The Indian Contract Act of 1872 governs all contracts formed in India. Sections 1 to 75 of the Act pertain to the general laws that apply to all types of contracts. The Act’s remaining sections address three specific types of contracts, namely:
- Indemnity and Guarantee: Chapter VIII: Ss. 124 – 127.
- Bailment: Chapter IX: Ss. 148 – 181
- Agency: Chapter X: Ss. 182 – 238
As per Section 124 of the aforementioned Act, a contract whereby one party agrees to save the other from any loss caused to them by the conduct of any person, including the promisor or any other party, is known as a “contract of indemnity”. The individual who promises to indemnify or cover the loss is referred to as the “indemnifier,” and the person to whom the promise is made is known as the “indemnified” or the “indemnity-holder.” In such a contract, the indemnifier acts as the promisor, and the indemnity-holder is the promisee.
Features of a Contract of Indemnity
It is important to note that a contract of indemnity is a contingent contract between two parties, wherein one party promises to save the other from any loss.
If we strictly interpret Section 124, we observe that the indemnity holder can hold the promisor liable on the contract of indemnity. However, the promisor must suffer a loss before becoming entitled to receive anything from the indemnifier.
Nonetheless, in the landmark case of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942) BOM LR 703, the Bombay High Court held that when a person contracts to indemnify another, the promisee may call upon the indemnifier to fulfill the contract or liability. This view is also supported by Kennedy L.J. in an English case and appears to be fair and just.
Furthermore, it must be noted that for the contract to be valid, the consideration and conditions must be lawful.
Essentials of a Contract of Indemnity
- Parties in a Contract of Indemnity: In a contract of indemnity, there are only two parties – the indemnifier and the indemnity holder
- Intention to cover loss: In a contract of indemnity, there must be an intent to save the other party from loss by one party.
- Express or Implied: The contract of indemnity may be expressed or implied
- Essentials of a general contract must be fulfilled: A contract of indemnity is a special kind of contract. It must fulfill all the essentials which make up a valid contract.
Scope of a Contract of Indemnity under English and Indian Laws
The definition of a contract of indemnity is not entirely definitive under Indian law. It only encompasses express promises to indemnify or instances where the loss is caused by the indemnifier’s conduct or the conduct of another person. It does not include cases where an implied promise to indemnify has been made or where loss arises from accidents or events beyond the control of any person. Furthermore, even contracts of insurance may not fall within the strict interpretation of Section 124.
In contrast, English law defines a contract of indemnity as a promise to save another from loss caused by a transaction entered into at the promisor’s instance. This definition covers losses resulting from accidents or events beyond the control of any person and is not dependent on any person’s conduct. The definition of a contract of indemnity is much broader in scope under English law.
Rights of indemnity – holder when sued
Section 125 of the Indian Contract Act addresses the rights of an indemnity-holder when they are sued. According to this section, an indemnity-holder acting within the scope of their authority is entitled to receive certain things from the promisor.
Firstly, the indemnity-holder is entitled to receive all damages that they may have to pay in any suit to which the promise to indemnify applies. Secondly, they are entitled to receive all costs that they may have to pay in bringing or defending such suits. However, the indemnity-holder must have acted prudently and within their authority, as any prudent person would have acted under similar circumstances in the absence of a contract of indemnity.
Thirdly, the indemnity-holder is entitled to receive all sums that they may have paid under the terms of any compromise of any such suit. However, the indemnity-holder must have acted prudently and not against the order of the promisor.
It is noteworthy that the Indian Contract Act does not address the rights of the indemnifier in a contract of indemnity.
Time of Commencement of Indemnifier’s Liability
The issue of the time of commencement of liability under a contract of indemnity has been a matter of debate and has not been clearly defined under the Indian Contract Act. While some High Courts have held that the indemnifier’s liability only arises when the indemnified party has actually suffered a loss, others have taken the view that the indemnified party can force the indemnifier to be liable even before the loss has occurred. It is important to note that the parties can clarify this issue by including specific terms in their contract of indemnity. In any case, a contract of indemnity is a special type of contract that requires one party to compensate the other in case of loss.
Authored by , Legal Intern, LawDiktat.
Edited by Sahid, Team Member, LawDiktat.