INDEMNITY UNDER INDIAN CONTRACTS ACT, 1872
Contract of Indemnity is defined by section 124 of the Indian Contract Act of 1872 as a contract in which one party guarantees to save the opposing party’s property from loss caused by the sponsor’s or the other person’s actions. Indemnity is a multifaceted type of insurance that compensates for damages or losses. When used in a legal context, the term indemnity can also refer to a waiver of obligation for damages.
A contract of indemnity is a legal arrangement between two parties. In this agreement, one party commits to compensate the other for any prospective losses or damages. An insurance contract, for example, is one in which the insurer or indemnitor agrees to compensate the other (the insured or indemnitee) for any damages or losses in exchange for premiums paid to the insurer. The insurer indemnifies the policyholder by promising to make the individual or business whole in the event of a covered loss.
LEGAL ENFORCEABILITY OF INDEMNITY CONTRACTS
One of the types of contracts is a contract of indemnity. The principles that apply to contracts in general apply to these contracts as well, so laws such free approval or consent, legality of the object, and so on are equally applicable. As with general agreements, permission to a contract should not be obtained through coercion, fraud, or deception; otherwise, the contract would be voidable at the choice of the party whose consent was obtained in this manner; the same applies to indemnification contracts.
The contract’s element or object must be legitimate, according to the Contract Act’s requirements. For example, if Manu’s son Shanu, a student, is unable to pay his monthly expenditures and rent to Ram (a PG), Manu will be required to pay on behalf of Shanu, so compensating for the damages that Ram will not be able to inherit as a result of Shanu’s actions. “Mr. Manu promises to indemnify and hold blameless Ram against loss or threatened loss or expense arising out of Ram’s liability or possible responsibility for arising out of any claims for damages,” for example, as an example of an indemnification clause for the aforesaid consideration.
FUNDAMENTALS OF INDEMNITY CONTRACT OF INDEMNITY
It is an unconditional commitment to compensate for a specific loss or injury, designed to ensure that an aggrieved party has a specific remedy for bugs or faults in products or services delivered under the Contract.
- It is a promise to compensate for or protect against damage, loss, or injury.
- It broadly refers to all contracts of protection, security, and assurance, among other things. It is not a subsidiary contract, but rather an independent one.
- It’s a tool for allocating risk-based responsibilities.
Indemnity clauses must be unambiguous, to the point, and should prescribe the circumstances under which compensation will be paid wherever possible. It should be viewed in light of any exclusion of responsibility clauses included throughout the agreement, and it should specify what damages will be paid if the clause is used favorably.
ASPECTS COVERED UNDER INDEMNITY CONTRACTS
A contract of indemnification, like an express commitment, can be triggered based on its conditions which include: –
- Judgement costs, and
- The amount paid under the terms of the agreement are just a few of the claims that an indemnity holder can make.
- The extent to which the promise has been indemnified is referred to as a portion of losses or harms.
- The relevant account should ideally be informed to the indemnifier.
- There is no requirement to demonstrate a breach of contract or real losses or damages.
CONSEQUENTIAL OR REMOTE DAMAGES
A claim for damages under the Contract Act,1872 can only be made for losses or damages “which the parties knew, at the time they made the contract, were likely to result from rupture or breach of it” at the time of contract formation, which is known as the “Principle of Contemplation of Damages” between the parties. Reasonable foreseeability is defined as the genuine likelihood of a loss occurring, and it is widely used in damage or loss tests. Furthermore, the losses claimed should be minimal, and hence damages for loss of profit or opportunity costs may not be tenable.
However, such restrictions do not apply to indemnification claims. According to Section 124 of the Indian Contract Act,1872 a request for damages or losses is subject to the above-mentioned standard rules of remoteness, while a claim for indemnification is not. As a result, until and unless the indemnified party is expressly excluded from the indemnification clause, any consequential, remote, indirect, and third-party losses can be claimed by the indemnified party.
INSTANCES OF APPLICATION OF INDEMNITY CONTRACTS
Under common law in the United Kingdom, an indemnity holder must first pay for the losses, injuries, or damages before claiming the indemnity. However, there is no clear-cut law in India that indicates that when an indemnification contract is enforced. Throughout the process, there have been differing legal conclusions.
- Osmal Jamal & Sons limited vs. Gopal Purushotham was the first Indian case to identify the right to indemnification. However, there is currently a general consensus in support of the equity court’s opinion. In the cases of K. Bhattacharjee vs. Nomo Kumar , Shyam lal vs. Abdul salal , and G. Moreshwar vs. M. Madan, it was decided that the indemnified can bind the indemnifier to put him in a position to meet any liability that may be imposed on him without having to wait until the indemnified has cleared it.
- Indemnity stipulates that the party who will be indemnified will not be required to pay at any time. As a result, the indemnifier’s liability begins the moment the loss or damages in the form of liability to the indemnified become absolute and limitless.
The following are the losses or damages resulting from the indemnity holder’s violation of contract or rights under Sec.125 of the Indian Contract Act 1872:
- In a contract of indemnification, the Promisee is designated to recover from the promisor all losses or damages that he may be forced to pay in any suit involving any substance to which the promise to indemnify applies, acting within his control.
For example, if Sita agrees to reimburse or indemnify Gita in the event of any legal action taken by Rita against Gita in connection with a specific action. If Rita initiates legal action against Gita and, as a result of the conclusion, Gita is required to pay Rita damages, Sita will be responsible for reimbursing Gita for the damages incurred in the case.
- All costs or expenses that he may be obliged to pay in any such litigation if, in bringing or protecting it, he did not contravene the promisor’s commands and acted as he would have acted in the absenteeism of any indemnification arrangement, or if the promisor empowered him to bring or protect the suit. All payments made under the terms of any agreements made in connection with any such litigation, if the agreement was not in violation of the promisor’s commands and was one that the Promisee would have made if there had been no contract of indemnity or if the promisor had given him the authority to amend the suit.
RIGHTS OF THE INDEMNIFIER
The Indian Contract Act of ,1872 excluded indemnifier rights. In the case of Jaswant Singh Vs. Section of State, it was determined that the indemnifier’s rights are similar to those of a surety under Section 141, where the indemnifier is entitled to the benefit of all securities held by the creditor against the principal debtor, whether or not the principal debtor was concerned about them.
When a person agrees to reimburse, he will be labelled as having succeeded to all of the ways and means through which the person who was initially compensated would have safeguarded himself against any loss or damages; or prepared for compensation for his loss or damages.
Once the indemnifier pays for the losses or damages, he automatically steps into the shoes of the indemnified, giving him all of the rights that the original indemnifier had to protect himself from loss or harm.
LIMITATION OF LIABILITY AND EXCLUSIVE REMEDY INDEMNIFICATION CLAUSE
To legally determine the scope of culpability, parties can agree to limit their disclosure to a well-drafted, essentially finite indemnity agreement that is mostly impervious to court judgement. As an example, consider the following:
- Clause of Exclusive Remedy: It should state that “the indemnity provided under this clause shall be its sole remedy in relation to the activities intended under this agreement to the exclusion of all other rights and remedies”; and that “the indemnity provided under this clause shall be its sole remedy in relation to the activities intended under this agreement to the exclusion of all other rights and remedies”
- Limitation of Liability: This clause specifies that the total liability under the agreement is restricted to the amount and terms of the indemnification.
On the foregoing points, there is currently no clear law. However, the courts are likely to hold that damages as a remedy is ruled out, leaving only indemnity subject to the limitations set out. This becomes critical in situations where an indemnified party may attempt to demand losses or damages in excess of the indemnity limit on grounds of equity or reasonableness.
FROM THE PERSPECTIVE OF AN INDEMNIFYING PARTY
Baskets or deductibles are used to ensure that an indemnifying party is not saddled with impractical claims. In general, when a deductible is used, the indemnifying party is only liable for the amount over and above the deductible limit, however when a basket is used, the indemnifying party is liable for the total amount once the basket limit is reached.
Due to the fact that it is an excusable clause, the limitations of responsibility clause are interpreted quite strictly. The parties may consider the following exclusions:
- Actual or constructive knowledge qualifier: The indemnifying party may recognize and bar claims for breach of the agreement if the indemnified party is aware of the claim’s facts, matters, information, or conditions.
- Net Financial Gain: The indemnifying party may add an explicit exclusion indicating that it will not be liable for any net quantifiable financial advantage received by the indemnified party as a result of any loss or damage.
- Exclusion of Contingent Obligation: It should be stated specifically that the indemnifying party is not liable for any contingent liability until and unless that liability becomes due and payable. Since, the indemnity is a continuing obligation, it is critical to remember that the indemnified party is not entitled to recover for the same matter or occurrence that resulted in the loss more than once. Additionally, the indemnifying party is not liable for any claim if the losses or damages are covered by insurance or are recoverable from a third party.
Notably, if enough allowances, provisions, or reserves are established in the accounting, the indemnifying party will not be held accountable for any claim. Unless expressly indicated in the indemnification contract, the indemnified party should bear no further responsibility for mitigating damages. As a result, the indemnifying party may negotiate and include in the indemnity agreement a reduction duty.
It is advisable to add a “limited of remedy” section that incorporates both the restriction of responsibility and exclusive remedy clauses and eliminates any interpretation issue. Contracts frequently include limitation of liability clauses that limit the indemnifier’s liability but do not preclude the indemnified from pursuing other legal remedies. The survival provision should be tailored to guarantee that it survives the termination of the agreement.
NEGOTIATING AN INDEMNITY CLAUSE AS AN INDEMNIFIED PARTY
It is crucial to avoid the expressions “make good” or “compensate,” as courts may take them to mean only claims for actual loss or harm experienced by the indemnified party, not situations in which guilt has been proved but no payment has been made. As a result, both circumstances will be referred to as “Hold Harmless.” Additionally, the term “protect against liability” imposes a duty of defense on the indemnifying party, requiring the party indemnifying to defend the indemnified against covered third-party claims and, depending on the clause’s terms, probable first-party claims.
While indemnification is a beneficial remedy, it should not be utilized only to protect the indemnified party; it should also include an obligation to safeguard the indemnified party. As a result, the clause could indicate that the indemnifying party’s right to defend the indemnified party may be invoked at any time during the course of a third-party claim.
Instead of “Damages means,” the term “Losses includes” should be used, as the indemnity clause covers any incidental, indirect, and remote losses. The expressions “as a result of” and “connected with” should be replaced by the term “arising out of,” which has a broad interpretation in the courts.
Due to the fact that indemnification payments are made in response to a breach of representations and warranties or contractual covenants, one could argue that the indemnifying party bears the tax repercussions of any indemnifiable loss. Due to the fact that indemnity payments are considered other income, they are taxed at 30%. As a result, indemnification payments should be structured so that the total amount paid equals the amount owed under indemnity claims plus any applicable taxes.
An indemnification clause must be drafted in such a way that it immediately initiates an indemnity payment claim when a claim notice is issued. Additionally, any delay in submitting claims or alerting the indemnifying party does not absolve that party of duty.
It can be stated that if the indemnifying party disagrees with the claim amount and requests arbitration or any other method of resolving the dispute as specified in the agreement, the claim amount should be deposited directly with the arbitrator, which will only ensure that the indemnifying party has the ability to pay if the indemnified party is awarded successfully. If the indemnifying party’s purposeful carelessness, breach, or fraud is predetermined, the indemnifying party may be deemed to be exempt from the indemnification cap.
INDEMNITY CONTRACT AS DEFENDANTS
In agreements between tenants and property owners, indemnity clauses are widespread. Dwellers undertake to hold the property owners harmless from any costs or damages incurred as a result of being hurt on the premises, and the property owners assume responsibility for anything that could be dangerous or bothersome. For example, if a property owner is indemnified from damages if a resident is injured in the property by accident, but if a part of the property is dangerous and is quite likely to cause damages and injuries to the occupant, and the owner is informed of this on a regular basis, a minor indemnity clause will not prevent the occupant from suing if the disrepair caused the mishap.
A contract of indemnity is defined as a contract that contains both explicit and implied guarantees. Sections 69, 145, and 222 of the Indian Contract Act of 1872 deals with implied indemnity situations. Insurance, indemnification, and guarantee contracts are all based on the assumption that something will go wrong. A contingent contract is one in which the parties agree to do or not do something based on the outcome of a contingent event.
Guarantee and indemnification contracts both serve the same business purpose of compensating the creditor in the event that a third party fails to fulfil his obligations. A contract of indemnity is an agreement to be held liable for another’s actions, and one of its most important characteristics is that it only exists between two parties, with no other parties involved in the contract’s subject matter. A contract of indemnity and a contract of guarantee differ primarily in this regard.
In the case of indemnity, the indemnifier assumes an independent obligation to discharge the liability in any case and voluntarily makes himself the primary accountable.
Except for life insurance, all insurance contracts are indemnity contracts; however, the reverse is not true. Payment of a premium during one’s lifetime is required for life insurance, and in exchange, the person will be reimbursed at death or maturity. Life insurance does not fall within the umbrella of indemnity contracts because there is no defined loss, which is a requirement for a contract of indemnification. “Almost all insurance, other than life and personal accident insurance, is a contract of indemnification,” according to New India Assurance Co. Ltd v. State Trading Corporation of India. The insurer’s promise to compensate is unconditional.”
In some cases, the need to indemnify may come from a legal or equitable duty to do so. In circumstances of unintentional misrepresentation, indemnity might be a viable remedy. According to the High Court of Bombay in National Petroleum Company v. Popat Lal Mulji , a third party cannot sue the indemnifier based on the principle of privity of contract.
IMPLIED INDEMNITY IN SOME EXTREME CASES
- Sec.69 designates a party to be indemnified if he is interested in the payment of money that another is required by law to pay and thus pays it himself.
- A party has the right of the surety to seek indemnification against the principal defaulter for all funds lawfully paid toward the guarantee under Sec.145.
- The principle is liable to indemnify the agent for any amounts paid during the legal exercise of his power, according to Section 222.
INDEMNITY: A JUDICIAL DECREE
In the case of Secretary of State vs. The Bank of India , an agent made a false presentation to a bank with a government promissory note in his hands. In exchange for a renovated promissory note issued by the Public Debt Office, the bank in good faith used the promissory note. During this period, the note’s true owner filed a conversion lawsuit against the Secretary of State. The bank was then prosecuted by the Secretary of State on the basis of implied indemnity, with the court ruling that the express indemnity clause was unnecessary in light of the implied right to indemnification that existed under Indian law prior to the bank’s actions.
A contract of indemnification establishes the parties, defines the types of losses or damages covered, and specifies whether or not legal fees associated with filing or challenging the litigation are covered. In most cases, the contract also specifies a “triggering event” that will hold the indemnifier liable if it occurs. “Arise out of,” “in conjunction with,” or “occasioned by,” “acts or omissions,” or “negligence” are some of the terminologies used to describe “triggering events.”
Since a party may not be able to control all visible aspects of a promise’s execution, a Contract of Indemnity is required. When the circumstances of performance were beyond his authority and control, the party could be sued for the actions of others. Indemnity is a type of compensation and a type of contract. The indemnifier accepts the duty to indemnify voluntarily.
The contract of indemnity is a legal claim as long as it does not violate public policy or the law. When one party is compelled to compensate the other for specific damages, this is referred to as an indemnity right. Because of the standard of contract secrecy established by the Bombay High Court in the case of National Petroleum Company vs. Popat Lal, no third party or intruder to the indemnification agreement can bring legal charges against the indemnified. In India, an insurance contract is almost never treated as an indemnity contract. However, agreements for marine insurance, fire insurance, or motor insurance are considered indemnity contracts because, unlike life insurance, which offers a specific sum of money upon the death of the policyholder, when a creditor takes out a policy on the principal debtor, he becomes entitled to a specific amount of money.
In the 1942 case of ‘Gajan Moreshwar vs. Moreshwar Madan,’ G Moreshwar was granted a long-term lease on land in then-Bombay. For a limited time, he handed over the lease to M.Madan. M.Modan began construction on the aforementioned property, ordering his supplies from K D Mohan Das. The accused was unable to pay when Mohandas demanded payment for the materials he gave. G Moreshwar produced a mortgage deed for K.D. Mohandas at the request of M Madan. G. Moreshwar put a charge on his belongings once the interest rate was agreed upon. The return of the principal amount was set for a specific date. M. Madan had made the decision to repay the debt plus interest and get the mortgage deed released by a certain date.
However, M. Madan did not pay K.D. Mohan Das as promised, and G. Moreshwar was forced to pay interest. When M. Madan refused to pay the principal amount plus interest and also refused to get the mortgage deed released despite numerous requests and intimations, G. Moreshwar filed a lawsuit against him for indemnification. If an indemnity holder has incurred an obligation that is absolute and without limits, the indemnity holder can ask the indemnifier to take care of the liability and pay it off, according to the Privy Council. As a result, M. Madan agreed to indemnify G. Moreshwar against any debt incurred as a result of the loan arrangement and deed of charge.
INDEMNITY CLAUSE Vs. LIQUIDATED DAMAGES
“If the contract specifies a sum as the amount to be paid in the event of such a breach, or if the contract also contains any other penalty clause, the party objecting to then breach is entitled to receive from the party who has breached the contract a justifiable settlement or compensation of no less than the amount specified in the contract, whether or not actual damages or losses have been confirmed. Unless the Court concludes that no loss or damage is likely to occur as a result of the breach or the occurrence of the event, there is no need to produce proof to substantiate the losses or damages. The Supreme Court declared in Fateh Chand vs. Balkishan Das that in all circumstances where a penalty is required, the court has authority to award only such a sum as it considers to be fair and reasonable, but not more than the amount specified in the contract.
A capped indemnity clause, on the other hand, works differently since the concepts of reasonableness, foreseeability, and distance that apply to damage claims do not apply to indemnity claims. As a result, a capped indemnification clause rather than a liquidated damage clause gives the parties a better chance of claiming more.
Indemnity as a legal term that refers to a legal release from the repercussions or responsibilities associated with a particular course of action. Simply expressed, indemnity requires one party to compensate the other if a third party incurs specific expenditures stipulated in the indemnity contract. Automobile rental companies, for example, stipulate that the individual renting the car is responsible for any damage or loss to the vehicle caused by his or her own reckless or irresponsible driving and must compensate the car rental company.
Liability issues can never be resolved by the employment of a straightforward indemnity clause. Those who want to avoid blame or seek immunity from punishment for their actions will find the law unfavorable. The fundamental premise is that a negligent party should not be permitted to completely shift all claims and damages against him to a non-negligent party. For instance, a ticket to an amusement park indicates that the purchaser waives any claims against the park’s management for injuries received as a result of ride breakdowns or other mishaps. However, because the defense is not based on a contract, it is rarely successful in court.
The notion of indemnity in contracts has undergone a number of changes, but it still has a limited scope and does not adequately serve its function. In previous reports, the Law Commission of India expressed concern over the Act’s enforcement. Their suggestions for improvement have now been incorporated into the legislation. The Indian Contract Act, 1872 offers flexibility for interpretation in order to eradicate ambiguity and confusion, thus keeping scope open for changes and amendments that would help the parties to have their rights secure and simultaneously aid the Court in coming to a decision.
- Indian Contracts Act, 1872
- Mulla’s Indian Contract Act (Act 9 of 1872)
- Indian Contract (Amendment) Act, 1997
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- http://www.legalservicesindia.com › article › Indemnity…
 AIR 1929 Cal 208, 118 Ind Cas 882
 1899 26 CAL 241
 AIR 1931 All 754
 (1942) 44 BOMLR 703
 1958 AIR 124, 1958 SCR 762
 (1936) 38 BOMLR 610, 165 Ind Cas 338
 (1938) 40 BOMLR 868
 (1936) 38 BOMLR 610, 165 Ind Cas 338
 (1942) 44 BOMLR 703
 1963 AIR 1405, 1964 SCR (1) 515
Authored by: LAKSHYA KAUSHISH, BBA LLB(Hon.),
ALKA SINGH, BA LLB(Hon.),