Contract of Indemnity and Insurance.

Introduction

A contract of indemnity is a type of contract defined by Section 124 of the Indian Contract Act, 1872 as: A contract in which one party promises to safeguard the other from loss caused by the promisor's behaviour, or the action of any other person.

The term indemnity, in its most literal definition, refers to security or protection against a loss or reimbursement. The primary goal of an indemnity contract is to protect the other party's losses.

The contract involves two parties:

• Promiser: a person who agrees to take on the risk of losing something.

• Whose loss is covered by Promisee.

An indemnification contract is made to protect the Promisee from financial loss. The loss could be the result of the promisor's or someone else's conduct. The indemnity agreement could be explicit or implied.

Express: created using spoken or written words,

Implied: i.e., inferred from the behaviour of the parties or the facts of the case.

A contract of indemnity is a one-of-a-kind sort of contract. They are bound by the general contract law standards outlined in Sections 1 through 75 of the Indian Contract Act of 1872. As a result, it must meet all of the legal contract's requirements.

Rights of Indemnity

Under Section 125 of the Indian Contract Act, 1872, the Promisee/ Indemnified/ Indemnity-holder has the following rights against the promisor/ indemnifier, provided he acted within his power.

• Right to Recover Damages Paid in a Lawsuit: [Section 125(1)] [Section 125(2)] [Section 125(3)

An indemnity-holder has the right to collect from the indemnifier whatever damages he may be forced to pay in any dispute involving any matter to which the indemnity contract relates.

• Right to Recover Legal Expenses of Defendant [Section 125(2)]

An indemnity-holder has the right to recover from the indemnifier all costs which he may be compelled to pay in any such suit if he did not contravene the promisor's orders 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.

• [Section 125(3)] Right to Recover Compromise Payments

If the compromise was not against the promisor's orders and was one that the Promisee would have made if there had been no contract of indemnity, or if the promisor authorised him to compromise the suit, an indemnity-holder has the right to recover from the indemnifier all sums of money paid under the terms of any such compromise.

Liability of Indemnifier

The indemnifier's obligation under the indemnity contract does not begin until the indemnifier's liability under the indemnity contract begins, according to the Indian Contract Act of 1872. In this context, numerous Indian High Courts have held the following rules:

• The indemnifier is not responsible until he or she has suffered a loss.

• The indemnified may compel the indemnifier to make good on his loss even if he has not discharged his responsibility.

• "If the indemnified has acquired a duty and the liability is absolute, he is entitled to rely on the indemnifier to save him from the liability and pay it off," the court declared in the landmark decision of Gajanan Moreshwar vs. Moreshwar Madan.

As a result, an indemnity contract is a specific agreement in which one of the contracting parties (the indemnifier) promises to protect the other (the indemnified) against loss caused by the promisor's or any other person's actions.

Sections 124 and 125 of the Indian Contract Act of 1872 govern these transactions.

Historical Development of Principle of Indemnity

The indemnity only compensated losses caused by the human agency.

According to the statement in Gajanan Moreshwar vs. Moreshwar Madan, this concept solely provides indemnification for losses caused by human activity. It excludes losses caused by events or incidents that are not or may not be related to the indemnifier's or any other person's acts, as well as liability incurred as a result of anything done by the indemnified at the indemnifier's request.

The contract must expressly define the terms and conditions of indemnity.

In State Bank of India and others vs. Mula Sahkari Sakhar Karkhana Ltd., it was stated that a document must be understood based on the terms and conditions included therein.

It is also general knowledge that the court should not utilise any words that the author did not use when construing a document. The document in question is one that is commonly used in the workplace.

On the surface, it does not appear to be unclear. According to the High Court, the paper appears to be an indemnity contract. Surrounding conditions are only relevant to document development if the document contains any ambiguity; otherwise, they are irrelevant.

According to the Supreme Court, the aforementioned instrument is a document of indemnity, not a promise, as indicated by the appellant's obligation to indemnify the co-operative society against any losses, claims, damages, actions, and costs it may suffer.

As the High Court determined, the instrument lacks the normal terms contained in a bank guarantee, such as a clear requirement that the co-operative society would be able to collect the damages without delay or demur, or that the guarantee was unconditional and total. Regardless of the criticisms, a bank guarantee must be understood on its own terms.

Contract Insurance

Insurance is a contract between two parties in which one party, the insurer, agrees to pay the other party, the insured, a predetermined amount of money in exchange for a predetermined amount of money called premiums if a specific event occurs.

It entails the prevention of loss. It's the process of safeguarding people's assets against loss and uncertainty. It is contingent on the terms of the agreement. It's a legally enforceable contract with precise terms and circumstances.

It's a type of social technology that lowers or eliminates the risk of death or property harm. The insurance sector and demand for insurance coverage are growing in tandem with the increasing complexity of life, trade, and commerce, resulting in a bewildering array of insurance coverage.

Marine, fire, and life insurance are the most common types of insurance. Many insurance law concepts are so fundamental that they apply to all types of insurance, regardless of the type of insurance or the danger insured against.

Except for life insurance, which is an indemnity contract, every insurance arrangement is a contract of absolute good faith that requires some insurable interest to sustain it; otherwise, it is just a bet.

In order for an insurance contract to be legally binding, certain requirements must be included.

Indemnity contracts under Indian law: legislative and judicial provisions

In the matter of Osman Jamal and Sons Ltd vs. Gopal Purshotam in India, when the injured party is a partnership that operates as a commission specialist for the respondent, a contract of indemnity was started.

The litigating firm purchased and sold Hessian and Gummies, and the infringing party firm pledged to indemnify the responder firm in the case of a disaster.

Maliram Ramjets sold the aggrieved party Hessian, but the litigating organisation was unable to pay for it. As a result, Maliram Ramjets was able to provide a similar product at a lower cost than the competition.

Maliram Ramjets filed a lawsuit against the wrongdoer, but the injured party wanted compensation from the plaintiff because they were now slowing down.

The defendant, on the other hand, refused to pay the damages, claiming that the lawsuit prevented him from doing so.

According to the court, the defendant is compelled to reimburse the plaintiff because he promised to do so.

In this section, indemnity may be declared or assumed. In the case of Secy of State for India in Council v. Bank of India Ltd, a counterfeit note endorsement was provided to a bank and received in good faith and for the value. After then, the Public Office obtained it for renewal in their name. The true owner of the note, who was also entitled to claim from the bank on the basis of an implicit guarantee of indemnification, collected the reimbursement from the state.

Moreshwar vs. Gajanan Moreshwar One of the case laws and judgements was Madan Mantri.

Gajanan Mores held land in Bombay in this case, but it had been rented for a long period. Gajanan Moreshwar was temporarily shifted to Moreshwar Madan Mantri. M Madan returned to the property and requested some things from K D Mohandas. When K D Mohandas requested the material instalment, M Madan refused to pay the money and proposed that G Moreshwar put up a house loan deed for him. After agreeing on the loan cost, G Moreshwar placed a fee on his ownership.

According to the deed, a date was set for the primary payment to arrive. In any case, M Madan decides to pay the principal plus interest in order to get out of a house loan deed, and sets a deadline for doing so.

In this case, the court determined that if an indemnity holder has created an absolute duty, the indemnity holder has the right to compel the indemnifier to fulfil the obligation or pay the money. To compensate for a loss, no commitment is required. 

The court reached the correct judgement, in my opinion, because the indemnifier can compensate the indemnity holder if any liability emerges, allowing the indemnifier to directly discharge the obligation.

In addition, if the indemnity holder causes the liability, he must pay it because indemnifiers agree to restore the indemnity holder to his previous state.

In India, all problems are perceived as tragedies caused by the promisor or someone outsider, however in England, all problems are viewed as disasters caused by anyone, similar to an accident.

Conclusion

In an indemnity agreement, one party is responsible for any injury or loss experienced by the other party as a result of the promisor's or other party's actions.

A simple indemnity provision in a contract does not always answer liability concerns because the law bans people from transferring their own obligations to others or attempting to dodge blame. A simple indemnification clause will never be sufficient to address a liability issue.

Those who try to avoid taking responsibility for their conduct by avoiding blame will find that the law is not on their side. The major reason for this is that a negligent party should not be able to completely shift all claims and damages against him to another party who is not culpable.

written by:

Divisha Srivastava.