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Contract of Indemnity: Introduction, Meaning it's overview, case laws

Introduction to contract of Indemnity:

You might be aware of the basic rule that whoever harms or causes injury to another person has to pay the damages or costs to the injured person. The contract of Indemnity works on the same principle. Indemnity is a kind of compensation that protects you from any potential losses. In it's broadest sense, it refers to the payment of money to a person who has lost money, goods or other property due to the error of third party.

This concept of Indemnity is also incorporated in English law.

Meaning of Indemnity:

According to the definition given by Halsbury,the term "indemnity" is a contract that expressly or impliedly protects a person who entered into a contract.

The word indemnity is derived from the Latin word "indemnity" which means freedom from loss.

According to dictionary meaning it means protection against any kind of loss,expense the form of a promise to pay for those losses.

Illustration: X contracts to indemnify Y against the consequences of any legal proceedings that Q may bring against Y for a certain sum of money.This contract or promise is known as a contract of Indemnity.

Contract of Indemnity: An overview
The word indemnity has been derived from the Latin term "indemnis" which means unhurt or free from loss.The fundamental idea behind an indemnity is to transfer some or all of the liability from one party to another.

This means that one party to the contract ,referred to as the "indemnifier" or "indemnifying party", promises to protect another party, referred to as the "indemnity holder" or "indemnified party".

As per the Oxford dictionary, "Security from damage,loss or penalty".Indemnity Contracts and contracts for insurance are extremely similar. In an insurance contract, the insurer pledges or promises to make up in the form of compensation for the insured's losses.ln return ,he receives consideration in the form of a premium.These kinds of transactions are not governed by the Contract Act.

This is so because legislation like the Insurance Act has provisions specifically for insurance contracts.

The definition of Contract of Indemnity has been given in section 124 of Indian Contract Act,1872.

Section 124:
"An agreement by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the lead of someone else, is classified as "contract of Indemnity."

Parties to a Contract of Indemnity:
In a contract of Indemnity,there are two parties.
  1. Indemnifier:
    A person who promises to indemnify or pay for the losses is known as indemnifier.
  2. Indemnified:
    A person for whom such a promise is made is known as indemnified or indemnity holder.

A and B have a contract in which B promises to deliver goods to A for Rs.10,000 per month.C promises B that he will pay for the loss that will be suffered by him due to A.Here C and B are in a contract of Indemnity,where B is the indemnity holder and C is the indemnifier.

Insurance Indemnity:
All insurances except personal accident insurance come in the scope of Indemnity.It is an absolute promise to indemnify the insured.

An insurance policy that compensate a party for any accidental damages or losses up to a certain limit usually the value of the loss of itself is known as indemnity insurance.

Essentials to a contract of Indemnity:
  1. There must be two parties.
  2. One of the parties must promise the other to pay for the loss incurred.
  3. The contract may be expressed or implied.
  4. It must satisfy the essentials of a valid contract.
Objectives and nature of contract of Indemnity:
The purpose of entering into a contract of indemnification is to safeguard the promise from unfroseen losses.Parties may directly impose their own conditions in such a contract.

A contract of Indemnity has a contingent nature and it mainly provides a safeguard provisions for potential risks and uncertainties.

A contract of Indemnity is essential because a party may not be able to command all apparent aspects of the performance of a promise.

Position of contract of Indemnity in England:
The word "Indemnity" is used in a wider sense under English law.It includes a contract or promise to save a person from losses caused by humans , agencies or any other event like accidents that are not under the control of any person.

It also identifies contract of insurance other than life insurance as contract of Indemnity.On the other hand , in the Indian context ,the contract of Indemnity does not specifically recognise a contract of insurance under Indemnity.

Position in India:
In India , Indemnity has been defined under section 124 of Indian Contract Act ,1872.

Acc. to the section,it is a contract in which a party makes a promise to saves others from any kind of loss due to the actions of the promisor himself or any third person.

This definition is only limited to the losses caused by the actions of humans or agencies and does not include losses that are caused due to events that can't be controlled or forseen by any person, as stated in the case of Moreshwar v.Moreshwar Madav.

It can be said that the contract of Indemnity in India does not include a contract of insurance within its ambit.

Case Law:
United India Insurance company v/s Aman Singh Munshilal
In this case ,goods were stored in godowns ,from where they had to be carried to their destination after some time. While in storage,the goods were destroyed by fire.

It was held that the goods were destroyed during transit and the insurer must pay as the contract of insurer.

Rights Of Indemnity Holder:
Section 125:
The promisee in a contract of Indemnity acting within the scope of his authority is entitled to recover from the promisor:
  1. All damages.
  2. All Costs.
  3. All Sums.
Some case laws on contract of Indemnity:
  1. Dugdale v/s Lovering
    In this case, the plaintiff was in possession of certain trucks, which were claimed both by the defendant and K.P Colliery .The defendant demanded delivery of the trucks. As the plaintiff was aware that the ownership of the trucks was claimed by both the defendant and K.P Colliery, the plaintiff asked for an indemnity bond from the defendant.

    A reply was received by the plaintiff which only demanded delivery and did not mention any Indemnity bond. After which the plaintiff delivered the trucks to the defendant. Suit for Indemnity was filed by the plaintiff against the defendant and K.P Colliery.

    It was held that there is no express contract of Indemnity, there is an implied contract of Indemnity. Defendant was liable to indemnify the plaintiff as the indemnity bond led to the creation of an implied promise.
  2. Chand Bibi v/s Santosh Kumar Pal
    In this case,the defendant's father ,while acquiring specific property,promised to pay off the plaintiff's mortgage obligation and indemnify him if they were proven accountable for the debt. The plaintiff sued the defendant's father to enforce the agreement when the defendant's father failed to pay off the mortgage obligation. The court took into consideration the fact that the plaintiff has not yet suffered any loss for which he should be compensated.

    It was held that the plaintiff has not suffered any losses and that the suit was premature so far as the cause of action on Indemnity was concerned.

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