Contract of Indemnity – An overview

CONTRACT OF INDEMNITY (ss. 124-125)

Sec 124 defines a contract of indemnity thus:

A contract of indemnity is a contract whereby one party promises to save the other from loss caused to him by the conduct of the promisor or any other person.

Illustration— A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

INDEMNITY AND CONTINGENT CONTRACTS

It will be observed that a contract of indemnity is really a kind of contingent contract. It is an original and direct engagement between two parties, whereby one promises to save another harmless from the result of the conduct of the promisor or any other person.

LOSS TO PROMISEE ESSENTIAL

It will be seen, from the wordings of S. 124, that the promisee under a contract of indemnity must have suffered loss before he can hold the promisor liable on the contract of indemnity. The happening of the loss is the contingency on which the liability of the indemnifier springs into existences.

However, In 1942, the Bombay High court. Departing from i’s earlier decisions held that, When a person contracts to indemnify another, the latter may Call upon the former to effectuate the indemnity without waiting until he (the person Indemnified), has actually discharged it. This appears to be a sound view, because, as observed by Kennedy L.J. in an English case, it be held that is a condition precedent to recovery, the contract may be of little value to the person to be indemnified, who may be unable to meet the claim in the first instance.

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CONSIDERATION AND OBJECT MUST BE LAWFUL

More consideration and object of a contract of indemnity must be lawful, Thus, an agreement to Indemnify the printer or publisher of a libel by the writer of the same cannot be enforced. Similarly, an agreement by an accused or any other person to indemnify the person who has given bail is illegal, and cannot be enforced.

INDEMNITY MAY BE EXPRESS OR IMPLIED

Although this section applies only to an expressed promise, a duty to indemnify may arise by operation of law in several circumstances. S. 69 of the Contract Act is one such example. Similarly, in the case of a sale of a Company’s shares, the transferor is bound to indemnify the transferee against future calls on the shares which are transferred.

SCOPE OF S. 124. — The definition of a contract of indemnity under this section is narrower than the one under the English law. According to S. 124, the loss must have been caused either by the conduct of the promisor or any other person. It does not include the loss caused by natural factors, not involving human conduct, like accidental fire, etc. caused by a human agency or by other natural factors also.

INSURANCE CONTRACTS

Contracts of insurance, which are the commonest examples of contracts of indemnity under the tract

English Act law, are not contracts of indemnity under Indian Contract Act, according to which indemnity is restricted to those cases only in which the loss which is sought to be reimbursed, is caused by the conduct of the promisor or any other person. The loss must be such as the promisor has taken upon himself to indemnify.

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Rights of indemnity holder (i.e., the promisee) when sued (S. 125)

  1. 125 lays down the three important rights of an indemnity-holder. Under S. 125, the indemnity-holder (i.e., the promisee) is entitled to recover from the promisor–

(A) All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;

(B) All costs which he may be compelled to pay in any such suit –

(a)  If in bringing or defending it—

(i) He did not contravene the orders of the promisor, and

(ii) He acted as it would have been prudent for him to act in the absence of any indemnity;

or

(b) if the promisor authorized him to bring or defend the suit;

(C) all sums which he may have paid under the terms of any compromise of any such suit,—

(a) (i) If the compromise was not contrary to the orders of the promisor; and

(ii) Was one which it would have been prudent for the promisee to make in the absence of

any contract of indemnity

or

(b) If the promisor authorized him to compromise the suit.

It has been held that Sections 124 and 125 do not embody the whole of the Indian law on the subject of contracts of indemnity.

RIGHTS OF PROMISOR

It is interesting to note that although the Act deals with the rights of a promisee (S. 125), there is no provision in the Act regarding the rights of a promisor in a contract of indemnity. One may, however, say that they are analogous

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Author: Akshada Sarpande,
MIT School of law, student of FY BBA LLB

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