The term Indemnity literally means “Security against loss”. In a contract of indemnity one party – i.e., the indemnifier promises to compensate the other party i.e., the indemnified against the loss suffered by the other. The English law definition of a contract of indemnity is – “it is a promise to save a person harmless from the consequences of an act.” The promise may be express or it may be implied under English law.
An illustration in English law of the meaning and effect of contract of indemnity is to be found in the facts of Adamson v. Jarvis. The plaintiff, an auctioneer sold certain cattle on the instruction of the defendant. It subsequently turned out that the livestock did not belong to the defendant, but to another person, who made the auctioneer liable and the auctioneer in his turn sued the defendant for indemnity for the loss he had suffered by acting on the defendant’s directions.
The court laid down that the plaintiff having acted on the request of the defendant was entitle to assume that, if, what he did, turned out to be wrongful, he would be indemnified by the defendant. In Dugdale v. Lovering, the plaintiff was in possession of certain trucks which were claimed both by the defendants and one K.P. Company the defendants demanded delivery and the plaintiffs asked for an indemnity bond, but received no reply. Even so they delivered the trucks to the defendant. K.P Company, having successfully sued the plaintiffs for conversion of their property, the plaintiffs were held entitled to recover indemnity from the defendants on an implied promise as evidenced by the fact that by demanding an Indemnity, they made it quite clear that they had no intention to deliver except on indemnity.
Similarly, in Sheffield Corporation v. Barklay, A corporation, having registered to transfer a stock on the request of a banker, was held entitle to recover indemnity from the banker when the transfers were discovered to be forged.
Thus, the English definition of Indemnity includes within its ambit losses caused not merely by human agency but also those caused by accident or fire or other natural calamities. Indeed, every contract of insurance, other than life insurance, is a contract of indemnity.
A Contract of indemnity is a direct engagement between two parties whereby one promises to save another from harm. According to section 124 of the Indian Contract Act a contract of indemnity means “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.” The definition provided by the Indian Contract Act confines itself to the losses occasioned due to the act of the promisor or due to the act of any other person.
Meaning of Indemnifier and indemnity holder
Indemnifier: The person who promises to make good the loss is called the ‘indemnifier’. In the aforesaid example A is the Indemnifier. Indemnity holder: The person whose loss is to be made good is called ‘Indemnity holder’. In the aforesaid example B is the Indemnity holder.
Nature of contract of Indemnity
A contract of indemnity may be express or implied depending upon the circumstances of the case, though Section 124 of the Indian Contract Act does not seem to cover the case of implied indemnity.
DEFINITION: - As provisions made in section 124 of the Indian Contract Act 1872 says that, “whenever one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of the any other person, is called a Contract of Indemnity.”
Example
A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
A broker in possession of a government promissory note endorsed it to a bank with forged endorsement. The bank acting in good faith applied for and got a renewed promissory note from the Public Debt Office. Meanwhile the true owner sued the Secretary of State for conversion who in turn sued the bank on an implied indemnity. It was held that – it is general principle of law when an act is done by one person at the request of another which act is not in itself manifestly tortious to the knowledge of the person doing it, and such act turns to be injurious to the rights of a third person, the person doing it is entitled to an indemnity from him who requested that it should be done. [Secretary of State v Bank of India].
Essential Elements:
The following are the essentials of the Contract of Indemnity: -
- There must be a loss.
- The loss must be caused either by the promisor or by any other person.
- Indemnifier is liable only for the loss.
Thus, it is clear that this contract is contingent in nature and is enforceable only when the loss occurs.
Modes of contract of Indemnity
EXPRESS : A contract of Indemnity is said to be express when a person expressly promises to compensate the other from the loss
IMPLIED : A contract of Indemnity is said to be implied when it is to be inferred from the conduct of the parties or from the circumstances of the case
Insurance and Indemnity
All most all insurances other than life and personal accident insurance are contracts of Indemnity. The insurers promise to indemnify is an absolute one. A suit can be filed immediately upon failure to performance, irrespective actual loss. If the indemnity holder incurred liability and that liability was absolute, he would be entitled to call upon the indemnifier to save him from that liability by paying it off (New India Assurance Company Ltd. v. State trading Corporation of India, AIR 2007 NOC)
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