INDEMNITY MEANING AND DEFINITION, CONTRACT OF

INDEMNITY

INTRODUCTION

An indemnity clause is standard in most insurance agreements, and exactly what is

covered and to what extent depends on the specific agreement. Any given indemnity
agreement has what is called a period of indemnity, or a specific length of time for which the
indemnity is valid. Similarly, many contracts include a letter of indemnity, which guarantees
that the contract stipulations will be met by both parties, or else an indemnity must be paid.
Indemnity is common in agreements between an individual and a business (for example, an
agreement to obtain car insurance), but it also applies, on a larger scale, to relationships
between businesses and government or between governments of two or more countries.

Sometimes, a business or an entire industry is forced to take on the costs of larger

issues on behalf of the public, such as outbreaks of disease. The New York Times reported on
one such situation, the widespread effects of bird flu expenses on the healthcare and
agricultural fields, in its article, "Exclusive: U.S. Boosts Bird Flu Emergency Funds as
Hormel Cuts Jobs." The indemnity paid by the government allowed these industries to
continue to fight the outbreak. In a similar story, but on a global scale, The New York Times
covered the indemnity demanded from the government due to losses incurred in the fight
against Ebola in "Drugmakers May Need Indemnity for Fast-Tracked Ebola Vaccines." The
article highlights the reasons for the claim and the benefits and services the indemnity would
provide.

MEANING

Indemnity is compensation for damages or loss. Indemnity in the legal sense may also
refer to an exemption from liability for damages.

DEFINITION

Undertaking given to compensate for (or to provide protection against) injury, loss,
incurred penalties, or from a contingent liability.

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 A shipping company, for example, will ask for a bank's indemnity for releasing a
shipment to a consignee who has lost original shipping documents. The bank in turn will
require the consignee to sign a counter-indemnity before issuing its indemnity to the shipping
company. This way the consignee gets the release of shipment in completion of a transaction,
and both the shipping company and the bank are protected in case some dispute arises out of
that transaction.

CONTRACTS OF INDEMNITY DEFINITION

The Contracts of Indemnity has been defined as: "A Contract whereby 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 term is often used in business contracts and in insurance.

Indemnity, in simple words, is protection against future loss.

The term 'Indemnity Agreement' is often used in the US.

The person who promises to save the other is called the Indemnitor or Indemnifier
and the person who is compensated is the Indemnitee, Indemnified or the indemnity-
holder. An indemnity can be defined as a sum paid by A to B by way of compensation for a
particular loss suffered by B. A, the indemnitor may or may not be responsible for the loss
suffered by the B, the indemnitee. Forms of indemnity include cash payments, repairs,
replacement, and reinstatement. Contract of Indemnties should all satisfy the conditions of a
valid contract. All Contracts of Insurance are Contracts of Indemnity except life insurance.

RIGHTS OF INDEMNIFIED OR INDEMNITY HOLDER

All damages which he may be compelled to pay in any suit in respect of any
matter to which the promise to indemnify applies;
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;

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 All sums which he may have paid under the terms of any compromise of any such
suit, if the compromise was not contrary to the orders of the promisor, and was
one which it would have been prudent for the promisee to make in the absence of
any contract of indemnity, or if the promisor authorised him to compromise the
suit.

The indemnity holder can call upon the indemnifier to save him from loss even before
the actual loss is incurred.

RIGHTS OF INDEMNIFIER

After compensating the indemnity holder, indemnifier is entitled to all the ways
and means by which the indemnifier might have protected himself from the loss.

RELEVANT CASE LAWS

Gajanan v. Moreshwar, AIR 1942

STATUTE / LEGISLATION RELATED TO CONTRACT OF INDEMNITY

India: Section 124 of Indian Contract Act, 1872 defines Contract of indemnity.

India: Section 125 of Indian Contract Act, 1872 specifies the Rights of indemnity-
holder when sued

UK: China Indemnity (Application) Act 1931

US: UCC 440.7601: Lost, stolen or destroyed documents of title; delivery of

goods, indemnity.

US: UCC 440.7601.amended: Lost, stolen, or destroyed documents of title;

delivery of goods or issuance of substitute document; indemnity

ESSENTIAL ELEMENTS OF A CONTRACT OF INDEMNITY

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 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 a "contract of
Indemnity".

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 Rs 200. This is a contract of indemnity. This
definition provides the following essential elements -

There must be a loss.

The loss must be caused either by the promisor or by any other person.
Indemnifier is liable only for the loss.

Thus, it is clear that this contract is contingent in nature and is enforceable only when
the loss occurs.

RIGHTS OF THE INDEMNITY HOLDER

Section 125, defines the rights of an indemnity holder. These are as follows -

The promisee in a contract of indemnity, acting within the scope of his authority, is
entitled to recover from the promisor -

Right of recovering Damages - all damages that he is compelled to pay in a suit in

respect of any matter to which the promise of indemnity applies.
Right of recovering Costs -all costs that he is compelled to pay in any such suit if,
in bringing or defending it, he did not contravene the orders of the promisor and
has acted as it would have been prudent for him to act in the absence of the
contract of indemnity, or if the promisor authorized him in bringing or defending
the suit.
Right of recovering Sums -all sums which he may have paid under the terms of a
compromize in any such suite, if the compromize was not contrary to the orders of
the promisor and was one which would have been prudent for the promisee to
make in the absence of the contract of indemnity, or if the promisor authorized
him to compromize the suit.

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 As per this section, the rights of the indemnity holder are not absolute or unfettered.
He must act within the authority given to him by the promisor and must not contravene the
orders of the promisor.

Further, he must act with normal intelligence, caution, and care with which he would
act if there were no contract of indemnity. At the same time, if he has followed all the
conditions of the contract, he is entitled to the benefits. This was held in the case of United
Commercial Bank vs Bank of India AIR 1981. In this case, Supreme Court held that the
courts should not grant injunctions restraining the performance of contractual obligations
arising out of a letter of credit or bank guarantee if the terms of the conditions have been
fulfilled. It held that such LoCs or bank guarantees impose on the banker an absolute
obligation to pay. In the case of Mohit Kumar Saha vs New India Assurance Co AIR 1997,
Calcutta HC held that the indemnifier must pay the full amount of the value of the vehicle
lost to theft as given by the surveyor. Any settlement at lesser value is arbitrary and unfair and
violates art 14 of the constitution.

COMMENCEMENT OF LIABILITY

In general, as per the definition given in section 124, it looks like an idemnity holder
cannot hold the indemnifier liable untill he has suffered an actual loss. This is a great
disadvantage to the indemnity holder in cases where the loss is imminent and he is not in the
position to bear the loss. In the case of Gajanan Moreshwar vs Moreshwar Madan, AIR 1942,
Bombay high court observed that the contract of indemnity held very little value if the
indemnity holder could not enforce his indemnity untill he actually paid the loss. If a suit was
filed against him, he had to wait till the judgement and pay the damages upfront before suing
the indemnifier. He may not be able to pay the judement and could not sue the indemnifier.
Thus, it was held that if his liability has become absolute, he was entitled to get the
indemnifier to pay the amount.

CONCLUSION

The concept of indemnity is based on a contractual agreement made between two

parties, in which one party agrees to pay for potential losses or damages caused by the other
party. A typical example is an insurance contract, whereby one party (the insurer,or the
indemnitor) agrees to compensate the other (the insured, or the indemnitee) for any damages

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or losses, in return for premiums paid by the insured to the insurer. In Canada, indemnity
refers to the salary received by a member of Parliament or a legislature.

REFERENCES

http://www.investopedia.com/terms/i/indemnity.asp
http://www.businessdictionary.com/definition/indemnity.html
http://www.lawnotes.in/Contracts_of_Indemnity
http://hanumant.com/IndemnityGuarantee.html
www.lawsofbusiness.com/2012/03/indemnity-and-guarantee-contract.html