“Contract of Indemnity” Compensate for the loss

Author Mansi Malik a fourth-year law student at Lovely Professional University, Phagwara, she is currently interning with Lexpeeps.in

“The article parlance about the compensation, loss or reparation by the Indemnifier

INTRODUCTION

The contract of indemnity is one of the forms of commercial contract, certain industries like a partnership, insurance co., principal-agent relationship, etc rely on such a contract. here the reparation connotes as a sum, cost, and damage that shall indemnify through indemnifier. The distinction between the contract of indemnity and the contract of guarantee was discussed in the 1980s.

In Birkmya v. Darnell (1704). Generally, A contract between two parties where one party promises to compensate or reparation from the loss caused to him either by its conduct or by the conduct of any third person called Contract of Indemnity. 

It plays a crucial role in small and large businesses. In Gajanan Moreshwar Parelkar v. Moreshar Madan Mantri AIR 1941Lah 68. It was held that the Contract of Indemnity is not exhaustive and hence the same principle is equitably followed in a court of England.

Definition

According to section 124 of the Indian contract Act- where one party promises to save the party from the loss occurred either by the conduct of promisor/ indemnifier or by the conduct of another person. 

Illustration- A (Insurance Co.) enters into a contract with B (Insurance Policy Holder if house destroyed by fire the A insurance co. will indemnify the B Insurance policyholder of Rs. 10 lakhs

Illustration- A promises B to deliver certain goods every week for Rs- 5000/. C enters into a contractual obligation with B if A fails to deliver, the loss occurred would be indemnified by C.

Illustration- A (Transferee) enters into a contract with B (company) demanding to share the duplicate certificate. B, demands indemnity bond if any loss occurred due to the conduct of transferee or other people A will compensate the same.

Parties under Contract of Indemnity

Under the contract of Indemnity, there are two parties. On one hand, there is a promisor also known as Indemnifier. Who promises to compensate for the damages? On the other hand, there is a promise who bears the loss, also known as indemnity holder.

     Essentials

  • Lawful contract exists between the parties
  • Involvement of indemnifier and indemnity holder
  • Loss occurrence consideration must be lawful
  • Liability of the indemnity holder should be primary
  • Contract can be in express or implied form
  • Right to recover damages, cost and sum under section 125 (1)

Indian Contract Act,1872 the commencement of indemnifier liability is silent, but many courts in India has laid down the rules:

Promisor not liable until unless the loss suffered by promisee. Even If the liability is absolute the promisor liability arises section 124 and section 125 of the Act 1872 rely on such contracts.

Provisions for Indemnity under English Law

In the United Kingdom and Wales “contract of indemnity” incarnate the parts of revocation, cancellation, recess, and order. The indemnity is granted for cost. The difference between indemnity and losses occurred, which are elusive and which are considered as the rootstock of the legal obligation.

Express/ Implied Form 

Indian Contract Act, 1872 states about the two forms of a contract under section 124 contract of indemnity however the section 124 is silent for an implied contract but express form and implies a form of contract are essentials of contract of indemnity. In case Secretary of state V. The bank of India ltd. AIR 198 PC 191. the imperil of happening any loss is probably anticipated against the promisor.

Right of Indemnity- Holder 

According to section 74 Liability of the indemnifier is to compensate the indemnity holder for the damages occurred. No matter the damages caused are punitive, liquidated damages. Under the Companies Act 2013, the liability of the director arises in case of any loss occurrence. Moreover, according to the Public liability insurance act. If any loss or damage suffered by the holder the liability of the insurance company arises to compensate for damages for case filing as well as case defend. Under section 125 of the Indian Contract Act 1872. Indemnifiers are compelled to pay all damages for the occurrence of a suit, compelled to pay all costs in filing or defending the suit. And all sums which the holder has paid out of its pocket.

Illustration: P (Principal) appoint an agent (B) on his behalf to purchase the land from C. during the process of acquisition of land C files a suit against B, during the proceedings B agent, has to pay the sums from his pocket thus under the contract of indemnity the liability of P arises to compensate for all the sums to the Indemnity holder.

The Legitimacy of Contract of Indemnity

The legality of the contract is based on the principle, in case of consent, the agreement should not be based on coercion, misrepresentation, and fraudulent. if it is then the contract will become voidable. the same general principle applicable to the contract of indemnity.

  • The contract of indemnity can be enforced by express or implied contract
  • The damages arose, due to express/ implied agreement can be claimed by indemnity holder
  • No burden to prove the actual loss, damage occurrence

In Osmal Jamal & Sons Lmt. v. Gopal Purushotam (1728) In England and Wales it is necessary for indemnity holders to first pay for sums, 

damages, and costs and then pay for indemnity. But in India, there is no such express provision laid down.

Distinction between Contract of Indemnity and Guarantee

Section124 lays down the procedure for indemnity whereas section 126 of the Indian contract Act 1872, states about a contract of guarantee.

A contract by which one party promises to indemnify for the loss by his conduct or by the conduct of other people. whereas under section 126 contract of guarantee states that where one party promises to compensate for the loss in default of their person.

In the contract of Indemnity two parties are essential Indemnifier and indemnity holders. whereas in the contract of guarantee three parties are required creditor, principal debtor, and surety.

In the contract of indemnity, the liability of indemnifier is primary, whereas in the contract of guarantee the liability of the promisor is secondary.

CONCLUSION

Contract of indemnity lays down the specific essentials of contract which are stated under the Indian contract act 1872. The contract can be in the form of express or implied form, the liability of the promisor is primarily specified under section 124 of the Act. It laid down the process for claiming compensation.

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