December 6, 2021

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All you need to know about contract of indemnity

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This article is written by Gauri Atreja, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Zigishu Singh (Associate, LawSikho) and Ruchika Mohapatra (Associate, LawSikho).

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Indemnity is a type of compensation that falls under the umbrella of compensation. In addition, an indemnification agreement regulates remuneration in the event of a contract. The indemnifier accepts the duty to indemnify voluntarily, and shockingly, even a distant risk of catastrophe will oblige him. The misfortune should occur as a result of the indemnifier or any outsider’s actions. A contract of indemnity is a contract that keeps a person who has engaged into or is about to enter into a contract or incur any other liability, insured against loss, regardless of third-party default or not.

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Indemnity is insurance that protects you from potential losses. The word indemnis comes from the Latin word indemnis, which means ‘unharmed’ or ‘loss-free.’ In its broadest definition, it refers to reimbursing a person for any losses he or she has suffered. The need to pay occurs for a variety of reasons, including an agreement, duties originating from the parties’ relationships, or statutory requirements.

An indemnity agreement should also have the basic elements of a contract, such as free assent, lawfulness, and so on. As a result of indemnification, the promisor is obligated to protect the promisee from any misfortune caused by the promisor’s own actions or the actions of a third party. Due to the rule that one person cannot complete all exchanges on their own, he should have the opportunity to work with his business where he is addressed by someone else when managing a third individual.

In English law, indemnification refers to a commitment to protect a person from the consequences of their actions, which might be explicit or implicit. Indemnity is not restricted to contract cases. Between a principal and an agent, an employer and an employee, and so forth, an indemnification right may exist.

In a broad sense, indemnification might be defined as “protection from calamities.” Indemnity is a type of insurance that protects you from misfortune. Section 124 of the Indian Contract Act, 1872, which lies under Chapter VIII of the Act, represents an indemnity agreement. An agreement of compensation is defined in this section as an agreement “by which one party swears to safeguard the other from the misery caused to him by the promisor’s agreement, or by the lead of some other individual, is known as a “contract of indemnification.”

According to Halsbury, Indemnity is an express or implied contract that protects a person who has entered or is going to enter into a contract or incur any other duty from loss, regardless of whether a third-party default.

Black’s Law Dictionary defines Indemnity in numerous ways:

As was described in Moorhead v. Waelde, “A contractual or equitable right under which the entire loss is shifted from a tortfeasor who is only technically or possibly at fault to another who is primarily or actively responsible.” 

The facts in Adamson v Jarvis serve as a superb illustration of the concept of Contract of Indemnity. The defendant gave the plaintiff, an auctioneer, instructions to sell particular livestock. After some time, the plaintiff discovered that the defendant did not possess the livestock in the first place. Because the plaintiff was the auctioneer, the livestock owner sued him, and the plaintiff sued the defendant for compensation for the loss he had suffered as a result of the defendant’s activities. The plaintiff, having acted on the defendant’s request, was entitled to presume that if what he did turned out to be wrongful, he would be compensated by the defendant, according to the court.

A contract of indemnity is defined by Section 124 of the Indian Contract Act as “a contract by which one party promises to rescue the other from loss caused to him by the promisor’s behaviour, or by the action of any other person.” The indemnifier is the person who provides the indemnity, while the indemnity-holder or indemnified is the person who receives the indemnification.

A contract of indemnification can be express or implicit, depending on the circumstances, though implied indemnity does not appear to be covered under Section 124 of the Indian Contract Act.

A broker in possession of a government promissory note forged an endorsement on it and gave it to a bank. The bank applied for and received a fresh promissory note from the Public Debt Office in good faith. Meanwhile, the genuine owner filed a conversion lawsuit against the Secretary of State, who then sued the bank on the basis of an implied indemnification. It was decided that: “ When a person performs an act at the request of another, and the conduct is not inherently tortious to the knowledge of the person performing it, and the act injures the rights of a third person, the person performing the act is entitled to an indemnification from the person who requested that it be done”. [Bank of India v. Secretary of State].

One of the types of contracts is an indemnification contract. The same principles that apply to contracts, in general, apply to such transactions, therefore laws like free consent, the legality of the object, and so on are equally applicable.

When a party’s permission is obtained through coercion, fraud, or misrepresentation, the agreement is voidable at the request of the person whose consent was obtained in this manner. The contract’s object must be legal, according to the Contract Act’s requirements. Depending on the provision of the law to which it is subject, an agreement whose goal is contrary to the law or to public policy is either unlawful or void.

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The question is whether the indemnifier’s liability begins when the indemnified has actually incurred loss or when there is a reasonable expectation that the indemnified will.

In cases like Shankar Nimbaji v Laxman Sapdu and Chand Bibi v Santosh Kumar Pal, the former perspective was held. The plaintiff filed a complaint against defendant no. 2 to recover Rs. 5,000/- plus interest from him through the sale of a mortgaged property and, in the event of a deficit, for a decree against his inheritance, which was in the hands of his sons. Defendant No. 2 died while the litigation was pending. Plaintiff cannot sue the defendant in the expectation that the revenues from the sale of the mortgaged property will be insufficient and that a deficit will result. [Laxman Sapdu vs. Shankar Nimbaji].

While purchasing specific property, the defendant’s father agreed to pay off the plaintiff’s mortgage obligation and vowed to indemnify him if they were found guilty of the debt. Plaintiff brought a lawsuit to enforce the covenant after the defendant’s father failed to pay the mortgage loan. The suit was deemed premature in terms of the cause of action on indemnification because the plaintiff had not yet sustained any damages. [Santosh Kumar Pal vs. Chand Bibi].

In the following cases, the courts had a different point of view

The plaintiff undertook to operate as a commission agent for the defendant firm for the purchase and sale of “Hessian” and “Gunnies,” charging a commission on all such sales, and the defendant firm committed to indemnify the plaintiff against all damages arising from such transactions. The plaintiff company bought some Hessian from a man named Maliram Ramjidas. The defendant company failed to pay for the Hessian or accept delivery. Then Maliram Ramjidas resolved it for a lower price and sued the plaintiff company for the difference in damages. The plaintiff company fell into liquidation, and the liquidator sued the defendant firm to recover the amount claimed by Maliram under the indemnification agreement. The defendant maintained that the plaintiff was not allowed to maintain the suit under indemnity because they had not yet paid Maliram any money for their liability. It was found to be negative and in favour of the plaintiff, with the directive that any money obtained from the respondent firm be paid to Maliram Ramjidas. [Gopal Purushotham v. Osmal Jamal & Sons Ltd.]

Following the landmark judgment in Gajanan Moreshwar v Moreshwar Madan Mantri, it is well known that the indemnifier’s liability begins when the indemnified loss becomes absolute, certain, or impending. The promisee is not required to compensate for the loss.

Despite its various provisions, the Indian Contract Act of 1872 is still ambiguous when it comes to indemnifier rights. Nonetheless, the promisor is not diminished by the lack of such a provision. These rights are based on natural equity and have a broad scope, and they are an important aspect of indemnity law. According to Jaswant Singh v. Section of State, the indemnifier is to the indemnified in the same way that a creditor is to the debtor, i.e., the indemnified is entitled to the indemnity-securities holder’s in the same way as a creditor is to his major debtor.

It was decided that the indemnifier’s rights are identical to those of a surety; a surety is entitled to the benefits of all securities owned by the creditor. 

It is reasonable to assume that the phrase indemnity has both broad and narrow applicability. The English concept of indemnity is broad enough to cover a promise of indemnification against loss occurring from any cause, while the Indian Contract Act’s definition is much more limited. In some ways, Indian law on contractual indemnities has deviated from English law and taken its own route. However, their commonalities vastly outnumber their differences.

  1. http://www.ejusticeindia.com/contract-of-indemnity-nature-and-the-scope/

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