What is a Contract of Indemnity? JAIIB IMPORTANT TOPIC | JAIIB MAY 2024
Indemnity is an important concept from the applicable JAIIB Syllabus 2024 for Junior Associate of the Indian Institute of Bankers (JAIIB) MAY 2024 EXAMS. We have tried to explain the concept in the as easy language we could manage. So, if you like these law notes, then you can also go through our other JAIIB notes 2024 for upcoming JAIIB MAY 2024 Exams.
What is a Contract of Indemnity?
The word indemnity simply means “to make good the loss”. In law terms, a contract of indemnity is defined as a legal contract between two parties whereby one party agrees to compensate the loss incurred to the other party, either caused by his conduct or by the conduct of some third party.
However, this contract does not cover the loss caused by – Conduct of promise, accident, or by the act of God, for e.g- earthquakes, floods etc.
The objective of entering into a contract of indemnity is to protect the promisee against unanticipated losses.
Examples of Contract of Indemnity
- Indemnity contracts are best exemplified by car insurance. A car insurance policy promises to pay to repair your car in the event of an accident and to take that into consideration. Suppose you get hit by a car on the road and your car gets damaged. A car insurance company will now pay for the damage done to your vehicle.
- With Aman’s indemnity contract, Rakesh agrees to pay Aman’s losses if he suffers a financial loss in his business. Aman is not liable to pay Rakesh any loss because Rakesh did not get any losses from the company. But if Rakesh suffers a loss in his company, Aman would be responsible for paying Rakesh’s losses in that circumstance.
TYPES OF INDEMNITY
There are basically 2 types of indemnities namely express indemnity and implied indemnity.
Under this, all the T & C of the indemnity are mentioned specifically in a contract & the rights and the liabilities of both the involved parties are clearly explained in the contract. This type of agreement includes insurance indemnity contracts, agency contracts & construction contracts etc.
Under this indemnity, the obligation arises from the facts & the conduct of the parties involved in the contract & it, not a written contract. The core example of implied indemnity is the principal & agent relationship. The principal is liable to indemnify his agent for the losses that the agent has incurred while working as per his (principal’s) instruction.
PARTIES INVOLVED IN CONTRACT OF INDEMNITY
There are two parties to the contract of Indemnity i.e
- Indemnifier or the promisor :- The person who promises to protect another from the loss
- Indemnity holder or the promisee :- The person who is so protected or whose loss is to be compensated.
FEATURES OF A CONTRACT OF INDEMNITY :-
- A Contract of indemnity is just like any other contract and must fulfill all the essentials of a valid contract ,e.g consideration , free consent , competency of parties , lawful object etc.
- The mode of the contract of indemnity can be either express or implied.
- The contracts of insurance, i.e. Fire and Marine Insurance will be covered under the contract of indemnity, but life insurance is not covered in it.
RIGHTS OF INDEMNITY HOLDER
The indemnity holder can exercise the following rights in this contract if he acts within the scope of his authority-
- The indemnifier is liable to pay all the damages claimed by the indemnity holder in a suit.
- The indemnity holder has the right to claim the costs incurred in litigating the suit.
- If the parties agree to legally compromise the suit, the indemnifier has to pay the compromise amount.
RIGHTS OF INDEMNIFIER
- Once the indemnity holder is compensated for the loss caused, the indemnifier possesses all the rights to all the methods and resources that can save the indemnifier from loss.
- If the indemnity holder is compensated for the losses , the indemnifier gets the right to sue the third parties on behalf of the indemnity holder.
- He can sue the third parties only to the extent of damages he has paid to the indemnity holder.
Thus, in simple words the contract of indemnity is a special contract that involves one party promising the other party to make good its losses either caused by himself or by some third party and is defined u/s 124 of the Indian Contract Act, 1872.
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