CONTRACT OF INDEMNITY

The term Indemnity literally means “Security against loss”. In a contract of indemnity one party – i.e. the indemnifier promise to compensate the other party i.e. the indemnified against the loss suffered by the other.

ACCORDING TO ENGLISH LAW

“It is a promise to save a person harmless from the consequences of an act”.

Thus it includes within its scope losses caused not merely by human agency but also those caused by accident or fire or other natural calamities.

ACCORDING TO SECTION 124 OF INDIAN CONTRACT ACT

“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.”

The definition provided by the Indian Contract Act confines itself to the losses occasioned due to the act of the promisor or due to the act of any other person.

Section 124 deals with one particular kind of indemnity which arises from a promise made by an indemnifier to save the indemnified from the loss caused to him by the conduct of the indemnifier himself or by the conduct of any other person, but does not deal with those classes of cases where the indemnity arises from loss caused by events or accidents which do not depend upon the conduct of indemnifier or any other person.

EXAMPLE: 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.

ESSENTIALS OF CONTRACT OF INDEMNITY

PARTIES TO A CONTRACT: There must be two parties, namely, promisor or indemnifier and the promisee or indemnified or indemnity-holder.

PROTECTION OF LOSS: A contract of indemnity is entered into for the purpose of protecting the promisee from the loss. The loss may be caused due to the conduct of the promisor or any other person.

EXPRESS OR IMPLIED: The contract of indemnity may be express (i.e. made by words spoken or written) or implied (i.e. inferred from the conduct of the parties or circumstances of the particular case).

COVERS ONLY THE ACTUAL LOSS: It covers only the actual loss may be due to the promisor himself or any other person and it covers only the loss caused by an event mentioned in the contract. The event mentioned in the contract must happen.

ESSENTIALS OF A VALID CONTRACT: A contract of indemnity is a special kind of contract. The principles of the general law of contract contained in Section 1 to 75 of the Indian Contract Act, 1872 are applicable to them. Therefore, it must possess all the essentials of a valid contract which are as follows:

  • Offer and Acceptance
  • Lawful consideration
  • Intention to create legal relationship
  • Capacity to parties
  • Expressly not to be declared void
  • Legal formalities 
  • Free consent
  • Lawful object
  • Certainty of meaning
  • Possibility of performance.

NUMBER OF CONTRACTS: In a contract of Indemnity, there is only one contract that is between the Indemnifier and the Indemnified.

DEPEND ON GOOD FAITH: The contract of indemnity depends upon the good faith of the parties.

RIGHTS OF PROMISEE/ THE INDEMNIFIED/ INDEMNITY HOLDER WHEN SUED

As per Section 125 of the Indian Contract Act, 1872 the following rights are available to the promisee/ the indemnified/ indemnity-holder against the promisor/ indemnifier, provided he has acted within the scope of his authority.

1. RIGHT TO RECOVER DAMAGES PAID IN A SUIT [SECTION 125(1)]

An indemnity-holder has the right to recover from the indemnifier all damages which he may be compelled to pay in any suit in respect of any matter to which the contract of indemnity applies.

The Damages are

  • Ordinary Damages.
  • Special Damages
  • Explainary Damages, …etc.

2. RIGHT TO RECOVER COSTS INCURRED IN DEFENDING A SUIT [SECTION 125(2)] 

An indemnity-holder has the right to recover from the indemnifier all costs which he may be compelled to pay in any such suit.

When it comes to the quantum of such costs that can be so claimed from the indemnifier, the courts have interpreted this relationship and concluded on various lines so as to iron out the confusions.

  • First is the situation of kinds of costs that arise while defending or fighting a suit in a court of law. In such a case, the indemnity holder, as decided by the courts, would be entitled to reasonably incurred costs. Such expenses do arise while reducing or ascertaining or resisting the claim. Hence, the cost of such a nature can be recovered.
  • The second situation can be best understood from a hypothetical arrangement. Suppose, the indemnity- holder faces a proceeding for claim over a movable property say a watch. For such a matter, a hotshot lawyer was being engaged and huge travel and food expenses were being incurred by the indemnity holder.

The question arises, should such a person be entitled to the costs that the law so benevolently provides to the indemnity- holders. The conscience would say no. And so did the judicial conscience. This was categorically held that only those costs would be recoverable that are supposed to be incurred by a prudent man.

This is the reason that the fees of the pleader that the indemnified may ask for should be reasonable. If a vendee has been given indemnity from the vendor of the property against litigation, the former can claim the fees of the lawyer, subject to the condition that the same is not unreasonable and beyond basis.

3.RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE [SECTION 125(3)]

This subpart is similar to that of the second sub-part of costs. But, this situation is being envisaged to arise that under a compromise. For this arrangement as well, the promise would become entitled to such amounts that-

  1. The Promisor has specifically authorised the promisee to do it.
  2. The compromise is not to be against the orders of the promisor and the action has been taken in a prudent manner.

Like the principle of res judicata could not be brought by the promisor in the case of damages, here as well, the promisor cannot shrug off his/ her responsibility that he/she is not liable for paying the amount since he/ she is not a party to the relationship.

In the landmark case of Alla Venkataramanna v. Palacherla Manqamma, the court laid down the conditions for the claim by the promisee, in this case, to be valid. If the indemnity holder genuinely wants the amount to be recovered, certain conditions with respect to the compromise so effected would have to fulfil:

  1. The compromise should have been put to effect in a bona fide manner.
  2. It has been resolved without any sort of collusion
  3. It has not been impeached as an immoral bargain.

All these rights would arise in the sole situation of the indemnity holder getting sued at the hands of any third party. 

CONCLUSION

The rights are at the disposal of one party against the other. The law as provides for conditions that must and should be followed at both the ends of that of the indemnifier as well as the indemnified.

Hence, it is a very precious opportunity that is being given in the hands of the indemnity holder and should be cautiously exercised in light of the legal restrictions and conditions.

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