CONTRACT OF INDEMNITY

By | April 24, 2017
Need for Indemnity to Facilitate Commercial Transaction
Indemnity – Introduction and Meaning

The term ‘indemnity’ literally means security against loss. Indemnification refers to the act of being held not liable or being protected from costs by shifting them to another party. If a person is promised by another that he will be protected or compensated in case of loss or damage, he is said to be indemnified.

A contract of indemnity is an express promise to compensate for defined loss or damage used to ensure that a contracting party has an express remedy to correct defects in goods or services delivered under the contract.

 Section 124 of the Indian Contract Act, 1872 defines a contract of indemnity as the contract wherein 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 person who promises to protect or compensate is called the indemnifier. The person to whom the promise of indemnity is given is called the indemnity holder.

Illustration 

A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of ` 200. A is the indemnifier and B is the indemnity holder. When A pays B to cover damages that B had to pay C, and then A has indemnified B.

Indemnity clauses are very common in agreements between tenants and landlords. Tenants agree to indemnify the landlord from costs or damages associated with being harmed on the property while the landlord takes the responsibility to anything that could be potentially dangerous. Thus, a landlord stands indemnified from damages if a tenant tripped and fell down the stairs. But if the stairs were in disrepair, and the landlord had been told to get the same fixed time and again, a mere indemnity clause will not prevent the tenant from suing for damages if such disrepair caused the accident. 

The objective of an indemnity clause is to get some work done; indemnity is a mere motivational tool. For example, an agent works for his principal and in case of any loss accruing to the principal, the agent will not be liable.

Conclusion

The definition of contract of indemnity is not exhaustive. The section sets out a case of an express contract of indemnity but there are implied contracts too. After all, Section 9 of the Indian Contract Act, 1872 talks about implied promises.  More obviously, the ICA 1872 deals with cases of implied indemnity under Sections 69, 145 and 222. But implied indemnity was recognised for sure by the Privy Council in the case of SECRETARY OF STATE v. THE BANK OF INDIA LD AIR [1938] PC 191. Sections 10 and 13 of the Indian Partnership Act, 1932 also deal with principles of indemnity.

Shradha Arora

(Editor @ Legal Bites)

Mayank Shekhar
Author: Mayank Shekhar

Mayank is a student at Faculty of Law, Delhi University. Under his leadership, Legal Bites has been researching and developing resources through blogging, educational resources, competitions, and seminars.

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