Just look at the image here, a red car seemingly damaged in a road accident. For the loss incurred to the car as well as the person(s) who had to medical treatment, Insurance Companies are inclined to pay unless the situation suggests otherwise. But Why? Did they cause the accident? NO! Did they induce the parties to commit that accident? NO! The answer is insurance agreement, which is a kind of indemnity wherein the Insurance Company gets paid for assuring that in case of any unseen loss, they will compensate for the loss incurred. Now the question arises – what is contract of indemnity?
In simple words, Indemnity means any loss or damage suffered to be recovered because of the promise made to compensate in terms of money. In every big or small organization, where contracts are formed, the clause of indemnity plays a pivotal role and has always been addressed as it protects the parties from any loss or damages in advance. Is there any specific law to indemnify under the law of contract? To understand what is Contract of Indemnity let’s get into depths of the same through this blog.
What is Contract of Indemnity?
Section 124 of the Indian Contract Act reads as ”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, is called a “contract of indemnity”. The provision reveals that there is an agreement which has to be abide by the both parties, one known as the indemnifier (promises to compensate), and the other known as indemnity holder (for any loss caused to him, either by the action of indemnifier also referred to as promisor or by the action of any third party).
Types of Indemnity
Express indemnity
It is simple contractual indemnity. It simply hints at a clause of indemnity stated in the contract. There are three types of express indemnity:
- Broad Form Express Indemnity is a kind of indemnity contract where the indemnifier protects the indemnity holder irrespective of who’s at fault or even if he’s (indemnity holder) at fault solely. For example, there is a contract between a General Contractor and Sub-Contractor in which the Subcontractor must protect or indemnify the General Contractor from the harm caused to him because of his own fault.
- Intermediate Form Express Indemnity is another type of express indemnity clause in a contract where indemnifier will compensate to the indemnity holder only if the indemnity holder is not 100 percent negligent.
- Limited Form Express Indemnity is when in a contract, the indemnifier will protect indemnity holder to a certain extent. For example, a contract between a Sub-Contractor and General Contractor, specifying that the subcontractor will protect or indemnify the general contractor only to the extent of Subcontractor’s negligence.
Implied Indemnity
It refers to a contract where there is no express provision for indemnity. There are two kinds of implied indemnity:
- Implied-in-Fact Indemnity: Even though there is no express provision for indemnity in contract. Still, implied in fact can be pled by the party because the right to indemnification depends upon the relationship of the contracting parties, the circumstances of their conduct, and their intent to create an indemnifier/indemnity holder relationship. In practice, it is hardly pled in Courts.
- Implied-in-Law Indemnity: Indemnity in this case is not an express provision in contract but can be interpreted from the conduct of the parties or circumstances of the party.
Rights of Indemnity Holder
Section 125 of Indian Contract Act talks about Rights of Indemnity Holder i.e. to recover damages, to recover cost incurred and to recover sum paid under compromise.
Right to recover damages
The law of indemnity entitles the indemnity holder to recover all the losses caused to him/her due to negligence of indemnifier or third party. For example, if two parties contract in case a ship which carries goods sunk due to some human error, and supposedly the ship actually sank, then A will indemnify B for the loss he suffered due to sinking of ship. Here, B has a right to recover damages from A.
Right to recover cost incurred
The indemnity holder has the right to recover all the incidental cost and damages from the indemnifier which he/she is required to pay when the clause of indemnity is in question in a law suit or otherwise. Suppose A and B contract that A will indemnify B if loss is caused due to a particular shipment of goods. Now, if any suit is filed regarding the event that caused loss of shipment of goods, like an accident due to which the shipment is lost, the indemnity holder can recover the cost from the Indemnifier as per section 125 of Indian Contract Act.
Right to recover sum paid under compromise
Let’s consider a situation where A and B enter into a contract, with A indemnifying B for the completion of a task assigned to B by a third party. If B fails to fulfilll the task and the third party initiates legal proceedings, but eventually both parties decide to reach a compromise where B agrees to pay a certain amount, then that sum paid by B to third party under the compromise can be recovered from A. However, Indemnity holder must behave and follow instructions of indemnifier like he would have followed in the absence of indemnity clause.
Duties of Indemnity Holder
- If indemnity holder is acting negligently, then indemnifier is not liable to indemnify or protect the indemnity holder. Therefore, it is duty of indemnity holder to act reasonably.
- The indemnity holder must act in good faith as he should not try to cause any harm or deceive indemnifier for his own good.
- Indemnity holder must act according to the instructions of Indemnifier. If he acts in contravention, then the indemnifier is not legally required to bear any loss which happened due to the non-compliance of instructions by Indemnity holder.
