Meaning of Contract of Indemnity | Civil Law for Judiciary Exams PDF Download

Introduction

• Contract of Indemnity is a legal agreement where one party commits to compensate another party for any loss incurred due to specified circumstances. It is designed to protect individuals or entities from financial harm resulting from certain actions or events.
• Indemnity, essentially, provides protection against potential damages or losses. It involves one party agreeing to bear the financial consequences that another party may face in specific situations. This concept aims to ensure that individuals are not unfairly burdened with liabilities beyond their control.
• In English Law, indemnity represents a promise to shield an individual from the repercussions of certain actions. This promise can be explicit or implicit and is not restricted to contractual scenarios. It can also arise in relationships like principal-agent or employer-employee relationships.

Definition of Contract of Indemnity

• According to legal authorities, a Contract of Indemnity is a formal or implied agreement to protect a party who is entering into a contract or incurring liabilities, ensuring that they are compensated for any resulting losses, irrespective of third-party actions.
• Black's Law Dictionary explains Indemnity as a right where the entire liability shifts from one party, who may be only technically at fault, to another party primarily responsible. This legal concept is crucial in cases where one party shoulders the financial consequences of another's actions.
• To illustrate, in the case of Adamson v Jarvis, the court ruled in favor of the plaintiff, an auctioneer, who faced legal action due to the defendant's misrepresented ownership of livestock. The defendant was held responsible for indemnifying the plaintiff for the losses incurred.
• The Contract of Indemnity under the Indian Contracts Act 1872 outlines the obligations of the indemnifier, who promises to protect the indemnified party from losses caused either by the indemnifier's actions or those of others. This legal framework ensures fair treatment and financial security in various transactions.

Nature of Contract of Indemnity

• Contracts of indemnity, insurance, and guarantee are based on contingencies.
• A contract of indemnity involves an agreement to compensate for the acts of another party.
• Unlike contracts of guarantee, indemnity contracts involve only two parties.
• The indemnifier voluntarily takes on the primary liability to discharge obligations.
• Most insurance contracts are contracts of indemnity, except for life insurance.
• Life insurance differs as it involves premium payments during one's lifetime for future benefits.

Legal Obligations and Scope:

• Under indemnity, the indemnifier assumes an absolute obligation to indemnify.
• Legal or equitable duties may trigger indemnity responsibilities.
• Indemnity can serve as a remedy in cases of innocent misrepresentation.
• Privity of contract restricts third-party suits against the indemnifier.
• The concept of indemnity has evolved, but challenges in its enforcement persist.

Extent of Liability in Contract of Indemnity

• Section 125 of the Indian Contract Act outlines the extent of liability and the rights available to the indemnity-holder. According to this section, the promisor is liable regardless of whether the promisee makes default. The promisee is entitled to recover damages that he was compelled to pay in a suit for which he was being indemnified, including:
  • All damages compelled to be paid in any suit related to the matter covered by the promise to indemnify.
  • All costs compelled to be paid in any suit, provided the promisee acted prudently and in accordance with the promisor's instructions or authorization.
  • All sums paid under the terms of any compromise of such suit, provided the compromise was not contrary to the promisor's orders and was a prudent decision.
• For instance, in the case of Adamson v. Jarvis, the plaintiff was compensated because he acted according to the defendant's instructions and incurred a loss as a result.
• The extent of liability under indemnity depends on the nature and terms of the contract, and the rights of the indemnity-holder are not limited by the provisions of the Act, as held in Khetarpal Amarnath v. Madhukar Pictures.
• However, indemnity cannot be implied in certain situations, such as when a person executes a bail bond, as ruled in Mehrauli v. Sariatulla.
• Moreover, indemnity cannot be claimed for consequences of an intentional wrongful act, as seen in Geismar v. Sun Alliance and London Insurance Ltd, where the court held that an assured cannot claim indemnity against the consequences of intentionally failing to declare items to customs.
• In summary, the extent of liability under indemnity depends on the specific terms of the contract, and certain legal principles apply to determine the rights and obligations of the parties involved.

Commencement of liability of the indemnifier

• When does the indemnifier become liable to pay, and under what circumstances can the indemnity holder recover the promised indemnity? Traditionally, according to the original English Rule, the indemnifier was only liable to pay once the indemnity holder had suffered an injury or loss, following the maxim "you must be damnified before you claim to be indemnified." However, this rule has evolved over time.
• In contemporary times, the indemnifier is expected to make payment as soon as the liability occurs, without waiting for the indemnity holder to claim reimbursement. This shift in approach was highlighted in the case of Liverpool Mortgage Insurance Co, where it was emphasized that indemnity is not just about reimbursing money paid but about saving from loss due to the liability against which indemnity was given.
• Previously, under English common law, the indemnified could not take action until an actual loss had been incurred. This meant that if a suit was filed against the indemnified, they had to wait until judgment to sue for indemnity, placing the burden upon them. However, courts of equity intervened and held that if the liability was absolute, the indemnifier had to pay off the claim or provide sufficient funds to cover it when the claim was made.
• The principle of indemnity before payment was established in cases like Osman Jamal and Sons Ltd. v. Gopal Purushottam, where the court ruled that indemnity does not necessarily require repayment after payment but necessitates that the party to be indemnified should never be called for payment.
• However, there are instances where the liability arises only when certain conditions are fulfilled. For example, in a hire purchase agreement, the indemnity may not become operative until a condition like providing a log book is fulfilled.
• In summary, the indemnifier's liability arises when the indemnified suffers a loss, and the indemnity holder can recover the promised indemnity once the loss becomes absolute or certain, as established by case law such as Chand Bibi v. Santosh Kumar Pal.

Conclusion

• The Indian Contract Act, 1872 encompasses various provisions that govern contracts and agreements in India. It addresses the rights and obligations of parties involved in a contract, providing a legal framework for their interactions.
• In the context of the Indian Contract Act, 1872, the rights of the indemnifier may not be explicitly defined, leading to some ambiguity.
  Despite this, the indemnifier holds crucial rights based on principles of natural equity and general legal application. These rights can be likened to the relationship between a creditor and a debtor, where the indemnified party is entitled to securities from the indemnity-holder. Similar to a surety, the indemnified party can claim the benefits of all securities possessed by the creditor.
• The term "indemnity" carries a broad yet nuanced meaning within legal contexts. While the English definition of indemnity is expansive, covering losses from any cause, the Indian Contract Act provides a more specific definition. Indian law on contractual indemnities has diverged from English law in certain aspects but maintains significant similarities. These differences do not overshadow the fundamental principles shared between the two legal systems.
• It is essential to compare and contrast the interpretations of indemnity in English law and the Indian Contract Act. While there are divergences, the core principles of indemnity and the rights of the indemnifier remain consistent across jurisdictions.