CONTRACT OF INDEMNITY

Updated: Jun 29



Section 124 ‘Contract of indemnity defined’


A contract of indemnity involves one party promising the other party to make good to its losses. These losses may arise either due to conduct of other person or that of somebody else.

To indemnify someone means that one party will compensate the other in case it suffers any loses.


NATURE OF INDEMNITY


Indemnity contract can either be expressed or implied. Parties may expressly create such a contract as per their own terms. The nature of circumstances may create indemnity obligations impliedly.

Eg. A does an act at the request of B. if B suffers some losses and A offers to compensate him, they impliedly create contract of indemnity.


INSURANCE OF INDEMNITY


Almost all insurances other than life or personal accidents are included.

· if the insurer’s promise to indemnify is an absolute one, a suit can be filed immediately on the failure of performance irrespective of the loss.

· If the indemnity holder incurred liability and the liability was absolute then he\she will be entitled to call upon the indemnifier to save him from that liability by paying it of himself.


ENFORCEMENT OF INDEMNITY


The liability of the indemnifier commences as soon as the loss the indemnified becomes absolute, certain or imminent. It was decided in the landmark judgement of Ganjan Moreshwar vs. Moreshwar Madan Mantri.


INDEMNITY AS PER ENGLISH LAW


Court of indemnity in UK uses a maxim “you must be damnified before you can claim to be indemnified” It means until & unless the promise has not undergone any injury, he cannot claim indemnity. However, such laws where causing trouble so The Court of Equity removed the principle of being damnified in order to be indemnified. If such situation arises then the indemnifier is liable to indemnify for the promise without the happening of actual loss. Indemnity is not necessarily given by repayment after payment. Indemnity requires that the party needs to be indemnified in the first occurrence shall never be called upon to pay.

The indemnity doesn’t merely mean to reimburse in respect of the money paid, but to save from the loss in respect of the money paid, but to save from the loss in respect of the liability against which the indemnity has been given otherwise, indemnity will be worthy little if the indemnity holder is not able to pay in the first instance.


INDEMNITY AS PER INDIAN LAW


As per section 124 of Indian Contract Act, 1872 indemnity has a limited scope since indemnity holder is only compensated in case loss occurred due to human agency. It does not include any other event or accident for the same. As of now India does not have any specific provision for enforceability of the contract of indemnity. Indian law only covers express contract of indemnity whereas implied contracts are left at the mercy of judiciary.

The basic difference in English law and Indian law is that losses are compensated against human conduct and events in English law whereas in Indian law it is only limited to the extent of human conduct.





Section 125 ‘Right of indemnity holder when sued’


An indemnity holder acting under the scope of his authority is entitled for following rights


· Right to recover damages he\she is entitled to recover all damages which he might have been compelled to pay in any suit in respect of any matter covered by the content.

· Right to recover costs – he\she to recover all costs incidental to the institution and defending of the suit.

· Rights to recover sums paid under compromise – he\she is entitled to recover all amounts which he had to pay due to the terms of the contract of such suit. However, the compensation must not be against the directions of indemnifier. It must be prudent and authorized by the indemnifier.

· Rights to sue for specific performance - he\she is entitled to sue for specific performance if he has induced absolute liability and the contract covers such liability.


RIGHTS OF INDEMNIFIER


Section 125 of the Indian Contract Act, 1872 lays down the rights of the indemnified and is quite silent about the rights of indemnifier. It seems indemnifier has no rights but only liabilities towards the indemnified. Well if see section 141 that deals with the right of the surety, we can easily conclude that the indemnifiers right would also be the same as that of surety. When one person has agreed to indemnify the other, he will, on making good the indemnity be entitled to succeed to all ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss

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