Compensation is an overall concept of civil cases to make good the loss or damage suffered by a party in a contract. Part II from sections 124 to 238 of the Indian Contract Act, 1872 deals with some specific types of contracts. One such contract is the contract of indemnity, where a party promises to save the other from the loss.
Sections 124 and 125 of the Indian Contract Act deals with the contract of indemnity. Let us take a look.
Note: We don’t find the words Part I and Part II written in the Contract Act. But often, informally, in colleges and coachings, we read Contract Act in two parts. Section 1 to 75 is the first part that deals with the general principles of contract. And the second part is from section 124 onwards.
- Meaning of Indemnity
- Contract of Indemnity as Per the Indian Contract Act
- Important Terminologies Related to Contract of Indemnity
- Essentials of Contract of Indemnity
- Case Laws Related to Contract of Indemnity
- Rights of the Indemnity Holder
- Contract of Indemnity – Difference Between Indian and English Law
Meaning of Indemnity
The general meaning of the word ‘indemnity’ is the protection, security, or compensation against any loss or damage.
Contract of Indemnity as Per the Indian Contract Act
Section 124 of the Contract Act defines the contract of indemnity. It says that when one party promises to another party to save from the loss caused to him by the conduct of:
- promisor himself, or
- any other person (i.e. stranger);
this is known as a contract of indemnity.
Important Terminologies Related to Contract of Indemnity
You must know the following fundamental terminologies used in the contract of indemnity.
- When one party promises to another party to save from the loss caused to him by the conduct of the promisor himself or any other person (i.e. stranger), such types of contracts are called the contract of indemnity.
- The procedure is to indemnify (i.e. to protect).
- The person who gives the indemnity is called an indemnifier (i.e. promisor).
- The person for whom the promise is made to make good the loss is known as the indemnity holder or indemnified (i.e. promisee).
Essentials of Contract of Indemnity
These are the essentials of a contract of indemnity:
- There must be a valid contract between the two parties.
- That promisor promises to save from the loss to the promisee.
- The promisee must suffer loss.
- That such loss must be caused by the conduct of the promisor or by any other person.
Case Laws Related to Contract of Indemnity
Adamson vs Jarvis (1827): In this case, the House of Lords held that the promise may be expressed or it may be implied from the circumstances of the case.
Gajanan Moreshwar Parelkar vs Moreshwar Madan Mantri (1942): The court held that the right of indemnity holder only commences when he had suffered actual loss by paying off the claim.
Rights of the Indemnity Holder
Section 125 of the Indian Contract Act provides for the rights of the indemnity holder when sued by a third party or by the indemnifier himself.
Section 125 provides the right to entitlement to recover from the promisor (i.e. indemnifier) if the indemnity holder acts within the scope of his authority.
The primary rights of an indemnity holder are:
1. Right to Recover All Damages
A promisee may compel the promisor to pay in any suit in respect of any matter for which the promise to indemnify applies.
2. Right to Recover All Costs Incurred in Bringing or Defending Any Suit
A promisee may compel the promisor to pay all costs, provided that the following conditions be fulfilled:
- That the promisee must not contravene the orders of the promisor.
- That, in the absence of any contract of indemnity, he must act in a way that a prudent man would act in that situation.
3. Right to Recover All Sums Paid Under Compromise
If the promisee had compromised for any such suit, then he can compel the promisor to pay for it, provided that the following conditions be fulfilled:
- That the promisee must not contravene or contradict the orders of the promisor.
- In the absence of any contract of indemnity, the indemnity holder must act in a way that a prudent man would act in that situation.
Note: Such right of indemnity holder prevails even when the promisor has authorised him to bring or defend the suit.
Contract of Indemnity – Difference Between Indian and English Law
1. In English law, a contract of insurance is a contract of indemnity where the insurance company promises to save the other party from the loss suffered. While in Indian law, a contract of insurance is a contingent contract where the contract depends on the happening or non-happening of the future event.
For example: ABC Insurance Company promises Z to pay rupees 20,000 if Z’s house is burned. This is a contingent contract.
But one thing that is similar in English as well as Indian Law is that ‘life insurance‘ is a general contract reason being death is a certain event.
2. In English law, a contract of indemnity may be expressed or implied, while in Indian law, it can only be expressed.
3. In English law, a contract of indemnity is applicable to accidents. In contrast, in Indian law, a contract of indemnity does not apply to the loss arising from accidents and events which are not dependent on the conduct of human beings.
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