Contract of Indemnity :
The law relating to indemnity as laid down by section 124 and 125 of Indian Contract Act is not exhaustive. It is much wider than what is stated in Contract Act. It is much enriched by judgments and interpretations of various law courts from time to time. Students are therefore well-advised to go beyond the confines of bare definitions and limited expiations provided in the text of law and reach the world wisdom by way of references to such rich material on this subject.
Let us in the first place know what the definition of the term indemnity is. Section 124 of Indian Contract Act defines contract of indemnity as under:
“A contract by which one party promises to save the other form loss caused to him by the conduct of the promisor himself or by the conduct of any other person is called a contract of indemnity.”
This section also gives an example that makes the things easy to understand. It is as under:
A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum say Rs. 50,000/= (this is a contract of indemnity).
The person who promises to make good the loss is called the indemnifier (promisor) and the person whose loss is to be made good is called the indemnified or indemnity holder (promise). A contract of indemnity is a class of contingent contracts. Let us take one more example of contract of indemnity:
A and B claim certain goods from a Railway company as rival owners. A takes delivery of the goods by agreeing to compensate the railway company against loss in case, B turns out to be the true owner. There is a contract of indemnity between A and the railway company.
The definition of contract of indemnity as given in the Indian contract Act is not exhaustive. It is an inclusive definition. It includes:
– Express promises to indemnify
– Cases where the loss is caused by the conduct of the promisor himself or by the conduct of any other person
It does not include:
– Implied promises to indemnify.
– Cases where loss arises from accidents and events not depending on the conduct of the promisor or any other person.
In India, it has been held that sections 124and 125 of the contracts Act are not exhaustive and the courts here would apply the same equitable principles that the courts in England do. Moreover, if section 124 is strictly interpreted, even contracts of insurance would have to be excluded from this definition. It may be submitted that such a strict application of the definition was not intended by the Legislature.
In English law, a contract of indemnify has been defined as ‘a promise to save another harmless form loss caused as a result of a transaction entered into at the instance of the promisor. This definition would cover the loss caused by events or accidents which do not depend on the conduct of any person, and liability arising from something done by the promise at the request of the promisor. The English definition is much wider in its scope. As such English law in respect of indemnity is followed by the Indian courts.
A contract of indemnity may be express or implied. An implied contract of indemnity may be inferred from the circumstances of the case or from relationship of the parties.
Example: A is the owner of an article. X sends it to Y, an auctioneer, for sale. Y sells the article. Claims it and recovers damages from Y for selling it. Y can recover the loss form X as a promise by X to save Y from any such loss would be implied from his conduct in asking Y to sell the article.
Section 69 also implies a promise to indemnify. It goes like this:
‘A person who is interested in the payment of money which another is bound by law to pay, and who, therefore pays it, is entitled to be reimbursed by the other.
A contract of indemnity is a species of the general contract. As such it must have all the essential elements of a valid contract, viz., consideration, competency of the parties, free and genuine consent, and legality of the object contracted for.
Over and above the kind of indemnity stated in section 124, there are cases where the Courts applying the principles of general law have held a person liable to indemnify, though the person never did undertake such a liability, The decision of the Privy Council in Secretary of State vs. Bank of India Ltd. (AIR 1938 PC 191) best illustrates this point. In this case, Ms. G was the holder of Government promissory note which she had handed over to Mr. A, her broker. A forged Ms. G’s signature and endorsed it for value to the bank. The bank in good faith applied to the Government Public Debt Office to have the note exchanged in their name which was done. Ms. G on coming to know that she has been defrauded sued to Government against the loss suffered by them. The court held the bank to be liable on the grounds that under common law right of indemnity, the bank is responsible for an injury to a third party’s rights.
A contract of indemnity, though similar to a contract of guarantee differs on various counts. In a contract of indemnity there are two parties, namely the indemnifier and the indemnified whereas in a contract of guarantee there are three parties viz., the debtor (the person on whose behalf the guarantee is give), the creditor (the beneficiary, the person to whom the guarantee is given) and the surety (the person who gives the guarantee).
In an indemnity, the risk is contingent whereas in a guarantee the liability is subsisting. In a contract of indemnity, he indemnifier is required to make good the loss as soon as it occurs and he cannot rely on the fact the person on whose behalf the indemnity is given has not made good the loss whereas in a contract of guarantee the surety’s liability is coextensive with that of the principal debtor.
There are only two parties to a contract of indemnity and as such only one contract. However, in a contract of guarantee there are at least three contracts: one between the debtor and the creditor, the other between the creditor and the surety and the third between the surety and the debtor. An indemnity is for the reimbursement of a loss whereas a guarantee is for the security of the creditor.