Contract Of Indemnity

By | February 2, 2024

Meaning of Contract of Indemnity

A contract of indemnity is a legal agreement between two parties where one party (the indemnifier) promises to compensate or reimburse the other party (the indemnified) for any loss, damage, or liability they may incur due to a specified event or circumstance. The purpose of such a contract is to provide financial protection and security to the indemnified party against potential losses.
In India, the concept of indemnity is defined under Section 124 the Indian Contract Act, 1872. Indemnity contracts are particularly valuable in scenarios where a third party brings a claim or lawsuit against the indemnified party. Indemnity contracts are common in various business transactions, such as contracts for the sale of goods, service agreements, lease agreements, and construction contracts. The indemnity contract provides assurance that the indemnifier will cover any financial losses arising from such claims.

 

Section 124 of the Indian Contract Act,1872

It defines a contract of indemnity as a contract by which one party promises to compensate the other party for any loss or damage that the latter may suffer as a result of the conduct of the promisor himself or the conduct of any other person. In essence, it is a promise to safeguard the other party from specified losses. It states that,

“A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of indemnity.”

 

Parties in contract of indemnity

  • Indemnifier (Promisor): The indemnifier, also known as the promisor, is the party who makes the promise to compensate or reimburse the other party (the indemnified) in case of any loss, damage, or liability incurred by the indemnified party. The indemnifier agrees to bear the financial consequences and protect the indemnified party from specified risks or circumstances.
  • Indemnified (Promisee): The indemnified, also known as the promisee, is the party who receives the assurance of compensation from the indemnifier. The indemnified party is the one who is protected against potential losses or liabilities that may arise due to specific events or situations. When the indemnified party suffers any loss covered by the indemnity agreement, they have the right to claim reimbursement from the indemnifier.

 

Object behind contract of indemnity

The primary object behind a contract of indemnity is to provide financial protection and security to one party (the indemnified) against potential losses, damages, or liabilities that may arise due to specific events or circumstances. The indemnity contract ensures that the indemnified party is not exposed to the full financial risk associated with certain situations. An indemnity contract helps in allocating risks between the parties involved. It allows one party (the indemnifier) to assume the responsibility for potential losses or liabilities that the other party (the indemnified) may face in the future due to specified events. By doing so, the indemnified party can focus on its core activities without being unduly burdened by certain risks. The primary goal of an indemnity contract is to protect the indemnified party from financial harm resulting from specific events. The indemnifier promises to compensate the indemnified party in case those events occur, thereby reducing the potential adverse impact on the indemnified party’s financial well-being. In these contexts, indemnity contracts serve to assure one party that the other will bear the financial consequences of certain events that might occur during the course of the transaction.

Insurance contracts are contracts of indemnity

Insurance contracts are a type of indemnity contracts. In an insurance contract, the insurer (the indemnifier) agrees to compensate the insured (the indemnified) for specific losses or damages that the insured may suffer due to covered events, in exchange for the payment of a premium by the insured. They play a crucial role in managing and mitigating risks for individuals and businesses, providing them with financial security and peace of mind. However, it’s essential for policyholders to understand the terms and conditions of their insurance contracts, including policy limits, deductibles, and exclusions, to ensure they have adequate coverage for their specific needs. Like other indemnity contracts, insurance contracts provide compensation to the insured for covered losses or damages. The insurer’s obligation is to restore the insured to the financial position they were in before the loss occurred, subject to the policy terms and conditions. The insurer’s liability under an insurance contract is contingent upon the occurrence of specific events or risks covered by the policy. These events may include accidents, property damage, illness, disability, or death, depending on the type of insurance.

Landmark cases on contracts of indemnity

  1. Union of India v. Raman Iron Foundry (1974): In this case, the Supreme Court of India highlighted the distinction between indemnity and guarantee contracts. The court emphasized that the liability of the indemnifier under an indemnity contract is primary, while the liability of a guarantor under a guarantee contract is secondary.
  2. Indian Oil Corporation Ltd. v. Messrs. Devi Nandan Petrochemicals Pvt. Ltd. (2004): In this case, the Supreme Court held that when a contract falls within the ambit of Section 124 of the Indian Contract Act, it must be expressly stated as an indemnity contract, and the intention to indemnify should be clear and unambiguous.
  3. Rajasthan State Mines and Minerals Ltd. v. Eastern Engineering Enterprises (2019): In this case, the Supreme Court reiterated that for an indemnity contract to be enforceable, it must fulfill the essential requirements of a valid contract, such as free consent, lawful consideration, and capacity to contract.

 

Conclusion

The specific terms and conditions of an indemnity contract can vary significantly based on the parties involved, the nature of the transaction, and the applicable laws and regulations. When entering into an indemnity contract, it is crucial for both parties to clearly understand the rights and obligations outlined in the agreement and to seek legal advice if needed to ensure that the contract meets their specific needs and requirements.

FAQs

  1. What is contract of indemnity with example?

Answer: It is a legally binding agreement in which one party (the indemnifier) promises to compensate or reimburse the other party (the indemnified) for any losses, damages, or liabilities they may incur due to specific events or actions. Insurance contracts are an example.

  1. What is the concept of indemnity?

Answer: The concept of indemnity is a legal principle that involves one party (the indemnifier) promising to compensate or reimburse another party (the indemnified) for any losses, damages, or liabilities they may incur due to specific events or actions.

  1. What are the two types of indemnity?

Answer: Contractual indemnity refers to indemnification that arises from a contractual agreement between two parties. Legal indemnity, on the other hand, is an indemnification that arises from a legal or statutory obligation. It is not based on a contractual agreement but rather on the operation of law or legal principles.

  1. Which type of contract of indemnity is?

Answer:  It can be considered a contingent contract as it hinges on the occurrence of a specific action, whether explicitly stated or implied. In other words, it acts as a backup plan in case the said event takes place.

  1. What is the principle of contract of indemnity?

Answer: The core principle underlying it is to shift the risk of such losses from the indemnified party to the other party (the indemnifier).

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