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Published : October 11, 2010 | Author : shuchi.lawstudent
Category : Contracts laws | Total Views : 24077 | Rating :

shuchi pandey, final year law student at university of burdwan

Indemnity in a contract

1. what is meant by Indemnity in a contract?
In common parlance indemnity is often used as a synonym for compensation or reparation.
As a legal concept, it has a more specific meaning. For instance, compensation connotes merely a sum paid to make good the loss of another without regard to the payer's identity, or their reasons for doing so. As the following paragraphs should explain, an indemnity is a sub-species of compensation, in the same way that damages and reparations are.

An obligation to indemnity can also be distinguished from a guarantee granted by one party in regard to the potential debts of another. For example A might agree to stand guarantor (or surety) for her son C (an impecunious law student) so that if C cannot afford to pay his rent to B (his canny landlord), A will be obliged to pay for him. Here, C is the one primarily responsible for payment of the rent. A's liability is only ancillary. The liability of an indemnifier, properly so-called, is primary. This distinction between indemnity and guarantee was discussed as early as the eighteenth century in Birkmya v Darnell.[1] In that case, concerned with a guarantee of payment for goods, rather than payment of rent, the presiding judge explained that a guarantee effectively says "Let him have the goods; if he does not pay you, I will." By contrast, an indemnity is like saying "Let him have the goods, I will be your paymaster.[2]

It has been held in Gajanan Moreshwar Parelkar v. Moreshar Madan Mantri[3],

“ that the provisions of the Indian contract Act dealing with indemnity are not exhaustive on the law of indemnity and hence the same equitable principles as courts in England do”

2. Indemnity under Indian Contract Act 1872

As per section 124 of the Indian contract Act 1872- 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.Key Fundamentals
1. It is a promise to compensate for or security against damage, loss or injury.
2. In wider sense it includes all contracts of insurance, guarantee. It is not a collateral but an independent contract.
3. It is a tool for allocating risks contingent liability.
4. Indemnity clauses, amongst other things, must be clear, specific, where possible stipulate the circumstances under which the indemnity will arise, be considered in light of any exclusion of liability clauses found elsewhere in the agreement and state what damages will be payable in the event of the clause being successfully invoked

1. A contract of indemnity can be enforced according to its terms.
2. Claim of Indemnity holder can include: damages, legal costs of adjudication, amount paid under the terms of compromise
3. The measure of damages is the extent to which the promisee has been indemnified.
4. Indemnifier should ideally be informed of the legal proceedings or should be joined as third party
5. There is no onus to show breach or actual loss.

5. Comparison between the remedies on breach of contract of indemnity and remedies under section 74 of the Indian contract Act
Damages on breach of contract under section 74 of Indian contract Act 1872 are as under-
(1) Compensatory Damages - money to reimburse for costs to compensate for your loss.

(2) Consequential and Incidental Damages - money for losses caused by the breach that were foreseeable. Foreseeable damages means that each side reasonably knew that, at the time of the contract, there would be potential losses if there was a breach.

(3) Attorney fees and Costs - only recoverable if expressly provided for in the contract.

(4) Liquidated Damages - these are damages specified in the contract that would be payable if there is a fraud.

(5) Specific Performance - a court order requiring performance exactly as specified in the contract. This remedy is rare, except in real estate transactions and other unique property, as the courts do not want to get involved with monitoring performance.

(6) Punitive Damages - this is money given to punish a person who acted in an offensive and egregious manner in an effort to deter the person and others from repeated occurrences of the wrongdoing. You generally cannot collect punitive damages in contract cases.

(7) Rescission - the contract is canceled and both sides are excused from further performance and any money advanced is returned.

(8) Reformation - the terms of the contract are changed to reflect what the parties actually intended.

Damages on breach of contract of indemnity under section 125 of Indian contract Act 1872 is as under-
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 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 authorized him to compromise the suit.

6. Can a party invoke indemnity on demand?

In Mary Coleiro v The State of NSW and Others case,
Mary Coleiro sued The State of NSW in District Court proceedings for injuries she alleged to have sustained as a result of an incident which occurred on 5 September 2000.

Ms Coleiro was a cleaner employed by Hydaree Pty Limited, a wholly owned subsidiary of Tempo Services Limited (“TSL”). TSL entered into a contract for the provision of cleaning services of public schools with the State Contracts Control Board (on behalf of the State of NSW Department of Education). Whilst on the school premises, the plaintiff alleged to have tripped and fallen on a raised section of concrete. She was not performing cleaning duties at the time, but was on her way to do so.

The State of NSW (“The State”) filed a cross-claim against TSL, alleging that it was obliged to indemnify it under the terms of a service contract.

Service providers can take some comfort from the case of Coleiro which supports the view that a temporal connection between the performance of the service and the loss sustained is insufficient to invoke an indemnity clause.

In Tanksley v. Gulf Oil Corp[4].this court held that an oil company cannot invoke an indemnification agreement with a contractor after settling an injured worker's claims because, by settling, the oil company foreclosed its opportunity to have a court determine that it was free from fault[5].

From the above case decisions it can be inferred that indemnity can be invoked on demand
· Indemnity may be invoked where the claimant has a pre-existing condition that caused a loss of use of a member of the body and there is proof that the loss of use is sufficiently pronounced that an ordinary person could discover it[6]

· In accordance with developed practice it is proposed that any indemnity is limited to exclude losses caused by the accountable body’s negligence and that the indemnity can only be invoked once the accountable body has made reasonable endeavors to recover any reclaimed grant from the relevant project manager, which may include taking legal action.

· Included procedures, terms and conditions in the contract to be followed for invoking the indemnity by the customer.

· A letter of indemnity, on the other hand, permits a misrepresentation and, in consequence, it should not be invoked against consignees or third parties and, if used against them, it should have no effect. The misrepresentation must, of course, be directly related to the loss or damage complained of.

· A letter of indemnity is a corollary to a fraud on a third party and cannot be invoked against a third party in good faith who, on the contrary, may use the letter as evidence of the bad order and condition of the goods.

7. Conclusion
Indemnity is a legal exemption from the penalties or liabilities incurred by any course of action. An insurance payout is often called an in indemnity, or it can be insurance to avoid any expenses in case of a lawsuit. Indemnification is a promise, usually as contract provision, protecting one party from financial loss. This is something stated as a requirement that one party hold harmless the other.(Hold harmless does not imply indemnification.

The first says I wont make any claims against you and the second says I will pay the claims against and/or your costs, etc.) Indemnification is a type of insurance which protects the one party from the expenses of other. Indemnification clause cannot usually be enforced for intentional tortious conduct of the protected party.

Corporate officers, board members and public officials often require an indemnity clause in their contracts before they perform any work. In addition indemnification provisions are common in intellectual properties. Licenses in which the licensor does not want to be liable for misdeeds of the licensee. A typical license would protect the licensor against product liability and patent infringement.

[1] (1704) 1 Salk 27.
[2] also: ''Mountstephan v Lakeman (1871) LR 7 QB 196.
[3] 5 Tropical Insurance Co v. Zenith Life Insurance Co, AIR 1941 Lah 68.
[4] 848 F.2d 515 (1988)
[5] The two intermediate Louisiana appellate courts that have considered the issue have both rejected the conclusion in Tanksley that an indemnities’ settlement of a case precludes a subsequent determination of fault.

Authors contact info - articles The  author can be reached at: shuchi.lawstudent@legalserviceindia.com

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Article Comments

Posted by G.C.Das on November 12, 2010
Very good

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