The term ‘indemnity’ literally means security against loss. Indemnification
refers to the act of being held not liable or being protected from costs by
shifting them to another party. If a person is promised by another that he will
be protected or compensated in case of loss or damage, he is said to be
indemnified.
A contract of indemnity is an express promise to
compensate for defined loss or damage used to ensure that a contracting party
has an express remedy to correct defects in goods or services delivered under
the contract.
Section 124 of the
Indian Contract Act, 1872[1] defines a contract of indemnity as the contract
wherein 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. The
person who promises to protect or compensate is called the indemnifier. The person to whom the promise of indemnity is given
is called the indemnity holder.
► Illustration: 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. A
is the indemnifier and B is the indemnity holder. When A pays B to cover
damages that B had to pay C, and then A has indemnified B.
► Illustration: A may agree to indemnify B for any loss or damage that may
occur is if a tree on B’s neighboring property blows over. If the tree then
blows over and damages B’s fence, A will be liable for the cost of fixing the
fence.
► Illustration: A asks B to enter into a transaction with C and
promises to indemnify B. B transact with A and ends up incurring losses of
` 1000. Now A has to take care of the losses.
Indemnity clauses are very common in agreements
between tenants and landlords. Tenants agree to indemnify the landlord from
costs or damages associated with being harmed on the property while the
landlord takes the responsibility to anything that could be potentially
dangerous. Thus, a landlord stands indemnified from damages if a tenant tripped
and fell down the stairs. But if the stairs were in disrepair, and the landlord
had been told to get the same fixed time and again, a mere indemnity clause
will not prevent the tenant from suing for damages if such disrepair caused the
accident.
The objective of an indemnity clause is to get
some work done; indemnity is a mere motivational tool. For example, an agent
works for his principal and in case of any loss accruing to the principal, the
agent will not be liable.
The definition of contract of indemnity is not
exhaustive. The section sets out a case of an express contract of indemnity but
there are implied contracts too. After all, Section 9 of the Indian Contract Act, 1872 [2]talks about implied promises. More obviously, the ICA
1872 deals with cases of implied indemnity under Sections 69,
145 and 222. But implied indemnity was recognised for sure by the
Privy Council in the case of SECRETARY OF STATE vs. THE BANK OF
INDIA LD AIR [1938] PC 191. Sections 10 and 13 of the Indian Partnership Act, 1932 also deal with principles of
indemnity.
SECRETARY OF STATE vs. THE BANK OF
INDIA LD AIR [1938] PC 191.
FACTS: A Broker endorsed a
government promissory note in his possession to a bank with false
endorsement. The bank applied in good faith for a renewed promissory note.
The bank was given the renewed promissory note from the Public Debt Office.
In the meantime, the true owner sued the Secretary of State for conversion.
The Secretary of State, in turn, sued the bank on basis of implied indemnity.
HELD: Express indemnity clause is
not necessary in face of implied right to indemnity already existing under
the Indian laws.
It is a principle of law that when
an act if done a person at the behest of another and the act is not itself
manifestly tortuous to the knowledge of the person doing the act, the person
doing the act has a right to indemnity from the man who requested such an act
be done when the act in question turns out to be injurious to the rights of a
third party.
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A Contract of Indemnity is needed because a party
may not be able to control all aspects of the performance of a promise. He can
be sued for the actions of another where the conditions of performance were out
of his control or supervision. A party can protect himself by providing that
the culpable party will bear the costs and expense for damages, including the
costs of a verdict, settlement, or defense of the suit in case of loss or
damage. A Contract of Indemnity is merely a way to shift risk to another by
agreement.
Clauses of indemnity should be studied carefully
before being inserted in a contract. They substantially increase exposure in
the extent of an unexpected event or breach of the contract.
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