A contract of indemnity is one of the most important forms of commercial contracts. Several industries, such as the insurance industry rely on these contracts. This is because of the nature of these contracts. Contract of indemnity plays an important role to save the contracting party from any loss caused by the other party i.e. promisor. They basically help businesses in indemnifying their losses and therefore, reduce their risks. This is extremely important for small as well as large businesses. Contract of indemnity can be made in commercial contracts, legal contracts, loan agreement, mortgages, supply agreement, lease, licensing agreements, etc.
Definition of Contract of Indemnity : The term Indemnity literally means “Security against loss”.
Sec. 124 of the Indian Contract Act defines Contract of Indemnity as, “A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a "contract of indemnity".
In English law Indemnity means “a promise to save a person harm less from the consequences of an act”. The promise may be express or it may be implied from the circumstances of the case.
For e.g., loss caused by fire or by some other accident. Indeed, every contract of insurance, other than life assurance, is a contract of indemnity.'
Illustrations :
· ‘A’ contracts to indemnify ‘B’ against the consequences of any proceedings which ‘C’ may take against ‘B’ in respect of a certain sum of 200 rupees. This is a contract of indemnity.
· ‘A’ & ‘B’ go into shop. ‘B’ says to the shopkeeper, let ‘A’ have the goods. I will see that you are paid. It is a contract of indemnity.
Parties in Contract of Indemnity : There are two parties in contract of indemnity.
1. Indemnifier : The person who gives the indemnity is called the "indemnifier". He is the person who promises to make good the loss. He is also called as promiser. Indemnifier can issue indemnity bond or indemnity agreement in favor promisee intending to provide financial reimbursement in case of any harm or loss caused by illegal actions on the part of bonded party.
2. Indemnity-holder : The person for whom protection is given is called the "indemnity-holder" or "indemnified". He is the person to whom the promise of indemnity is given. He is the person whose loss is to be compensated is also called as promisee. Indemnity-holder can claim damages at any time when he suffered financial loss by the action of indemnifier.
Essential Ingredients of Contract of Indemnity :
i) Contract of indemnity is a contract
ii) One party must promise the other
iii) Promise must be related to save the other party from the loss caused to him
iv) There must be a loss.
v) Loss caused must be by the-
a) Conduct of the promiser himself or
b) Conduct of any other person
Nature of contract of Indemnity :
Contract of indemnity is a contingent in nature and is enforceable only when the loss occurs. Indemnity is an obligation by a person to provide compensation for a particular loss suffered by another person. The general law about contract of indemnity is much wider than given in the Act. The English law of indemnity is much wider than Indian law.
The English law of indemnity includes promises to save the promisee from harm or loss caused by the events or accident, which do not or may not depend on the contract of any person or by liability arising from something done by the promisee at the request of the promisor. Thus it also includes within its ambit losses caused not merely by human agency but also those caused by accident or fire or other natural calamities.
Rights of Indemnity holder :
Sec. 125 defines the rights of an indemnity holder. These are as follows –
i. Right of recovering Damages : all damages that he is compelled to pay in a suit in respect of any matter to which the promise of indemnity applies.
ii. Right of recovering Costs : all costs that he is compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor and has acted as it would have been prudent for him to act in the absence of the contract of indemnity, or if the promisor authorized him in bringing or defending the suit.
iii. Right of recovering Sums : all sums which he may have paid under the terms of a compromise in any such suite, if the compromise was not contrary to the orders of the promisor and was one which would have been prudent for the promisee to make in the absence of the contract of indemnity, or if the promisor authorized him to compromise the suit.
Case laws :
United India Insurance Co Ltd v T. Venkata Narsaiah, AIR 2002 NOC 119 (AP)
The insurer held liable for stock of bidis destroyed in fire, figures of the stock were known to the insurer. Shifting of the insured stock from one specified ground to another to protect it from rain could not be regarded as contrary to the insurance policy.
Adamson v Jarvis, (1827) 4 Bing 66: 29 RR 503
The plaintiff, an auctioneer, sold certain cattle on the instruction of the defendant. It subsequently turned out that the livestock did not belong to the defendant, but to another person, who made the auctioneer liable and the auctioneer in his turn sued the defendant for indemnity for the loss he had thus suffered by acting on the defendant's directions.
Gajanan Moreshwar Parelkar V Moreshwar Madan Mantri, AIR 1942
Bombay high court observed that the contract of indemnity held very little value if the indemnity holder could not enforce his indemnity until he actually paid the loss. If a suit was filed against him, he had to wait till the judgement and pay the damages upfront before suing the indemnifier. He may not be able to pay the judgement fees and could not sue the indemnifier. Thus the court held that if the person indemnified had incurred the liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability.
State of Orissa V United India Insurance co. ltd. AIR 1997
In this case Supreme Court held that, contract of fire insurance or life insurance is a contract of indemnity. The insured person has to prove the loss incurred to ascertain the liability of insurance company. i.e. promise. Court also held that, though contract of fire insurance or life insurance is not covered by the sec. 124 but it falls within the definition.