The Contract of Indemnity is explained in the Indian Contract Act, 1872, in articles 124 and 125.
But what is Indemnity?
In simple terms, indemnity refers to a contract between two people in which one person agrees to save the other person with a "contingency contract" based on the occurrence or non-occurrence of an event.
According to Section 124 of the Indian Contract Act,A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself or by the conduct of any other person is called a "contract of indemnity."
In England, a "Contract of Indemnity" has been defined as "a promise to save another harmless from loss caused as a result of a transaction entered into at the instance of the promisor." Indemnity covers not only loss arising from the conduct of the promisor or a third party but also accidental loss.
However, the definition in Section 124 of the Indian Contract Act is narrower and seems to exclude indemnity as a cover for accidental loss.
ILLUSTRATION:
A contracts to indemnify B against the consequences of any legal proceedings that Q may bring against B for a certain sum of money. This contract or promise is known as a "contract of indemnity."
A (the car owner) promises to indemnify B (the creditor) if his car is damaged in an accident. B met with a minor accident in which he did not suffer any injury, but his car was damaged completely. Here, A is obliged to indemnify B for the damage.
CONTRACTING PARTIES:
1) Indemnifier: A person who promises to indemnify or pay for the losses (promisor).
2) Indemnity holder: A person to whom the promise is made.
THE INDEMNITY CONTRACT'S ESSENTIALS:
1) Special contract
2) All the requirements of a valid contract
3) The promisor's indemnity
4) Loss to one party
5) The reason for the loss
INDEMNIFIED/HOLDER OF INDEMNITY RIGHTS (SECTION 125):
According to Section 125, the promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the indemnifier or promisor.
1) Damages: All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies
2) Cost: all costs which he may be compelled to pay in any such suit, whether in bringing or defending it.
3) Sums paid for the compromise: All sums which he may pay under the compromise of any such suit
INDEMNIFICATION RIGHTS:
The Indian Contract Act, 1872, is silent about the rights of the indemnifier. In Jaswant Singh vs. the State on July 15, 1965, it was held that the rights of an indemnifier are the same as the rights of a surety. After paying all damages, the indemnifier takes the position of indemnity holder and has rights over the property. He is required to indemnify the promisee for losses up to the amount mentioned in the terms and conditions of the contract. He takes the position of the creditor after settling all his claims.
Case Law on Indemnity Contracts:
1) Keppel v. Wheeler (1927) 1 KB 577: In this case, the plaintiff, Keppel, owned a car dealership and had entered into a contract with the defendant, Wheeler, to purchase a car. Wheeler agreed to indemnify Keppel against any claims arising from the sale of the car. The car was later involved in an accident, and Keppel was sued by the injured party. Keppel then sought indemnity from Wheeler.
The court held that the contract between Keppel and Wheeler was a contract of indemnity and that Wheeler was liable to indemnify Keppel for any damages resulting from the accident.
2) Union of India v. Raman Iron Foundry, AIR 1974 SC 126:
In this case, the plaintiff, Raman Iron Foundry, had entered into a contract with the defendant, the Union of India, to supply certain goods. The contract included a clause for indemnity, which stated that the plaintiff would indemnify the defendant against any claims arising from the supply of the goods. The plaintiff later discovered that the goods were defective and could not be used as intended. The defendant then claimed indemnity from the plaintiff for the losses suffered due to the defective goods.
The Supreme Court held that the clause for indemnity was valid and that the plaintiff was liable to indemnify the defendant for the losses suffered.
(3) National Insurance Co. Ltd. v. Harish Chandra, AIR 1969 SC 966:
In this case, the plaintiff, National Insurance Co. Ltd., had issued an insurance policy to the defendant, Harish Chandra, for his truck. The policy included a clause for indemnity, which stated that the insurer would indemnify the insured for any losses arising from the use of the truck. The truck was later involved in an accident, and the insurer paid compensation to the injured party. The insurer then claimed indemnity from the insured for the amount paid as compensation.
The Supreme Court held that the clause for indemnity was valid and that the insured was liable to indemnify the insurer for the losses suffered.
4) Adamson v. Jarvis:
The defendant claimed to be the legitimate owner of the goods and cattle, and the petitioner (Adamson) who was an auctioneer offered some cattle for sale. The petitioner was ignorant of the defendant's illegal right to sell the livestock. Following a successful lawsuit against the defendant by the true owner of the animals, Adamson was forced to compensate him for his losses. In response, the defendant was sued for indemnification by the petitioner. He filed a lawsuit to seek compensation for the loss he incurred from having to pay the genuine owner's damages.
It was decided that the defendant is entitled to cover the loss caused by the petitioner for the payment of damages to the rightful owner because the Jarvis did not accurately reflect the ownership.
5) "Secretary of State vs. the Bank of India" [1938]:
The holder and endorsee of a government promissory note for Rs. 5,000 was a woman. Having possession of the note on the lady's behalf, a broker endorsed it for the respondent for a value while forging the lady's endorsement in his favour (bank). In accordance with the Indian Securities Act of 1920, the respondent applied to the public debt office in good faith. After learning about the deception, the lady filed a conversion lawsuit against the Secretary of State and was awarded the required damages. In response, the secretary sued the bank using an implied indemnity clause.
It was held that the appellant should recover from the respondent the proper amount of the claim; it also says the express indemnity clause is not necessary in light of the implied right to indemnity that already exists under Indian law.
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