Define Contract of indemnity.

Question: Define Contract of indemnity. [MPJS 2001]

Find the answer to the mains question only on Legal Bites. [Define Contract of indemnity.]

Answer

The Contract of indemnity as described in Section 124 of the Indian Contract Act, 1872 is a contract between two parties where one party promises to indemnify the other party in case the later one suffers from any loss or to incur any kind of expenses or to protect him from any legal consequences which have been caused by the conduct of the promisor himself or caused by the third party.

“The section states that when a person enters into a contract with another party where he promises to save the first parties from any losses that would arise from the contract of the promisor or from any other party”.

This type of contract includes 3 parties; first is the promisor, second is the promisee and the last one is indemnifier. Now, the indemnifier would choose to indemnify the promisor from any losses which he incurs in the transaction with the promisee or from any other person.

Like if ‘A’ states that he shall bear all the expenses or losses incurred by ‘B’ which are caused by the act of the third-party with whom ‘B’ has any type of contract, let it be ‘Z’ in this case. The whole point of instituting the indemnity clause in the commercial contract is to exclude the affected party from any type of loss or incurring any type of liability.

Prior to the amendment of Section 124 of The Indian Contract Act,1872 it previously stated that only those cases of indemnity would be taken into account which has occurred due to the conduct of the promisor or any other third party.

The essential principle was that loss has to occur only with the intervention of any human act. But if a loss occurred due to any natural act, that type of event wasn’t specified previously in the section. It also didn’t include the ambit of the contract of insurance.

Then with the suggestion of the 13th Law Commission Report, it recommended amending the provision to its present state, now the present provision as it stands states that any loss incurred which may or may not have been caused by human activity can be indemnified.

In the famous case of Secretary of State for India v. Bank of India [AIR 1938 PC 191], a forged endorsement bill was given to the bank and gave the money as per the value and then the bill was sent to the Public Debt Officer. Now the original owner of the bill recovered the amount of the bill from the state and the state sent the notice to the bank for indemnifying the transactions as the implied promise of the indemnity.

The court held that since there was a contract of indemnity with the bank and the state to indemnify the state in case of any loss was a valid contract and that bank has the duty to indemnify the loss to the state.

---

Law of Contract Mains Questions Series: Important Questions for Judiciary, APO & University Exams

1. Law of Contract Mains Questions Series Part-I
2. Law of Contract Mains Questions Series Part-II
3. Law of Contract Mains Questions Series Part-III
4. Law of Contract Mains Questions Series Part-IV
5. Law of Contract Mains Questions Series Part-V
6. Law of Contract Mains Questions Series Part-VI
7. Law of Contract Mains Questions Series Part-VII
8. Law of Contract Mains Questions Series Part-VIII
9. Law of Contract Mains Questions Series Part-IX
10. Law of Contract Mains Questions Series Part-X