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Types of Indemnity under Indian Contract Act

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 Indemnity. In this article, we will analyse the concept of indemnity, its meaning, scope, types of indemnity, rights of indemnity holder, 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 the loss. Chapter VIII of the Indian Contract Act, 1872 governs the framework of indemnity. Section 124 of the 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.

Parties Involved in Indemnity

The above definition clearly shows that there are mainly two parties involved namely Indemnifier and 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.

Read more about Essential elements of a valid contract

Types of Indemnity

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

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

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

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.

Rights of Indemnity Holder When Sued by Other Party

Section 125 of the Indian Contract Act, 1872 deals with the rights of indemnity holder or indemnified when he is 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 to receive damages – In a suit, it may occur that the court ordered the indemnity holder to pay damages to the third party. Now, he is entitled to receive all these damages from the indemnifier.
  • Right 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 cost which he incurred as he was merely acting as per his instructions.
  • Right 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 took all possible step 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.

Scope 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 the 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.

Conclusion

The concept 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.