Meaning of Contract of Indemnity - Judiciary Exams PDF Download

Contract of Indemnity Summary

• Definition of Indemnity:

  • Indemnity is a form of protection against potential losses or damages.
  • It involves compensating an individual for any losses incurred.
  • Liability for indemnity can arise from contractual obligations, statutory requirements, or relationships between parties.

• English Law Perspective:

  • In English Law, indemnity is a promise to shield a person from the consequences of an action, whether expressed or implied.
  • It extends beyond specific cases and can arise in various relationships like principal-agent or employer-employee.

• Contract of Indemnity Definition:

  • A Contract of Indemnity, as per legal definitions, is a promise, express or implied, to protect an individual who has entered into or is about to enter into a contract or incur a liability, from losses, irrespective of the actions of a third party.

• Illustrative Examples:

  • In the case of Adamson v Jarvis, an auctioneer sued a client for indemnity when the client instructed the auctioneer to sell cattle he did not own.
  • Instances like Secretary of State v Bank of India Ltd and Starkey v. Bank of England highlight how indemnity can be implied and enforced in various scenarios.

• Indian Legal Framework:

  • The Indian Contracts Act 1872 defines and regulates Contract of Indemnity.
  • Section 124 of the Indian Contract Act outlines a Contract of Indemnity as a promise to save one party from losses caused by the promisor's conduct or that of another person.
  • Key terms include the indemnifier (provider of indemnity) and the indemnity-holder (recipient of indemnity).

Nature of Contract of Indemnity

• Contingent Nature of Contracts

  Contracts of indemnity, insurance, and guarantee are contingent contracts, meaning they are based on certain events happening or not happening.

• Functionality of Contracts of Indemnity

  Contracts of indemnity serve to compensate a creditor in case a third party fails to fulfill their obligation. They make the indemnifier primarily liable for the acts of another party.

• Difference Between Indemnity and Guarantee

  A key distinction between contracts of indemnity and contracts of guarantee is that indemnity exists only between two parties, while guarantee involves three parties.

• Insurance as Indemnity

  Most insurance contracts are contracts of indemnity, except for life insurance. Life insurance, although not categorized under indemnity contracts, operates on a different principle of premiums and benefits upon death or maturity.

• Obligations and Scope of Indemnity

  Under indemnity, the indemnifier assumes a direct obligation to settle liabilities. Indemnity can arise from legal duties or equitable obligations. It can also be a remedy in cases of innocent misrepresentation.

• Legal Interpretations and Recommendations

  Despite changes in indemnity laws, the concept still has limitations. The Law Commission of India has expressed concerns about the enforcement and interpretation of indemnity contracts. Recommendations for improvement have been incorporated into the law to address ambiguities.

Extent of Liability in Contract of Indemnity

Section 125 establishes the scope of liability and the rights of the indemnity-holder. The promisor remains liable regardless of whether the promisee defaults or not.

Possible Damages and Costs

• All damages the promisee may have to pay in any suit related to the indemnified matter.
• All costs the promisee may have to pay in any suit, provided they acted prudently and in accordance with the promisor's instructions.
• All sums paid under a compromise of any such suit, if deemed reasonable and authorized.

For instance, in the case of Adamson v. Jarvis, the plaintiff was compensated for following the defendant's instructions and suffering a loss as a result.

Case Examples

• Re British India General Insurance Co. Ltd emphasizes that a person claiming under an indemnity must demonstrate a loss.
• Khetarpal Amarnath v. Madhukar Pictures illustrates that the indemnity-holder's rights are not confined to Section 125 and can seek specific performance if absolute liability arises.
• Mehrauli v. Sariatulla clarifies that indemnity cannot be implied for unlawful acts, such as executing a bail bond for an accused's appearance in court.
• Geismar v. Sun Alliance and London Insurance Ltd reveals that indemnity cannot cover intentional wrongful acts, as seen in a case involving undeclared jewelry and customs duty.

Each indemnity scenario's extent of liability varies based on the contract's nature and terms, without strict limitations imposed by law.

Commencement of liability of the indemnifier

• Initially, under the English Rule, indemnity was only claimable after actual loss, but this has evolved.

• Now, indemnifiers must pay as soon as liability occurs, not awaiting claims from the indemnity holder.

• Judicial cases like Liverpool Mortgage Insurance Co. have emphasized that indemnity is to prevent loss, not just reimburse money paid.

• Before this evolution, indemnified parties had to wait for actual loss to claim indemnity under English common law.

• Courts of equity intervened, requiring indemnifiers to pay off claims or deposit money when liability was absolute.

• The Indian Contract Act doesn't exhaustively outline conditions for contracts, as per Gajanan Moreshwar v. Moreshwar Madan.

• In The New India Assurance Company Ltd. v The State Trading Corporation of India Ltd, the court upheld liability even without actual loss.

• Liability arises when conditions in a contract for indemnity are met, such as providing a logbook in a hire purchase agreement.

• Osman Jamal and Sons Ltd. v. Gopal Purushottam introduced indemnity before actual payment, emphasizing prevention of payment needs.

• Liability of indemnifiers begins when indemnified parties experience a loss, as seen in Chand Bibi v. Santosh Kumar Pal.

Summary: Indian Contract Act 1872

Conclusion

• Indemnifier Rights

  While the Indian Contract Act of 1872 addresses numerous provisions, the clarity regarding indemnifier rights remains ambiguous. Despite this, the absence of specific provisions does not diminish the rights of the promisor. These rights, rooted in natural equity, are fundamental to the law of indemnity.

• Comparison to Creditor-Debtor Relationship

  Referencing the case of Jaswant Singh v. Section of State, it was established that the relationship between the indemnifier and the indemnified mirrors that of a creditor and debtor. This implies that the indemnified has the right to the securities of the indemnity-holder, similar to the rights of a creditor against their primary debtor.

• Interpretation of Indemnity

  Understanding the term "indemnity" reveals its dual nature. While the English definition encompasses a broad range, including promises against losses from any source, the Indian Contract Act's definition is more restrictive. The Indian law on contractual indemnities has diverged from English law in some aspects but predominantly maintains similarities.

References

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