A contract of indemnity is a legal agreement where one party promises to compensate the other for losses caused by the promisor or any third party. This concept is pivotal in Indian contract law, providing a safeguard against unforeseen losses.
MEANING AND DEFINITION
Section 124 of the Indian Contract Act, 1872, defines a 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.”
In this context:
- Indemnifier: The party who promises to compensate for the loss.
- Indemnified/Indemnity-holder: The party who is protected against the loss.
ESSENTIALS OF A CONTRACT OF INDEMNITY
For a contract of indemnity to be valid under Indian law, it must include:
- Two Parties: An indemnifier and an indemnified.
- Promise to Compensate: A clear promise by the indemnifier to compensate the indemnified for specific losses.
- Loss Caused by Specific Conduct: The loss must result from the conduct of the promisor or another person.
- Compliance with Valid Contract Essentials: The contract must meet all criteria of a valid contract as per the Indian Contract Act, 1872.
SCOPE OF INDEMNITY
The scope of indemnity in India is somewhat narrower compared to English law. Indian law focuses on losses caused by human actions, whereas English law extends indemnity to losses from events beyond human control, such as natural disasters. This distinction was highlighted in the case of Moreshwar v. Moreshwar Madav, where the court emphasized the limited scope of indemnity under Indian law.
RIGHTS OF THE INDEMNITY HOLDER
Section 125 of the Indian Contract Act, 1872, outlines the rights of the indemnity holder:
- Recovery of Damages: All damages incurred in matters covered by the indemnity.
- Reimbursement of Legal Costs: All legal costs incurred in defending or settling claims, provided the indemnifier authorized such actions.
- Compensation for Sums Paid: All sums paid under a compromise of any suit, if the compromise was prudent and authorized by the indemnifier.
CASE LAW: OSMAN JAMAL & SONS LTD. V. GOPAL PURSHOTTAM
- Facts: The plaintiff acted as a commission agent for the defendant, purchasing goods on their behalf. The defendant failed to pay for certain goods, leading the plaintiff to incur losses.
- Issue: Whether the plaintiff could claim indemnity for the losses suffered due to the defendant’s failure to pay.
- Judgment: The court held that the plaintiff was entitled to indemnity, emphasizing that the indemnity holder has the right to recover losses incurred while acting within the scope of their authority.
TYPES OF INDEMNITY
Indemnity contracts can be categorized as:
- Express Indemnity: Clearly stated terms, either orally or in writing.
- Implied Indemnity: Arises from the conduct of parties or the nature of the relationship between them.
COMPARISON WITH CONTRACT OF GUARANTEE
While both indemnity and guarantee involve promises to protect against loss, they differ fundamentally:
| Aspect | Contract of Indemnity | Contract of Guarantee |
|---|---|---|
| Number of Parties | Two: Indemnifier and Indemnified | Three: Surety, Principal Debtor, and Creditor |
| Nature of Liability | Primary liability on the indemnifier | Secondary liability on the surety, with primary liability on the principal debtor |
| Purpose | To compensate for a loss | To assure the creditor of the performance or payment by the principal debtor |
LEGAL PROVISIONS AND DOCTRINES
The Indian Contract Act, 1872, provides the foundational framework for contracts of indemnity. Key sections include:
- Section 124: Defines the contract of indemnity.
- Section 125: Details the rights of the indemnity holder.
Additionally, the principle of subrogation applies, allowing the indemnifier to step into the shoes of the indemnified after compensating for the loss, thereby acquiring all rights and remedies against third parties responsible for the loss.
CASE LAW: STATE BANK OF INDIA V. MULA SAHAKARI SAKHAR KARKHANA LTD.
- Facts: The respondent, a cooperative society, entered into a contract with a company for the installation of a paper mill. The company provided a bank guarantee for the release of retention money. Disputes arose, leading to the termination of the contract and invocation of the bank guarantee.
- Issue: Whether the bank was obligated to honor the guarantee upon the contract’s termination without evidence of loss.
- Judgment: The Supreme Court held that the terms of the contract indicated it was a contract of indemnity. The bank was not required to honor the claim without proof of loss, emphasizing the indemnity nature of the agreement.
CONCLUSION
Contracts of indemnity play a crucial role in commercial transactions, providing a mechanism to manage and allocate risks. Understanding their definition, scope, and the rights and obligations of the parties involved is essential for legal practitioners and students alike.
REFERENCES
- Indian Contract Act, 1872, Section 124.
- Indian Contract Act, 1872, Section 125.
- Osman Jamal & Sons Ltd. v. Gopal Purshottam
