Contract Of Indemnity

Coverage of this Article

Key Takeaways

A brief introduction of the term ‘indemnity’ and its meaning in the context of the Indian Contract Act, 1872. 

Introduction

-The contract of indemnity falls under the category of special contracts. Indemnity literally means to compensate the other party for the losses incurred to him or her. 

Provisions of Indemnity Under Indian Contract Act, 1872

Contract of indemnity

Section 124 of ICA:

-The section says that a contract in which any party promises the other party to the contract, to pay the damages incurred by the other party due to the acts of the promisor himself or due to any third person, then such a contract is known as a contract of indemnity. Here, the promisor is the indemnifier and the promisee is the indemnity holder.

Rights of indemnity-holder when sued

Section 125 of ICA:

-It provides for the rights of the indemnity holder against the indemnifier if in case he is sued by a third party. Sub-section (1) provides that the indemnity holder is entitled to all the damages that he may be compelled to pay in a suit to which such a contract applies. Sub-section (2) provides that the promisor shall indemnify the promisee, for any sort of expenses incurred by the promisor (indemnity holder) in a suit, which is not against the orders of the indemnifier or the promisor and could be considered an act of a prudent man if such a contract did not exist. Sub-section (3) provides that in case of an out-of-court settlement or compromise, any sort of expenses that are incurred are to be indemnified by the indemnifier if the same is not against the orders of the indemnifier.

ADAMSON v. JARVIS [1827]

-In this case, Adamson, who was an auctioneer, was asked by Jarvis to auction his cattle. As per his instructions, the cattle were auctioned by Adamson but later on, he was sued by the real owner of the cattle for conversion, since Jarvis was not the real owner of the cattle auctioned and Adamson followed his instructions. 

GAJAN MORESHWAR v. MORESHWAR MADAN [AIR 1942]

-G. Moreshwar (plaintiff) got a piece of land in then Bombay at lease for a period of 999 years which he transferred to M. Madan (defendant) on lease for a limited period of time. 

Conclusion

-The contract of indemnity provided under the Indian Contract Act has not explicitly mentioned the rights of the indemnifier just as it has prescribed for the rights of the indemnity holder.

Key Takeaways

• A brief introduction of the term ‘indemnity’ and its meaning in the context of the Indian Contract Act, 1872.
• The specific provisions under the Indian Contract Act deal with the contract of indemnity and the rights of the indemnity holder.
• Few case laws to explain the concept of indemnity. 

Introduction

The contract of indemnity falls under the category of special contracts. Indemnity literally means to compensate the other party for the losses incurred to him or her. It is a contract that is entered into by the two parties in which one of the parties is the indemnifier and the other party is the indemnity holder. Indemnifier is the one who promises to pay a certain sum of money to the other party in case he or she suffers any monetary loss. The indemnity holder on the hand is the party in favor of whom such promise to indemnify or compensate has been made. Sections 124 and 125 of Chapter VIII of the Indian Contracts Act, 1872, talk about the contract of indemnity and the rights of the indemnity holder respectively. The most important thing to be kept in mind while entering into a contract of indemnity is that, since it is covered under the Indian Contract Act, it too needs to have the essential ingredients of a valid contract fulfilled; such as a contract between adults and people with a sound mind, the object and consideration is valid, there is a free consent without any coercion and undue influence, etc. If such essentials are not met, then it will be termed as a void contract and hence, will not be suitable to be lawfully enforced. 

Provisions of Indemnity Under Indian Contract Act, 1872

Contract of indemnity

Section 124 of ICA:

The section says that a contract in which any party promises the other party to the contract, to pay the damages incurred by the other party due to the acts of the promisor himself or due to any third person, then such a contract is known as a contract of indemnity. Here, the promisor is the indemnifier and the promisee is the indemnity holder.

Rights of indemnity-holder when sued

Section 125 of ICA:

It provides for the rights of the indemnity holder against the indemnifier if in case he is sued by a third party. Sub-section (1) provides that the indemnity holder is entitled to all the damages that he may be compelled to pay in a suit to which such a contract applies. Sub-section (2) provides that the promisor shall indemnify the promisee, for any sort of expenses incurred by the promisor (indemnity holder) in a suit, which is not against the orders of the indemnifier or the promisor and could be considered an act of a prudent man if such a contract did not exist. Sub-section (3) provides that in case of an out-of-court settlement or compromise, any sort of expenses that are incurred are to be indemnified by the indemnifier if the same is not against the orders of the indemnifier.

ADAMSON v. JARVIS [1827]

In this case, Adamson, who was an auctioneer, was asked by Jarvis to auction his cattle. As per his instructions, the cattle were auctioned by Adamson but later on, he was sued by the real owner of the cattle for conversion, since Jarvis was not the real owner of the cattle auctioned and Adamson followed his instructions. As a result, he had to pay the damages however, Adamson then in turn sued Jarvis to indemnify him. The Court, therefore, held that since it can be presumed on behalf of Adamson that if after following the instructions of Jarvis, any losses are going to occur then he would be indemnified. Hence, Jarvis had to pay the damages to Adamson as indemnity.

GAJAN MORESHWAR v. MORESHWAR MADAN [AIR 1942]

G. Moreshwar (plaintiff) got a piece of land in then Bombay at lease for a period of 999 years which he transferred to M. Madan (defendant) on lease for a limited period of time. M. Madan initiated the development of such land and ordered the construction materials from K D Mohan Das. However, at the time of payment of such materials purchased, the defendant could not pay. He then requested the plaintiff to prepare a mortgage deed in favor of K.D. Mohandas and the Interest rate was also agreed upon, from both sides. The defendant decided to repay the principal amount along with interest and get the mortgage deed released before the date of maturity of the deed, but he could not pay as per his assurance, to K.D. Mohan Das as a result of which the plaintiff had to pay the interest. Later even after several requests when the defendant did not pay the principal amount along with interest and hence, did not get the mortgage deed released, the plaintiff sued him for indemnity. The Privy Council thus, held that the indemnity holder can ask the indemnifier to indemnify him. Hence, G. Moreshwar was asked to be indemnified by M. Madan against the deed of charge and the loan agreement.

Conclusion

The contract of indemnity provided under the Indian Contract Act has not explicitly mentioned the rights of the indemnifier just as it has prescribed for the rights of the indemnity holder. The definition so proposed under the said Act is quite ambiguous as the nature of loss or damage is not clearly mentioned. Since there is always a scope for amendment in the statutes as per changing requirements of the society over time, therefore, the provision of the contract of indemnity needs to be more explicitly framed and in an unambiguous manner so that the rights of either party to the contract is not violated simply because the concerned law is silent upon that.