on the same condition, it is known as acceptance. After accepting the offer it becomes a promise.

The party who made the promise becomes the promisor and the party which accepted the promise becomes the promisee.


Promises to pay losses

It is the important part of the contract of indemnity that “the promise must be made by the promisor to pay the damages of the promisee”.


Expressed or Implied

The contract of indemnity can be expressed or implied. There are two types of contracts given under contract law:


Express contracts

This is also known as written indemnity. In this all the terms and conditions of the indemnity are envisaged circumstantially in a contract. The rights and liabilities of both parties are distinctly embarked in the settlement. This type of contract includes insurance indemnity contacts, agency contracts etc.


Implied contracts

It refers to that indemnity where liability appears from the facts and the conduct of the parties involved. This is not a written contract.

The basis of this type of indemnity is the master-servant relationship.

There are two types of indemnity given in the Indian Contract Act:

The landmark judgement of implied indemnity is of Adamson v. Jarvis 1872 in this case, plaintiff was giving wrong information about him that he is the auctioneer and sold certain goods but later on it was found out wrong and the owner of the goods sued the plaintiff. The plaintiff in turn sues the master to recover the damages. The court held that the master will be answerable to identify the auctioneer as it was apparent from the conduct that he was working under his instructions and there was implied indemnity contract between them.


Social provisions of implied indemnity

Section 69 of Indian Contract Act

According to the section, if a person pays the money on the behalf of any other person ( which is legally bound to pay) then he is enabled to recompense them.

For example if A is running a shop on rent. When the owner comes to collect the monthly rent, B oats the rent on the behalf of the A. Now A is liable to reimburse B.


Section 145 of the Indian Contract Act

It deals with the right of assurance in the contract of guarantee. It states that if the guarantor pays the money on behalf of the principal debtor, then the debtor is liable to indemnify him by recompense.



Section 222 of the Indian Contract Act

This section deals with the liability of a principal to indemnify his agent to make good all the losses that he occurred while working in the authority given to him.


Rights incurred by the indemnity holder

Section 125 of the Indian Contract Act describes the right of an indemnity holder


  • Any payment he was voluntary to pay in a matter or a suit where the guarantee of indemnifier extended will be recoverable by the indemnity holder. For example, X and Y will agree that if Z sues Y in a specific matter, X will indemnify Y.

  • Z has sued Y, Y has been compelled to reach a settlement. According to the contract, X would be responsible for all payments made by Y to Z in connection with that matter.

  • Any price that the indemnity holder has to pay to the third party is also defensive.

However the indemnity holder should have behaved wisely and in accordance with the indemnifier's instructions.

  • Any amount charged under any suit or agreement, as long as it was not against the indemnifier’s orders, are also recoverable by the indemnity holder.

Rights of indemnifier

  • After the compensation given by indemnifier to the indemnity holder for all the damages that occurred, it is the right of the indemnifier that he can acquire any procedure or measure through which he can save himself from the loss

  • He will indemnify the indemnity holder if there is any damages caused to him.


Conduct of the promisor or other party

The damages caused to the promisee should be done by:


  • The conduct of promisor- the promisor is accountable to pay for the loss if he has done something which accordingly caused loss to the promise.

  • Conduct of other parties- the promisor is also accountable in the contract of indemnification if the loss caused to the promisee is due to any other party also, if any other party has done something which may caused loss to the promisee, the promisor has to pay the losses.

Nature of Indemnity

The contract of indemnity is emergent in nature and it basically provides a safeguard principle for future uncertainties. A contract of indemnity is the same as any other contract and it is necessary to follow all the requisites of a valid contract.


Types of the contract of the indemnity

There are three main types of indemnity which can be done expressly or impliedly as well.

The types of the contract of indemnity are:


Broad indemnification

In the broad indemnification, the indemnifier promises to pay the damages caused by all the parties including the third party. He promises to pay all the damages even if the third party is completely at loss.


Intermediate indemnification

In the intermediate section, the indemnifier promise to pay all the losses occurred due to the act of promisor and promise only. In this situation, the contract of indemnity does not encompass the losses occurred due to the act of the third party.


Limited indemnification

In this limited indemnification, the indemnifier promises to pay all the damages incurred by his act only. Here, the contract of indemnity does not encompass the damages occurred due to the conduct of the third party or promisee.


Conclusion

Despite the many provisions in the Indian Contract Act, 1872, it is still equivocal when it comes to rights of the indemnifier. In an indemnity deal, one party is responsible for any harm or loss occurred by the other party as a result of the promisor’s or other party action.

A simple indemnity provision in a contract does not always resolve liability issues because the law discourages people from attempting to transfer their own liability onto others or trying to escape liability. Liability issues will never be solved by a simple indemnity clause.


The law is not on the side of those who want to avoid the liability or seek exemptions from their conduct. The main reason is that a careless, irresponsible party should not be able to carry all the losses and damages made against him to another or non-negligent party.

The indemnified party is given an advantage that they need not to prove the causation of the event, or its proximity to the default of the promisor or any third party, but simply its occurrence is enough to claim damages.

The party is also empowered to claim damages abide by the outcome of breach of contract. The main purpose is to make sure that the indemnified party comes out unaltered from the effect of any event bringing harm.


The Law Commission in its recommendations (in 13th report, 1958 ) has justified that “ the rights of the indemnity holder should be more fully defined and the remedies of an indemnity holder should be indicated even in cases where he has not been sued”.

Since there is constantly a scope for modification in the statutes as per changing requirements of the society over time, therefore the provisions of the agreement of indemnity needs to be more explicitly framed and unambiguous manner so that the rights of either party to the contract is not violated simply because the concerned law is silent upon that.



This article is written by Rituja Gupta of Law College Dehradun.

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