CONTRACT OF INDEMNITY UNDER INDIAN CONTRACT ACT, 1872

This article will be discussing about the Contract of Indemnity under Indian Contract Act 1872, with its meaning, parties required, essentials, insurance contract, and rights and duties of indemnity-holder.

1. CONTRACT OF INDEMNITY:

 

According to dictionary meaning, indemnity is protection against loss especially in the form of a promise to pay or payment for loss of money, goods etc. It is a security against, or compensation for loss etc. As mentioned above, the word indemnity is derived from the Latin word “indemnis”, which means freedom from loss. According to Longman’s dictionary, it is protection against any kind of loss, expense, etc., in the form of a promise to pay for those losses. 

 

For instances, X contracts to indemnify Z against the consequences of any proceedings which Y may take against Z in respect of a certain sum of rupees 200. This is a contract of indemnity. In a contract of indemnity, the who promises to indemnify is known as “indemnifier”, and the person in whose Favour such a promise is, made is known as “indemnified” or “indemnity holder”.

 

According to Section 124 of the Indian Contract Act, 1872, a contract of indemnity means “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 conduct of any other person.”

 

This provision incorporates a contract where one party promises to save the other from loss which may be caused, either.

 

                   i.        By the conduct of the promisor himself, or,

                  ii.        By the conduct of any other person.

 

It does not address those categories of cases where the indemnity results from a loss brought on by incidents or events that are not necessarily dependent on the conduct of the indemnifier or another person, or from liability incurred as a result of something the indemnified did at the indemnifier's request.

 

2. PARTIES TO A CONTRACT OF INDEMNITY:

   

In a contract of indemnity there are two parties viz.,

                                     i.        Indemnifier, and

                                   ii.        Indemnity-holder.

 

‘Indemnifier’ means a person who promises to make good the lose caused to another party.

 

‘Indemnity-holder’ means a person whose lose is make good by another.

 

3. ESSENTIALS TO A CONTRACT OF INDEMNITY

 

For the purpose of a contract of indemnity, the following conditions must be satisfied:

 

•     i.        There must be two parties.
•    ii.        One of the parties must promise the other to pay for the loss incurred. 
•  iii.        The contract may be expressed or implied. 
•   iv.        It must satisfy the essentials of a valid contract.

 

4. INSURANCE CONTRACT, IF CONTRACT OF INDEMNITY

 

India:

 

As mentioned above, Section 124 only recognizes contracts as contracts of indemnity when there is a promise to protect a third party from loss that could be caused by the promisor's own conduct or the conduct of any other person. It excludes a promise to make good on a loss that wasn't brought on by human action. Therefore, the definition of section 124 does not apply to an insurance contract. As a result, a contract of insurance that contains a promise from the insurer to make payments in the event of a fire loss is not covered by section 124. These agreements are legal because they meet the definition of contingent contracts in section 31.

 

In United India Insurance Company vs. M/s Aman Singh Munshilal, 1994, the cover notes stipulated delivery to the consigner. Moreover, on its way to the destination the goods were to be stored in a godown and thereafter to be carried to the destination. While the goods were in godown, the goods were destroyed by fire. It was held that the goods were destroyed during transit and the insurer was liable as per the insurance contract.

 

England:

 

The term "indemnity" has a much broader definition under English law than it does under the Indian Contract Act. It includes a contract to save the promisee from a loss, whether it be caused by human agency or any other event like an accident and fire. Under English Law, a contract of insurance (other than life insurance) is a contract of indemnity.

 

However, a contract for life insurance is not an indemnity contract because there are different considerations involved. For instance, a life insurance contract may stipulate that a certain amount of money will be paid upon a person's death or upon the passing of a predetermined amount of time (even if the assured is still alive). In such a situation, the issue of how much the assured will lose and whether they will be compensated for it does not come up. Additionally, even if a specific amount is payable in the event of death, the entire amount assured becomes due because, unlike property, a person's life cannot be valued. It is also not an indemnity contract because of this.

 

The Indian Contract Act does not specifically provide that there can be an implied contract of indemnity.

 

5. RIGHT OF THE INDEMNITY HOLDER:

 

In a suit against the indemnity holder, he may have been compelled to pay damages and incurred costs etc. in his own turn, he can bring an action against the promisor (indemnifier) to recover damages and costs, etc. paid by him, if the indemnifier has promised an indemnity in such a case. Section 125 of the Indian Contract Act contains the relevant provision, which is as follows:

 

“Section 125. Rights of indemnity holder when sued. -

 

The promise in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor-

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1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies.

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2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit.

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3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit”.

 

6. DUTIES OF INDEMNITY HOLDER:

 

Rights and duties are inter-related. The indemnity holder has some implied duties, for instance, to comply with the terms and conditions of the contract. unless otherwise mentioned in the contract, the indemnifier would not be responsible for damage in the following conditions:

 

i. Duty to exercise caution:

 

The indemnity-holder is required to behave responsibly. If any damages occurred due to the negligence of indemnity-holder, then indemnifier will not be bound to good the loss occurred.

 

ii. Duty not to take any action that will harm or cause loss: 

 

The indemnity-holder must act honestly and with no intent to mislead or harm the indemnifier.

 

iii. Duty to follow Promisor's instructions: 

 

The indemnifier will not be liable for losses that result from failure to follow instructions if the indemnity-holder does something that is against the Promisor's orders.

 

7. CONCLUSION:

 

It is reasonable to say that the term indemnity has both broad and specific applications. The Indian Contract Act's definition of indemnity is more limited than the English definition, which is broad enough to cover a promise of indemnity against loss resulting from any cause. In some ways, the Indian Law on Contractual Indemnities has deviated from English law and taken its own course. However, the similarities between them far outweigh any differences.