Contract of Indemnity- Types of Indemnity

Contract of Indemnity- Types of Indemnity

In this growing commercial sector, the volume of transactions and the risk associated with it are very high. The risk generally emerges from the misrepresentation, non-performance of duty or the fraudulent conduct of the other parties. So, it is very essential that we shall protect ourselves from the loss arising from the risk and this protective provision is known as the contract of Indemnity. In this article, we will analyse the concept of indemnity, its meaning, scope, types of indemnity under the Indian contract act, rights of indemnity holders, etc.

Meaning of Indemnity

The term indemnity is derived from the Latin word “indemnis” which denotes uninjured or suffering no damage or loss. It is a sort of security or protection against loss.

In simple words, the meaning of indemnity is to indemnify one person by bearing his losses incurred to him by the conduct of promissory or by any other party.

Chapter VIII of the Indian Contract Act, 1872 governs the framework of indemnity. Section 124 of the Indian contract Act define indemnity which involves 3 elements –

1). indemnity is a promise or obligation on a person to provide compensation to the other party.

2). There shall be a loss to the party.

3) The loss is occurred due to his conduct or by the conduct of any third party.

Contract of insurance is the best example to understand the contract of indemnity where the insurance companies made the contract with their clients that they will bear the loss or if they will suffer any loss. Car insurance is also an example of indemnity.

Contract of indemnity

A contract of indemnity is a valid contract in which one party promises to save the other party from loss caused to him due to the conduct of the party or any other party.

Let us understand the contract of indemnity with its necessary conditions or essentials of contract of indemnity.

Conditions for the contract of indemnity

Two parties

There must be more than one party in the contract of indemnity. No person can make a valid contract with himself. Also, these parties should have the capacity to contract, which means the parties should not be minor or lunatic. There can be more than two parties also, depending upon the situation.

A promise

The one party must offer the condition to another party and the same should be accepted by another party. When the offer is accepted on the same conditions by another party, it is called acceptance.  After accepting the offer, it becomes a promise. The party who made the promise becomes the promisor and has accepted the promise becomes the promisee.

Promise to pay losses

It is the important part of the contract of indemnity that “the promise must be made by the promisor to pay the losses of the promisee”.

Expressed or implied

The contract of indemnity can be expressed or implied. The express and implied are two types of contracts given under contract law. Express means the contract is done orally or in writing whereas, where the contract is made due to the conduct of the parties is called implied contract.

There must be loss incurred

It is the condition of the contract of indemnity that “the loss must be incurred to the promisee”. If there is no loss incurred to the promisee, the promisor is not liable to pay anything.

Conduct of the promisor or other party

The loss incurred to the promisee should be done by:

  • The conduct of promisor- the promisor is liable to pay the loss if he has done something which consequently made the loss to the promisee.
  • Conduct of other parties- the promisor is also liable in the contract of indemnity if the loss incurred to the promisee is due to any other party also. If any other party has done something which made the loss to the promisee, the promisor has to pay those losses.

Lawful object and consideration

It should be kept in mind that the contract of indemnity can only be done for the lawful object and lawful consideration. A contract to do something illegal act that is contrary to the public policies cannot be considered a contract of indemnity. There must be the lawful object and lawful consideration for the contract of indemnity.

Example of Contract of Indemnity

  • Car insurance is one of the best examples of the contract of indemnity.  When you take car insurance, the insurance company makes the promise that they will pay to repair your car if you got an accident and the take consideration for the same. Now, your car is hit by a person on road and your car got damaged. Now, the car insurance company will pay the loss done to your car.
  • Amit make the contract of indemnity with Rakesh that he will pay his losses if he got took any loss in his business. Rakesh did not get any losses in the company, Amit is not liable to pay any loss. But if Rakesh incurred any loss in his company, in that condition, Amit will be liable to pay the losses incurred to Rakesh.
  • A makes the contract with B to deliver his goods every month at the cost of 5000 per month. Now, C made the contract of Indemnity with B that he will pay his losses if A fails to deliver his goods on time. Here C is Indemnifier and B is indemnified.

The indemnification can be done with cash or by repair or replacement or any other way which is decided by the parties of the Indemnity.

Parties in the Contract of Indemnity

The definition of the contract of indemnity clearly shows that there are mainly two parties involved namely promisor and promisee. The promisor is known as Indemnifier and the promisee is known as Indemnified. The person who makes the promise and makes good the loss is known as Indemnifier and the person whose loss is to be made good is known as indemnity holder or indemnified.

For example, there is a contract between A and B in which A will sell his plot to B after 6 months and he will compensate if any loss occurred in this process. But in the meantime, A sold this plot to C. Now, A will be liable to indemnify B. Here A is the indemnifier and B is the indemnified.

Nature of Indemnity

It is important to note that the contract of indemnity is contingent in nature and it mainly provides a safeguard provision for future uncertainties. A contract of indemnity is just like any other contract and it shall necessarily follow all the requirements of a valid contractFor example – A enters into a contract with B. The principal terms and conditions were that B will beat C and A promises to indemnify him against any grave consequences. Now, B beats C and he was fined 1000 rupees for it.  Here, the promise of A cannot be enforced and B will not get anything because the object of the agreement is unlawful.

The object of the contract of Indemnity

The main object of the contract of indemnity is to protect the promisee from the losses incurred to him due to the conduct of the promisor or any other person.

Read more about Essential elements of a valid contract

Types of Indemnity

There are basically 2 types of indemnity namely express indemnity and implied indemnity.

Express indemnity

This is also known as written indemnity. Under this, all the terms and conditions of the indemnity are mentioned specifically in a contract. The rights and the liabilities of both parties are clearly set out in the agreement. This type of agreement includes insurance indemnity contracts, construction contracts, agency contracts, etc.

Implied indemnity

It refers to that indemnity wherein the obligation arises from the facts and the conduct of the parties involved. This is not a written contract. The core example of this type of indemnity is the master-servant relationship. The master is liable to indemnify his servant for the losses that he incurred while working as per his instruction.

These two are the Types of Indemnity given under the Indian contact act.

The landmark judgement of implied indemnity is of Adamson vs Jarvis 1872. In this case, the plaintiff was an auctioneer and he sold certain goods on the instructions of the master. Later on, it came to the knowledge that the master was not the real owner of the good and the true owner sued the plaintiff.  The plaintiff in turn sues the master to recover the damage. The court held that the master will be liable to indemnify the auctioneer as it was evident from the conduct that he was working under his instructions and there was an implied indemnity agreement between them.

Special Provisions of Implied Indemnity

Section 69 of Indian Contract Act, 1872-

As per this section, if a person pays the money on behalf of any other person (which is legally bound to pay) then he is entitled to reimburse them. Forex. If A is running a shop on lease. When the owner came to collect monthly rent, A was out of town and B paid the rent on his behalf. Now A is liable to reimburse B.

Section 145 of the Indian Contract Act

It deals with the right of surety in a contract of guarantee. It states that if the surety (guarantor) pays the money on behalf of the principal debtor, then the debtor is liable to indemnify him by repaying the amount. For example. X took a loan from the bank and Y gave the guarantee for it. X failed to repay the money and Y were called to pay the dues of the bank. Y paid it but now X will be liable to indemnify Y for the loss he incurred.

Section 222 of the Indian Contract Act

This section deals with the liability of a principal to indemnify his agent to make good all the losses that he incurred while working in the authority given to him.

Types of the contract of indemnity

As we know from the essentials that indemnity can be done expressly and impliedly. There are mainly three types of contract of indemnity which can be done expressly and impliedly as well. The types of the contract of indemnity are:

Broad indemnification

Under the broad indemnification, the indemnifier promise to pay the losses incurred by all the parties including the third party. He promises to pay the losses even if the third party is solely at the fault.

Intermediate indemnification

Under the Intermediate indemnification, the indemnifier promise to pay the losses incurred due to the act of promisor and promisee only. In this situation, the contract of indemnity does not include the losses incurred due to the conduct of a third party.

Limited indemnification

Under the limit indemnification, the indemnifier promise to pay the losses incurred due to his act only. In limited indemnification, the contract of indemnity does not include the losses incurred due to the conduct of the promisee and third party.

Rights of Indemnity Holder 

Section 125 of the Indian Contract Act, 1872 deals with the rights of indemnity holder or indemnified when he sued due to the conduct of the promissory or by the other party. For receiving all the benefits it is necessary that for receiving any type of benefit in an ongoing suit either he shall be authorised by the indemnifier or as per the circumstances, it was prudent to represent.

He has mainly 3 rights namely:-

Right of Indemnity holder to receive all damages

It is one of the best rights of indemnity holders that, in a suit, it may occur that the court ordered the indemnity holder to pay all damages to the third party. Now, he is entitled to receive all these damages from the indemnifier. He has to file the plaint under the civil procedure code in the court of law by containing all the facts of the case. In that case, the indemnifier may agree with all the facts given in the plaint by filing the written statement or denying them. The court will decide the case on the basis of oral and documentary evidence.

Right of indemnity holder to receive all cost

The indemnity holder may incur a hefty cost in the ongoing litigation. Now it is the responsibility of the indemnifier to pay all the costs which he incurred as he was merely acting as per his instructions.

Right of indemnity holder to receive all sums

The indemnity holder is also entitled to receive all the sums which he paid as a sort of compromise in a suit from the indemnifier. It is necessary that the compromise shall not be against the will or order of the indemnifier.

It is important to understand that the rights mentioned under Section 125 are not exhaustive in nature. The indemnity holder has many other rights which he can exercise to save himself from the liability concerned.

Liability of Indemnity Holder

Along with the rights, the indemnity holder has certain liabilities also. The chief among them is that he must act as per the direction of the promissory and shall not violate his orders. Furthermore, he shall act with due caution and care and take all possible steps to reduce the loss as no contract of indemnity exists. This shows that the rights of the indemnity holder are not absolute or unfettered.

For example.  A was a school driver by profession and work for XYZ school. It was an order by the school administration that all the drivers will not run the bus beyond 40 km/ph. A did not follow the rules and met an accident. Now the school administration will not be liable to indemnify him as he contravenes their orders.

Timing for Invocation of Indemnity

There is always a matter of debate regarding the time when the indemnity holder should be called upon to discharge his liability. The major question is whether the liability shall commence when the actual loss occurs or when the liability becomes certain or absolute. The Indian Contract Act, 1872 is silent on this but from our judicial pronouncement it is clear that the indemnity holder doesn’t need to wait till the actual loss occur but it can invoke the indemnity when the liability became absolute.

The landmark authority in this regard is the judgement of the Bombay High Court of Bombay in the case of Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri

In this case, it was held that the value of the indemnity Clause will lose its significance if the indemnity holder had to wait till he paid the actual loss. It will put an unnecessary burden on his shoulders and he had to wait till the judgement is pronounced. The court applied the concept of equity and held that the indemnifier can be called upon to pay into the court a sufficient amount of money which is used to create a fund and pay the claim whenever it is made.

Rights of Indemnifier

  • After the compensation provided by the indemnifier for the losses caused to indemnity holders, it is the right of the indemnifier that he can possess all the methods and resources that can save him from the loss.  
  • He will indemnify the indemnity holder if there is any loss incurred to him.

Scope of the contracat of Indemnity

The scope of an indemnity clause is quite subjective in nature and it differs from agreement to agreement. The scope mainly depends upon the wording of the particular indemnity clause in the agreement and the liability thereto. The parties to a contract may agree to a narrow or a widely drafted indemnity clause as per their requirement.  A narrowly drafted clause reduces the liability of the indemnifier whereas a widely drafted one increases it. For example, a broadly drafted indemnity clause may provide for the protection of liability against indirect losses or any other potential threats.

Indemnity and Damages

Both indemnity and damages are the remedies for the breach of contract and they hold special importance in a commercial contract. These two concepts are generally taken interchangeably and we sometimes failed to understand their actual difference.  These differences are as follows –

  1. A claim for indemnity can be brought before the actual breach of contract but the damages can only be asked after the breach of contract.
  2. The concept of indemnity also covers the loss arising out of the conduct of the third party whereas the damages can only be claimed from the parties to a contract at the time of the breach.
  3. The jurisprudence behind the concept of indemnity is to restore the position of the person as personally as he was before the loss occurred. There is no profit or loss involved in it. However, in the case of monetary damages, the award may exceed or fall below the actual loss that occurred.

FAQ related to the contract of Indemnity

What is Indemnity Insurance?

The indemnity insurance meaning is the insurance policy, used to compensate the insured party for the unexpected damage up to a certain limit. Normally, the insurance company pays these losses from the money paid by the insured party. Medical malpractice is an example of Indemnity insurance.

What is professional indemnity insurance?

Professional indemnity insurance is also known as PI insurance. It is made to protect the business owners, self-employed and freelancers if their client makes any claim for inadequate service. Sometimes, it happens that professionals make some losses to their clients while doing the work. The professional indemnity works to compensate these losses done by the professionals. The insurance company analyze the data while making it confidential. That is why it becomes more important to buy professional indemnity because here, your research of process to do any works is confidential and secure. These types of insurances can be used by doctors, engineers etc.

What is medical indemnity insurance?

Medical indemnity insurance is also a kind of professional indemnity. It is specifically referred to as the profession of doctors. If the negligence is proven in a case done by the doctor, this indemnity insurance will compensate the party who is bearing the loss due to the negligence done by the doctor.

Can I change the terms of the contract of indemnity?

Yes, you can change the terms of the contract of indemnity with the mutual consent of both parties to the contract.

Can I make the contract of indemnity orally?

Yes, the law does not restrict the oral contract. But, in my opinion, a written contract has more benefits than an oral contract. It can help you file the litigation in court if there is any breach of contract done. The written contract is documentary evidence that can be produced in court to prove your point.

Conclusion

The contract of Indemnity is the sub-species of compensation that provides an obligation to fulfil his promise to indemnify the aggrieved party from the loss incurred due to his conduct. The indemnity can be explicit or implicit and these both are recognized by our judicial authorities. Lastly, the claim of indemnity can be claimed even before the occurrence of actual loss to enforce the provision in its true spirit.

In today’s time, it becomes very important to use these types of indemnity insurance for safety.


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