1. Contract of Indemnity (special contracts).pptx

The PPT explains the contract of indemnity, a part of special contract syllabus in the course of B.A. LL.B. It helps students understand the concept of indemnity in Indian contract act and its relationship with guarantee.

1. Contract of Indemnity

2. Meaning Longman’s Dictionary of Contemporary English: It is protection against loss or security or compensation in case of loss. Sec 124 ICA: 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”

3. Example: A Contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a sum of Rs. 200. This is a contract of indemnity (Illustration to Sec. 124 ICA) A receipt pertaining to certain goods was lost by A while travelling in a train. B who found the receipt claimed the goods from railways. Railways asked B to furnish an Indemnity bond in their favour. Now if A (original Owner) sued the Railways for the damages, they can claim the same from B Here Railways is Indemnity holder and B is Indemnifier.

4. Essentials of a contract of indemnity It must be a valid contract under section 10 of Indian Contract Act : Free consent parties competent to contract lawful consideration, lawful object not expressly declared void Two parties : Indemnifier (Promisor) Indemnity holder (Promisee) Loss to indemnity holder: Occurrence of loss or damage is a contingency upon which liability of the indemnifier comes into existence.

5. Indian law vs. English Law Under English law, the term “Indemnity” carries wider meaning. It includes compensation for any loss caused to a party whether by human agency or not. But in India indemnity includes only loss which is caused by the human agency. Under English Law Contact of Indemnity includes Insurance also, which is not true in Indian context. Ex: Insurance in case of damage due to fire is a contract of indemnity under English.

6. Exceptions (Exclusion) A contract of indemnity does not include: Cases where loss arises due to accidents such as fire/marine, or any unforeseen event. Any event not depending on the conduct of the person, for e.g. Death

7. Amendment required Law Commission of India in its 13 th report (1958) had recommended that the definition of ‘Contract of Indemnity’ in this section be expanded to include cases of loss caused by the events which may or may not depend upon the conduct of human beings.

8. Rights of Indemnity Holder Sec. 125:- Right of indemnity-holder when sued - The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor- (1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies; (2) all costs which he may be compelled to pay in any such suit, if in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit; (3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contract to the orders of the promisor, and was one which it would have been prudent for the promise to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit.

9. Section 125 - Rights of indemnity- holder when sued Preconditions: Existence of a contract of indemnity Indemnity holder should have acted within the scope of his authority Indemnity holder entitled to recover from the indemnifier – Damages All costs Provided: Indemnity holder did not contravene the orders of the indemnifier Indemnity holder acted prudently; or Indemnifier authorized indemnifier to bring/defend the suit Any compromise payment Provided: compromise is not contrary to the orders of the indemnifier Indemnity holder acted prudently Indemnifier authorized indemnity holder to compromise the suit

10. Indemnity holder, When to made liable? There is a controversy in this regard that whether a indemnity holder can claim to be indemnified before the actual loss has been occurred?

11. Earlier view based on English Common Law: No action can be maintained against the indemnifier till the indemnity holder has suffered actual loss. Present view based on equitable principles: Existence of a clear enforceable claim suffices to call the indemnifier’s obligation into action. The indemnity holder can compel the indemnifier to place him in a position to meet the liability that may be cast upon him without waiting until he has actually discharged it.

12. In India Lahore and Nagpur High Court’s view: A Person must be demnified before he can be indemnified. Bombay, Madras, Calcutta, Patna High Court’s view: Above high courts recognises the English principle followed in court of equity. i.e. Indemnity holder can compel the indemnifier to indemnify even before the actual loss occurs.

13. Equitable View - Landmark Case Gajanan Moreshwar Parelkar Vs. Moreshwar Madan Mantri – AIR 1942 Bom 302 Sections 124 and 125 of the Indian Contract Act are not exhaustive of the law of indemnity. The Courts in India would apply the same equitable principles that the Courts in England do. “ An indemnity might be worth very little indeed if the indemnified could not enforce his indemnity till he had actually paid the loss. If a suit was filed against him, he had actually to wait till a judgment was pronounced, and it was only after he had satisfied the judgment that he could sue on his indemnity. It is clear that this might under certain circumstances throw an intolerable burden upon the indemnity-holder. He might not be in a position to satisfy the judgment and yet he could not avail himself of his indemnity till he had done so. Therefore the Court of equity stepped in and mitigated the rigour of the common law. ” Chagla J.

14. The Law Commission of India supported the views of Justice Chagla and recommended the amended in concerned sections of Indian Contract Act.

15. Indemnity Vs. Guarantee Indemnity Guarantee Contract of indemnity is a bilateral contract: Requires the concurrence of only two persons - the indemnifier and the indemnity holder. Contract of guarantee is a tripartite contract: Requires concurrence of three parties - the creditor, the surety and the principal debtor. Indemnifier is primarily and independently liable. There must be contract by which the principal debtor, expressly or impliedly requests the surety to act as surety. Indemnifier’s liability arises from loss caused by the conduct of indemnifier himself or by the conduct of another person. Surety’s liability arises from principal debtor’s default.

16. Indemnity Clause A provision in a contract under which one party (or both parties) commit to compensate the other (or each other) for any harm, liability, or loss arising out of the contract. The formula to compute the amount of compensation is usually included in the contract.

17. Nature of Indemnity Clauses Broad version of indemnity clause: “ Contractor agrees to indemnify and hold harmless Owner from any and all liabilities, claims, actions, demands, losses, damages, penalties, lawsuits, judgments, including attorneys’ fees and costs, arising out of or relating to the work of Contractor.”   Narrower version of indemnity clause:   “Contractor agrees to indemnify and hold harmless Owner from any and all liabilities claims, actions, demands, losses, damages, lawsuits, judgments, including attorneys’ fees and costs, but only to the extent caused by, arising out of, or relating to the work of Contractor.” Capping: “ In no event shall the maximum liability hereunder exceed the sum of Rs. ____. The limitation should bear a reasonable commercial relationship to the contract”

18. Indemnification clause - Things to remember Every indemnification clause is different so read it carefully -  Don't assume that it is "standard" or "fair." Who is agreeing to pay who -  Are you agreeing to pay the counter party if there is a problem or is the counter party agreeing to pay you? Don't go out of your way to offer indemnifications; it increases your potential risk. What kinds of losses will be covered -  Will the indemnifier pay the attorneys' fees, Court costs and actual damages? Which party gets to control the legal strategy -  Who is picking the attorney? Who gets to decide whether to settle the case? 

19. Indemnification clause - Things to remember What kind of event triggers the obligation to indemnify - Breach of contract or negligence by the other party? Third-party claims? Limitation of liability – It is advisable to exclude consequential and remote damages from the scope of indemnity. Indemnity holder’s duty to co-operate with the indemnifier – The indemnifier’s obligation can be made conditional to the indemnity holder promptly notifying the indemnifier of any claim in writing and cooperating with the indemnifier in the defense of the claim .

20. Stamp Duty Indemnity Bond is listed at no. 34 of the Indian Stamp Act 1899 When an agreement includes an indemnity clause, the stamp duty payable shall be: stamp duty payable on the agreement + stamp duty payable on an indemnity bond It differs in different states. Example: Duty payable in Delhi: When the amount secured does not exceed Rs. 1000/- : 2% In other case: Rs.100/-

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