Indemnity Clause is governed under Section 124 of Indian Contract Act, which is defined as a contract by which one party promises to save the other from loss caused to him by the conduct of the promise himself, or by the conduct of any other person, is called a “contract of indemnity”. Thus the section is clear that if promisee suffers any loss by conduct of the promisor or by conduct of any other person in respect of which indemnity is furnished by the promisee would be entitled to indemnify such loss against the promisor.
- Fundamentals of Indemnity Clause
The fundamental principle of an Indemnity Clause is indemnifier is liable for damages or compensation which is relatable to or arising from the contract or on tort.
- Classification of Indemnity
In general, all contractual indemnity provisions would fall under following classifications:-
- The first type of provision is that which provides expressly and clearly that the indemnitor is to indemnify the indemnitee for, among other things, the negligence of the indemnitee i.e. the person to Be Protected. Under this type of provision, the indemnitee is indemnified whether his liability has arisen as the result of his negligence alone or whether his liability has arisen as the result of his co-negligence with the indemnitor.
- The second type of provision is that which provides that the indemnitor is to indemnify the indemnitee for the indemnitee’s liability “arising from the use of services of the indemnitee” or “which might arise in connection with the agreed work”.
- The third type of contractual provision is that which provides that the indemnitor is to indemnify the indemnitee for the indemnitee’s liabilities caused by the indemnitor (e.g. Breach of terms of Contract), but which does not provide that the indemnitor is to indemnify the indemnitee for the indemnitee’s liabilities that were caused by other than the indemnitor (e.g. No indemnification for Third party claims). Under this type of provision, any negligence on the part of the indemnitee, either active or passive, will bar indemnification against the indemnitor irrespective of whether the indemnitor may also have been a cause of the indemnitee’s liability.
- Under this type of indemnity provision, the indemnitee is indemnified; from his own acts of passive negligence that solely or contributorily cause his liability, but is not indemnified for his own acts of active negligence that solely or contributorily cause his liability.
- Indemnity and Guarantee
In a common parlance, Guarantee is where a surety is discharged from his liability under the guarantee if the principal promisor pays the debt or performs the obligation which the surety has guaranteed, whereas in case Indemnity, the surety may not necessarily be discharged by reason of the performance of the principal promisor of his obligations, or otherwise, by discharge of the principal promisor
The key difference between indemnity and guarantee is that while a guarantor’s liability is collateral to and dependent upon the liability and default of the principal debtor, an indemnifier’s liability is original and independent. This is related to the principle of co-extensiveness, which holds that a guarantor’s liability is generally co-extensive with the principal promisor’s liability in terms of the amount, time of payment and conditions under which the principal promisor is liable. This principle does not applies in case of Indemnity.
Where the liability of a promisor under an agreement exceeds that of the primary debtor, in that, for example, he may be liable when the primary debtor is not, or for an amount for which he is not, then the agreement is not a guarantee, and the promisor undertakes primary liability himself. In such circumstances the contract in question can only be viewed as an indemnity.
In S Y Technology Inc. vs. Pacific Recreation Pvt. Ltd. It was adjudged by the Singapore Court that :- (21.03.2007 – SGHC) CWU 68/2006 Decided On: 21.03.2007
“An indemnity is a contract by one party to keep the other harmless against loss, but a contract of guarantee is a contract to answer for the debt, default or miscarriage of another who is to be primarily responsible to the promisee. The essential differences are, therefore, that a guarantee gives rise to a secondary, whereas an indemnity gives rise to a primary obligation and that there are, therefore, three parties to a guarantee, the creditor, the debtor and the guarantor, who promises to answer for “the debt, default or miscarriage of another”, whereas there are only two parties to an indemnity and if it is a promise to indemnify a debtor it is owed to the debtor only, and not because he has failed to perform his obligation, but because he has performed it.”
- Implied Indemnity
Implied Indemnity has its roots under Section 69 of Indian Contract Act, Under this Section of the, a person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other. It shall be noted that the word bound by law to pay ‘ under Section 69 does not exclude those obligations of law which arose inter-parties whether by contract or tort.
The principle as regards implied indemnities as stated in Chitty on Contracts, Twenty-second Edition, Volume II, in para. 1035 at page 455 is as under:-
In many cases the law implies a promise to indemnify. If the circumstances are such that the law imposes on any person a legal or equitable duty to indemnify, it will imply a promise on his part to do that which under the circumstances he ought to do.
The implied indemnity piece was discussed by the Judicial Committee and on page 1821 :-
A right to indemnify generally arises from contract express or implied, but it is not confined to cases of contract. A right to indemnity exists where the relation between the parties is such that either in law or in equity there is an obligation upon the one party to indemnify the other. There are, for instance, cases in which the state of circumstances is such that the law attaches a legal or equitable duty to indemnify arising from an assumed promise by a person to do that which, under the circumstances, he ought to do. The right to indemnity need not arise by contract; it may (to) give other instances) arise by statute; it may arise upon the notion of a request made under circumstances from which the law implies that the common intention is that the party requested shall be indemnified by the party requesting him.
- Indemnity and Insurance
Contracts of insurance are considered really as contracts of indemnity and the principle of subrogation is applied to it being an equitable arrangement incidental to all contracts of indemnity and to payments on account of the indemnity.
Contracts of Insurance are generally in the nature of contracts of indemnity. Except in the case of contracts of Life Insurance, personal accident and sickness or contracts of contingency insurance, all other contracts of insurance entitle the assured for the reimbursement of actual loss that is proved to have been suffered by him. The happening of the event against which insurance cover has been taken does not by itself entitle the assured to claim the amount stipulated in the policy. It is only upon proof of the actual loss, that the assured can claim reimbursement of the loss to the extent it is established, not exceeding the amount stipulated in the contract of Insurance which signifies the outer limit of the insurance company’s liability. 2
The amount mentioned in the policy does not signify that the insurance company guarantees payment of the said amount regardless of the actual loss suffered by the insured.
The law on the subject in this country is no different from that prevalent in England; which has been summed up in Halsbury’s Laws of England – 4th Edition in the following words: The happening of the event does not of itself entitle the assured to payment of the sum stipulated in the policy; the event must, in fact, result in a pecuniary loss to the assured, who then becomes entitled to be indemnified subject to the limitations of his contract. He cannot recover more than the sum insured for that sum is all that he has stipulated for by his premiums and it fixes the maximum liability of the insurers. Even with in that limit, however, he cannot recover more than what he establishes to be the actual amount of his loss. The contract being one of indemnity only, he can recover the actual amount of his loss and no more, whatever may have been his estimate of what his loss would be likely to be, and whatever the premiums he may have paid, calculated on the basis of that estimate.3
- Rights of Indemnity Holder
If the indemnity holder had incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and pay it off.
Under an Indian judgement it was reiterated under Para 40:-
“On this view, an indemnity holder is entitled to sue the indemnifier even before he has incurred any damage, provided of course the indemnity holder is able to satisfy the Court about the existence of a clear enforceable claim against him and is able to show that it is in respect of such a clear enforceable claim that a contract of indemnity has been executed. … that the rights of the indemnity holder should not and need not be confined to those mentioned in S. 125, Contract Act. Even before damage is incurred by the indemnity holder, it would be open to him to sue for the specific performance of the contract of indemnity, provided of course it is shown that an absolute liability has been incurred by him and that the contract of indemnity covers the said liability.”4
- Indemnity and Damages
Indemnity must be carefully distinguished from damages. A right to indemnity is given by the original contract as agreed between parties, whereas a right to damages arises in consequence of the breach of that contract. These two terms are confounded and one reason for the confusion is, that when a contract is broken, indemnity is often found to coincide with the measure of damages. These two terms express fundamentally two different legal ideas.
Hence to conclude the rules on interpretation of Contract of Indemnity can considered as under unless agreed otherwise:-
(i) Upon an indemnity against liability, expressly, or in other equivalent terms, the person indemnified is entitled to recover upon becoming liable; (ii) Upon an indemnity against claims, or demands, or damages, or costs, expressly, or in other equivalent terms, the person indemnified is not entitled to recover without payment thereof; (iii) An indemnity against claims, or demands, or liability, expressly, or in other equivalent terms, embraces the costs of defense against such claims, demands, or liability incurred in good faith, and in the exercise of a reasonable discretion; (iv) The person indemnifying is bound, on request of the person indemnified, to defend actions or proceedings brought against the latter in respect to the matters embraced by the indemnity, but the person indemnified has the right to conduct such defenses, if the person chooses to do so.5
- – Eastern Shipping Co. v. Quah Beng Kee (1924) A.C. 177
- – Trustees of the Port of Madras vs. Home Insurance Co. Ltd. dated September 20,1967 – AIR 1970 Mad 48
- – Para 19 – United India Insurance Company Ltd. vs. Kantika Colour Lab. and Ors. dated May 6,2010 (Bench: D.K. Jain, T.S. Thakur)
- – Reliance Industries Limited vs. Balasore Alloys Limited dated January 10, 2014 (Bench : R.D. Dhanuka, J.
- – United States Elevator Corp. v. Pacific Investment Co. (1994) No. B070891. Second Dist., Div. Four. Nov 17, 1994