Covering Losses and Lowering Risks: Contract of Indemnity

Indemnity contracts assist companies in covering their losses and lowering their risks. According to Section 124 of the Indian Contract Act, a “Contract of Indemnity” is a contract where one party promises to protect the other against damage caused to him by the promisor’s behaviour or by the action of another party.

The Contract of Indemnity is entered into by the parties to shield the promisee against unforeseen losses. It is an assurance that a person will be saved from an act’s repercussions without suffering damage.

The Contract of Indemnity is between two parties.

• An indemnifier protects from or makes up for the loss of the suffered injury.
• The other party who receives compensation for the damage incurred is known as the indemnified party or indemnity-holder.

Essentials of Contract of Indemnity

1. Parties to Contract: A contract must have two parties, namely the promisor (also known as the indemnifier) and the promisee (also known as the indemnified or indemnity-holder).
2. Protection against Loss: A contract of indemnification is made to shield the promisee against loss. The loss may have been brought about by the promisor’s or another person’s actions.
3. Express or Implied: The indemnification agreement may be made explicitly (via spoken or written words) or implicitly (i.e. inferred from the parties’ conduct or circumstances of the particular case).
4. Number of Contracts: There is only one agreement between the indemnifier and the indemnified in an indemnity contract.

Examples

Example 1:

One of the greatest examples of an indemnification contract is car insurance. When you get auto insurance, the insurance provider promises to pay to repair your vehicle should an accident occur and account for the cost of doing so. Now, a person on the road hits your car, causing damage, and your auto insurance provider will pay for the loss caused to your automobile.

Example 2:

A agrees to provide specific commodities to B monthly in exchange for Rs. 2,000. If A fails to deliver the products, C enters and guarantees to cover B’s damages. B and C will engage in contractual responsibilities of indemnification in this manner.

Example3:

Amit and Rakesh enter into an indemnification contract whereby Rakesh agrees to cover Amit’s damages should the latter suffer a business loss. Amit is not responsible for paying any losses, and Rakesh did not suffer any losses in the business. But in such circumstances, Amit would be accountable for covering Rakesh’s losses if he sustained any in his business.

Nature of Contract of Indemnity

The Contract of Indemnity is conditional and serves primarily as a safety net against potential risks. Like any other contract, an indemnification agreement must adhere to all legal standards to be enforceable.

As an illustration, let’s say A and B contract together. The two main criteria were that B would defeat C and that A would hold B harmless from any serious repercussions. B was now fined 1000 rupees for beating C. As a result of the illegality of the agreement’s goal, A’s commitment, in this case, cannot be carried out, and B will not get anything.

Types of Indemnity

In general, there are two types of Indemnity: express and implied.

Express Indemnity

It also goes by the name “written indemnity.” Under this scenario, a contract would expressly list all the terms and circumstances of the Indemnity, and the agreement clearly outlines the obligations and rights of both parties. Contracts for construction, agency work and insurance indemnity are examples of this arrangement.

Implied Indemnity

It alludes to that indemnification when the duty is based on the facts and actions of the parties. There is no formal agreement here. The master-servant relationship serves as the fundamental illustration of this form of indemnification. The master is responsible for covering his servant’s losses sustained while carrying out his instructions.

Indemnification can be provided both explicitly and implicitly. There are primarily three sorts of indemnification contracts, which can be made both expressly and implicitly. The several kinds of indemnification contracts include:

• Broad Indemnity

  The indemnifier pledges to cover all parties’ damages under the wide Indemnity, including those of the third party.

• Intermediate Indemnity

  Per the Intermediate Indemnity, the Indemnifier agrees to cover only damages brought on by the actions of the Promissor and the Promissee. The losses sustained as a result of the actions of a third party are not covered by the Contract of indemnification in this case.

• Limited Indemnification

  The limit indemnity clause commits the indemnifier to cover damages brought on by his actions. When there is a restricted indemnification clause, the damages sustained due to the promisee’s and third party’s actions are not covered by the Contract of Indemnity.

Timing for Invocation of Indemnity

When the indemnity bearer should be required to release his obligation is a subject of constant discussion. The main issue is whether the obligation to pay goes into effect when the loss happens or when it becomes absolute or certain. There is nothing specified in Indian Contract Act 1872 about this. Still, it is evident from our judicial statement that the indemnity holder might call the Indemnity once the responsibility becomes absolute rather than waiting until the actual loss occurs.

The decision of the Bombay High Court in the matter of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri is a milestone decision in this respect.

In this instance, it was decided that if the indemnity holder had to wait until he had paid the real damage, the value of the indemnification clause would be lost. He had to wait until the verdict was rendered, adding an unneeded load to his shoulders. The indemnifier might be required to pay into the court a sufficient amount of money used to build a fund and pay the claim whenever it is made, according to the court’s application of the equity principle.

Rights of Indemnifier

After paying the indemnity holder, the indemnifier can use any available defences against the loss. However, many high courts in India upheld the following guidelines: Before the indemnified person has incurred a loss, the indemnifier is not responsible.

The indemnified party may require the indemnifier to compensate for their loss if the indemnified party has not released them from obligation. In the landmark decision of Gajanan Moreshwar vs Moreshwar Madan (1942), the judge noted that if the indemnified had acquired a duty and the liability was absolute, he had the right to request that the indemnifier absolve him of the obligation and settle it.

Rights of Indemnity Holder

Section 125 describes the rights of an indemnity holder. The list is as follows:

In a contract of Indemnity, the promisee (Indemnity holder), working inside the limits of his power, is entitled to damages from the promisor (Indemnifier) which are:

1. Right of Recovering Damages: The ability to recover all damages that he must pay in a lawsuit concerning any subject to which the guarantee of indemnification applies is referred to as damages.
2. Right of Recovering Costs: The ability to collect costs incurred in pursuing or defending any such lawsuit, provided that he obeyed the promisor’s instructions and behaved reasonably under the circumstances had the Contract of indemnification not been in place, or if the promisor gave his permission to do so.
3. Right of Recovering Sums: The option to regain All amounts that he may have paid as part of a compromise in connection with any such lawsuit, provided that the compromise was not against the promisor’s instructions and was one that the promisee would have been wise to enter into even in the absence of the indemnity contract, or that the promisor had permitted him to settle the case.

The indemnity holder’s rights are not unrestricted or absolute under this provision, which is one of the crucial restrictions he needs to abide by. He must follow the directions of the promisor and only behave as permitted by that authority.

Commencement of Liability of Promiser/ Indemnifier

The start of the indemnifier’s responsibility under the indemnity contract is not specified in the Indian Contract Act of 1872. However, many Indian High Courts have upheld the following guidelines in this case.

Before the insured has experienced the loss, the indemnifier is not responsible.

Even when the indemnifier has not released himself from obligation, the indemnified may require him to make good on his loss.

Comparison of remedies for breach of indemnity contract and those provided for under Section 74 of the Indian Contract Act

Section 74 of the Indian Contract Act of 1872 lists the following damages for breach of Contract:

1. Compensatory Damages: These are financial compensation for your loss-related expenses.
2. Consequential and Incidental Damages: These are financial compensation for damages anticipated due to the violation. Foreseeable damages signify that both parties had a reasonable understanding at the time of the Contract that there may be losses in the event of a violation.
3. Attorney Fees and Costs: Only recoverable if expressly provided for in the Contract are attorney fees and costs.
4. Liquidated Damages: Liquidated Damages, as defined in the Contract, are damages that would be due in the event of fraud.
5. Specific Performance: A court order mandating compliance with the Contract’s terms exactly as written. Due to the courts’ disinterest in performance monitoring, this remedy is uncommon outside real estate deals and other special property.
6. Punitive Damages: These are financial penalties for offensive and severe behaviour to prevent the offender and others from repeating the offence. Punitive damages are typically not recoverable in contract proceedings.
7. Rescission: The agreement is terminated, both parties are released from future performance, and any advance payments are reimbursed.
8. Reformation: The Contract’s provisions are modified to reflect the parties true intentions.

Conclusion

A legal indemnity is a release from the consequences or responsibilities of any course of conduct. A payout from insurance is sometimes referred to as an indemnity, or it may be insurance to cover costs in the event of a lawsuit. A guarantee to indemnify one party against financial damage is typically included in contracts. It is anything that is presented as a demand that one side hold the other party unharmed. Holding harmless does not mean being compensated.

Before beginning any job, corporate leaders, board members, and public authorities frequently demand an indemnification clause in their contracts. Additionally, indemnity clauses are frequently included in intellectual property.