Indemnity

PRAMA MUKHOPADHYAY
(1) What is a contract for indemnity?
(2) When is an indemnifier liable to be indemnified?
(3) What are the rights of the indemnified?

 Sections-124-125 Indian Contract Act

Introduction

 The term indemnity derives from the Latin word “indemnis,” which denotes
‘to be unharmed or to have no losses or damages’.

 The fundamental tenet of indemnity is to put an individual back in the

position or circumstances in which they were before the accrual of the
liability.

 To “indemnify’ means to make good the loss of another in certain events.

Section 124

 “Contract of indemnity” defined- 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”.
 This provision incorporates a contract where one party promises to save
the other from loss which may be caused, either
(i) By the conduct of promisor himself, or,
(ii) By the conduct of any other person
Indemnity

 Typically, under the claim of indemnity, one party (the indemnifier) undertakes
to safeguard another party (the indemnity holder) from any loss, expense, cost,
damage, or other legal ramifications brought on the indemnity holder on
account of the indemnifier's actions or inactions or those of any third party.
 The overall objective of an indemnification in a contract is to transfer
obligation, in full or in part, from one party to another.
 An indemnity can be referred to as a promise by one party ensuring the other
party, compensation for the loss suffered as a consequence of an event
specified in the contract, called the “triggering event”.
 The triggering event could be anything defined by the parties like breach of
contract, a party’s fault or negligence, a specific action, etc.
Two Parties in a Contract of Indemnity

 In a contract of indemnity there are two parties- indemnifier and indemnity

holder or indemnified
 Indemnifier- the person who promises to indemnify is known as indemnifier.
 Indemnified/ indemnity holder- the person in whose favour such a promise
is made.
Examples

 A contracts to indemnify B against any proceedings which C may take

against B in respect of a certain sum of 200 rupees. This is a contract of
indemnity.
 Aman sends a parcel to his friend Avi through railways. Aman sends the
railway receipts by post which entitles Avi to claim the parcel from the
railways. If the receipt is lost, Avi can claim the parcel from the railway s by
filling in an indemnity bond by which he undertakes to make good the loss
of the railway in case any other claimant comes forward to claim the
parcel.
Example:

 A bakery, Sweet Delights, supplies pastries to a local cafe, Coffee Haven.

 They have a contractual relationship, and their supply agreement includes an
indemnity clause:
"Sweet Delights agrees to indemnify and hold harmless Coffee Haven from any
claims, demands, liabilities, damages, costs, and expenses arising out of or
resulting from any foodborne illnesses caused by the consumption of pastries
supplied by Sweet Delights to Coffee Haven.“
 Rila, a customer of Coffee Haven falls ill after consuming a pastry from Sweet
Delights.
 Rila incurs medical expenses and claims that the pastry was contaminated
and led to their illness. She files a case against Coffee Heaven to compensate
her for the medical expenses.
Examples

 Coffee Haven, as per the indemnity clause, can invoke the clause and
request Sweet Delights to compensate for the customer's medical
expenses and any other costs incurred due to the foodborne illness.
 Sweet Delights, by agreeing to the indemnity clause, is legally obligated to
cover these expenses and liabilities arising from the consumption of their
pastries.
Essentials of a Contract of Indemnity

1. two parties- the indemnifier and the indemnified

2. Promise to save the other from loss- There must be promise to save the
other from loss. The promise may be expressed or implied.
3. Cause of loss- The loss may be caused due to the conduct of the
promisor himself or any other person. When a person undertakes to save
the other from loss caused due to the conduct of a third person, he must
do so without any request from such third person. If he promises at the
request of the third person, it would be a contract of guarantee.
4. Presence of all essentials of a valid contract- All the essentials of a
contract must be present in a contract of indemnity.
Position under English Law

 English usage of the word “indemnity” is much wider than that in Indian
Law.
 It includes promises to save the promisee from harm or loss caused by the
events or accidents which do not or may not depend on the conduct of
any person, or by liability arising from something done by the promisee at
the request of the promisor.
Adam v Jarvis

 D told P, an auctioneer, to sell certain cattle.

 P sold the cattle.
 Subsequently, it was found out that the cattle did not belong to D but to S.
 S sued P.
 P sued D for indemnity for the loss he had suffered by acting on the
defendant’s directions.
 Court- P having acted on the request of the defendant was entitled to
assume that, if, what he did, turned out to be wrongful, he would be
indemnified by the defendant.
Shanti Swarup v. Munshi Singh, AIR
1967 SC 1315

 On May 09, 1914, the Plaintiff (owners of land) executed a mortgage in favour
of one Bansidhar and Khub Chand for Rs. 12,000.
 Thereafter, on February 09, 1920, a sale deed for half of this land was executed
by the Plaintiff in favour of Shanti Swarup (Defendant) for Rs. 16,000.
 Out of Rs. 16000, Rs. 13,500 was left with the purchaser (defendant) for paying
up the debt to Bansidhar and Khub Chand.
 Neither the purchasers nor the plaintiff paid to the mortgagees.
 The mortgagees brought a suit against the plaintiff and the purchasers.
 The Collector ordered a self-liquidation of mortgage for 3/4th of half of the
land held by the Plaintiff.
Shanti Swarup v. Munshi Singh, AIR
1967 SC 1315

 As a result, the Plaintiff had to part with a huge part of his property.
 The plaintiff filed a suit against the purchasers to recover the principal
amount along with the interest.
Held
 The contract of indemnity need not be express. It could be implied from
the circumstances of the case, as well.
 There was an implied contract of indemnity, given the understanding
between the parties whereby Rs. 13,500 was left with the purchaser
himself.
Shanti Swarup v. Munshi Singh, AIR
1967 SC 1315

 The purchaser takes the property subject to the burden attached to it.
 In this case the contract of indemnity is implicit because of the covenant
on the part of the purchasers to pay off the previous encumbrances on
the property sold.
Implied Indemnity

 CodeGen Solutions, a software company, is hired by a financial institution,

BankTech, to develop a secure online banking platform. The contract
between the two parties does not explicitly include an indemnity clause.
CodeGen Solutions is responsible for creating a robust and secure online
banking platform to safeguard sensitive customer data and financial
transactions. BankTech experiences a cyberattack that results in
unauthorized access to customer accounts and the theft of funds. The
security breach causes significant financial losses for BankTech, and
customers' trust in the bank is shaken. The customers sued the Bank to
recover their money.
Implied Indemnity

 Although the contract between CodeGen Solutions and BankTech does

not explicitly include an indemnity clause, an implied indemnity could
arise.
 The implied indemnity is based on the understanding that CodeGen
Solutions was contracted to provide secure software services to prevent
such cyber incidents, and their failure to do so could lead to implied
liability.
 In this case, CodeGen Solutions may be held responsible for compensating
BankTech for the financial losses incurred due to the security breach, even
though the indemnity was not expressly stated in the contract.
Need for an Indemnity Clause?

1. Risk Allocation: An indemnity clause defines which party will bear the financial
burden or liability if certain specified events or situations occur. It helps distribute
risks more equitably and ensures that the party best positioned to manage or
control a particular risk assumes that responsibility.
2. Protection Against Third-Party Claims: Indemnity clauses provide protection to a
party against claims brought by third parties. For example, if a customer sues a
seller for injuries caused by a product, an indemnity clause may require the
manufacturer to compensate the seller for any resulting legal costs and damages.
3. Clarification of Responsibilities: By explicitly outlining the indemnity obligations of
each party, the clause clarifies their respective roles in managing potential risks
and liabilities. This clarity helps prevent misunderstandings and disputes regarding
who is responsible for specific losses or damages.
Practical Significance of Indemnity

 Commercial Transactions
 Intellectual Property
 Lease Agreements
 Construction Contracts
 Employment Agreements
 Share Purchase Agreement
 Service Agreements
 Independent Contractor Agreement
 Sale and Purchase Agreement
 Etc.
An indemnity contract in the context
of IP rights

 An indemnity contract in the context of intellectual property (IP) rights is an

agreement wherein one party (the indemnifier) agrees to compensate,
defend, or hold harmless another party (the indemnified) from certain
specified losses, liabilities, or expenses that may arise due to claims of
intellectual property infringement.
 This type of contract is commonly used to protect parties from legal
disputes related to patents, copyrights, trademarks, or other intellectual
property rights
An indemnity contract in the context
of IP rights

 XYZ Software Solutions is developing custom software for ABC Corporation.

 Indemnity Clause:
"XYZ Software Solutions hereby agrees to indemnify, defend, and hold
harmless ABC Corporation, its officers, directors, employees, and agents from
and against any and all claims, demands, liabilities, damages, costs, and
expenses, including reasonable legal fees and expenses, arising out of or
resulting from any claim of patent infringement related to the custom
software developed by XYZ Software Solutions for ABC Corporation."
An indemnity contract in the context
of IP rights

 XYZ Software Solutions develops custom software for ABC Corporation based
on the specifications provided. The software involves certain unique features
that may be similar to patented technology owned by third parties.
 After the software is developed, ABC Corporation becomes aware that certain
features of the software could potentially infringe on the patents of another
company.
 The patent holder (third party) sends a legal notice to ABC Corporation,
alleging patent infringement and demanding compensation for damages.
 ABC Corporation invokes the indemnity clause in the contract and notifies XYZ
Software Solutions of the patent infringement claim. ABC Corporation requests
that XYZ Software Solutions fulfill its obligation to indemnify.
Indemnity Clause in Lease Agreement

 An indemnity clause in a house lease agreement is designed to outline the

responsibilities and liabilities of the landlord and tenant in case of certain
events or situations that may result in losses, damages, or claims related to
the leased property.
 Indemnity Clause-“The Tenant hereby agrees to indemnify and hold
harmless the Landlord, from and against any and all claims, demands,
liabilities, damages, costs, and expenses, including reasonable legal fees
and expenses, arising out of or resulting from any injury to persons or
damage to property caused by the Tenant's use, occupancy, or activities
on the leased premises.”
Employment Contract

Indemnity Clause:
 "The Employee acknowledges that resigning from employment before
completing the required notice period of 12 weeks, as specified in this
contract, will result in forfeiture of salary and benefits for the remaining
notice period. The Employee agrees to indemnify XYZ Corporation and
compensate the company for any losses, damages, or expenses incurred
due to the employee's failure to fulfill the notice period."
Share Purchase Agreement

Product Liability Claim

 Imagine that Company A is purchasing all the shares of Company B, a
manufacturer of consumer electronics. A few months after the transaction
is completed, it comes to light that some of Company B's products are
causing harm to consumers due to a manufacturing defect.
Share Purchase Agreement

 Undisclosed Tax Liabilities

Let's consider a situation where Company C acquires all the shares of
Company D, a software development firm. After the acquisition is finalized, it
is discovered that Company D had undisclosed tax liabilities from a previous
fiscal year.
Other Sources of Indemnity

 The subject of contracts of indemnity is much wider than what is given in this
section.
 This section deals only with one particular kind of indemnity which arises from a
promise made by the indemnifier to save the indemnified from the loss caused
to him by the conduct of any person.
 A right to indemnity may also arise out of a relationship between two parties or
a state of circumstances to which the law attaches a legal or equitable duty.
Example: In case of a principal agent relationship, the principal is liable to
indemnify the agent for lawful acts done by him on behalf of the principal.
 It may also arise by the operation of law (i.e. if it is provided in a legislation) or
events and accidents not depending on conduct. Examples: Section 12 of
Workmen’s Compensation Act, Sec. 64- Railways Act, Sec. 62- Companies Act.
Workmen’s Compensation Act, 1923

Section 12: Contracting.-

(1) Where.. the principal… in the course of… his trade or business contracts
with any… contractor.. for the execution by or under the contractor of… any
work which is ordinarily part of the trade or business of the principal, the
principal shall be liable to pay to any workman employed in the execution of
the work any compensation which he would have been liable to pay if that
workman had been immediately employed by him…
(2) Where the principal is liable to pay compensation under this section, he
shall be entitled to be indemnified by the contractor…
The Railways Act 1989

Section 64. Forwarding note.—

(1) Every person entrusting any goods to a railway administration for carriage
shall execute a forwarding note in such form as may be specified by the
Central Government…
(2) The consignor shall be responsible for the correctness of the particulars
furnished by him in the forwarding note.
(3) The consignor shall indemnify the railway administration against any
damage suffered by it by reason of the incorrectness or incompleteness of
the particulars in the forwarding note.
The Companies Act, 1956

Section 62(4) -
Where--
(a) the prospectus specifies the name of a person as a director of the
company… and he has not consented to become a director…
(b) …the directors of the company… shall be liable to indemnify the
person referred to in clause (a)... against all damages, costs and
expenses to which he may be made liable by reason of his name having
been inserted in the prospectus…
What is not covered?

 Loss caused by the conduct of promise himself or act of god is not

covered.
 It does not include loss caused by natural reasons which are beyond
human control, fire, perils of sea etc.
 Loss caused by the receiving party's deliberate acts: in an insurance
contract, the insured should not be indemnified if the trigger event results
from their own intentional act.
 Loss caused by the receiving party's own fraud or crimes: indemnities do
not cover the consequences of the receiving party's own illegal acts.
What is not covered?

 For example, if A tells B to commit fraud on C and A promises to indemnify

B against all losses/ consequences suffered by B for such act?
 Mr Gupta works with XYZ Corporation as a senior financial manager. He
made a mistake in an important financial report.
Warranty and Indemnity

 Warranty and indemnity clauses are contractual provisions that serve distinct
purposes in commercial agreements. They are commonly used to allocate risks
and responsibilities between parties involved in a transaction, but they operate
in different ways.
Nature
 Warranty Clause: A warranty is a promise or representation made by one party
to the contract regarding the accuracy, quality, performance, or condition of
a product, service, or situation. It assures the other party that certain facts or
conditions are true or will be met.
 Indemnity Clause: An indemnity clause is a contractual provision through
which one party (the indemnifier) agrees to compensate, protect, or hold
harmless another party (the indemnified party) from specified losses, liabilities,
damages, or claims arising from specified ev ents or circumstances.
Warranty and Indemnity

Purpose:
 Warranty Clause: The purpose of a warranty is to assure the other party
that certain statements or conditions are accurate or will be fulfilled. It may
provide a remedy or recourse if the stated facts or conditions turn out to
be untrue.
 Indemnity Clause: The purpose of an indemnity clause is to shift the
financial burden of specified risks, losses, or liabilities from one party to
another. It provides a mechanism for compensating the indemnified party
if certain events or situations occur.
Warranty and Indemnity

Triggering Events:

 Warranty Clause: A breach of warranty occurs when the warranted facts

or conditions are not met, leading to a potential claim for damages or
remedies.
 Indemnity Clause: The indemnity clause is triggered by the occurrence of
specified events or circumstances, often outlined in the contract. These
events may include third-party claims, losses, damages, liabilities, or other
defined triggers.
Warranty and Indemnity

Nature of Liability:

 Warranty Clause: Liability under a warranty is usually limited to the specific

representations or promises made in the contract. It may involve the cost
of repairing or replacing defective goods or providing compensation for
failure to meet stated conditions.
 Indemnity Clause: Liability under an indemnity clause is broader and may
cover a wider range of losses, damages, liabilities, and expenses, including
those arising from third-party claims.
Warranty and Indemnity

Extent of Coverage:

 Warranty Clause: The scope of coverage under a warranty is usually

limited to the specific representations made in the contract.
 Indemnity Clause: The scope of coverage under an indemnity clause can
be broader, encompassing a wider range of potential risks and liabilities,
even those beyond the direct control of the indemnified party.
Warranty and Indemnity

Third-Party Claims:

 Warranty Clause: Typically, warranties do not directly address third-party

claims. Remedies for breach of warranty are generally sought by the
contracting parties themselves.
 Indemnity Clause: Indemnity clauses often address third-party claims and
may require the indemnifier to defend and compensate the indemnified
party against claims brought by external parties.
 Warranty and Indemnity (Example)

 A furniture manufacturer, FurniCraft Pvt. Ltd., produces and sells wooden chairs
to retailers.
 Warranty Clause:
"FurniCraft Pvt. Ltd. warrants that all chairs sold to retailers are free from defects in
material and workmanship for a period of one (1) year from the date of purchase.
If any chairs are found to be defective within the warranty period, FurniCraft Pvt.
Ltd. shall, at its discretion, repair or replace the chairs."
 Indemnity Clause:
"FurniCraft Pvt. Ltd. agrees to indemnify and hold harmless retailers from any
claims, demands, liabilities, damages, costs, and expenses arising out of or
resulting from personal injuries, property damage, or any other losses caused by
the defective design, manufacture, or safety concerns of chairs sold by FurniCraft
Pvt. Ltd."
Example(Contd…)

 One of the chairs is defectively designed, causing it to collapse unexpectedly

when someone sits on it. As a result, a customer who purchased the chair
suffers injuries to their back.
 The customer files a lawsuit against the retailer for the injuries.
 Warranty Aspect: The customer may invoke the warranty clause, notifying the
retailer about the defective chair. The retailer informs FurniCraft Pvt. Ltd. about
the defect. FurniCraft Pvt. Ltd., in compliance with the warranty clause, takes
responsibility and replaces the defective chair with a new one.
 Indemnity Aspect: The injured customer also files a claim against the retailer for
personal injuries. The retailer, in turn, invokes the indemnity clause in their
agreement with FurniCraft Pvt. Ltd. FurniCraft Pvt. Ltd. is obligated to indemnify
the retailer, covering legal costs, damages, and any other expenses
associated with the customer's claim. The indemnity clause protects the retailer
from the financial burden of the customer's claim.
Illustration: Software Development
Agreement

 Parties Involved:
 Software Developer: TechSolutions Ltd.
 Client: ABC Corporation
Software Development Agreement

 Indemnity Clause:
TechSolutions Ltd. agrees to indemnify and hold harmless ABC Corporation, its
officers, directors, employees, and agents from and against any and all claims,
demands, liabilities, damages, costs, and expenses arising out of or resulting from
any claim of copyright infringement or software defects related to the software
developed by TechSolutions Ltd."

Warranty Clause:
 "TechSolutions Ltd. warrants that the software developed for ABC Corporation
shall be free from defects in material and workmanship for a period of twelve
(12) months from the date of delivery. If any defects are discovered during this
warranty period, TechSolutions Ltd. shall remedy such defects at no additional
cost to ABC Corporation."
Indemnity and Insurance

 When used in the wider sense, contracts of indemnity would include

contract of insurance.
 Under English law, a contract of insurance (other than life insurance) is a
contract of indemnity.
 Unlike contracts of insurance, a contract of indemnity is not one uberriame
fidei.
 In case of insurance there is a legal right on the part of the assured to
claim under the policy as soon as the event insured against (the liability to
meet the claim of a third person) has arisen. It is immaterial that he has not
discharged the liability to the third party.
 Life Insurance is not a contract of indemnity.
When can an indemnifier be made liable?
Gajanan Moreshwar v. Moreshwar
Madan, A.I.R. 1942 Bom, 302

“It is true that under the English common law no action could be maintained until actual loss had
been incurred. It was v ery soon realized that an indemnity might be worth v ery little indeed if the
indemnified could not enforce his indemnity till he had actually paid the loss. If a suit was filed
against him, he had actually to wait till a judgment was pronounced, and it was only after he had
satisfied the judgment that he could sue on his indemnity. It is clear that this might under certain
circumstances throw an intolerable burden upon the indemnity-holder. He might not be in a
position to satisfy the judgment and yet he could not av ail himself of his indemnity till he had done
so. Therefore the Court of equity stepped in and mitigated the rigour of the common law. The Court
of equity held that if his liability had become absolute then he was entitled either to get the
indemnifier to pay off the claim or to pay into Court sufficient money which would constitute a fund
for paying off the claim whenever it was made.”
Relation Between Indemnity and
Breach:

 Indemnity clauses are often used in contracts to address the potential

consequences of a breach. An indemnity clause can specify how parties will
handle the financial repercussions of a breach. For instance, an indemnity
clause might state that if Party A breaches the contract and Party B incurs
legal expenses as a result, Party A must indemnify Party B for those expenses.

 In summary, "indemnity" pertains to the obligation to compensate for losses,

damages, or liabilities, while "breach" refers to the failure to fulfill contractual
obligations. Indemnity clauses can help allocate the financial risks associated
with breaches of contract. It's essential to carefully review and understand
these terms when entering into agreements to ensure that both parties' rights
and responsibilities are clear.
Indemnity and Damages

 Indemnity claims may be brought before breach of contract. Claim can only
be brought after the breach of contract.
 There is not duty to mitigate for indemnity. Section 73 of the Act puts a duty on
the claimants to mitigate their losses.
 Indemnity can be claimed for loss arising out of the action of a third party to a
contract. Damages can only be claimed for loss arising out of the actions of
the parties upon breach of contract.
 The main principle behind indemnity is to put a person back into the place he
was before the loss occurred. Hence when a person is indemnified he will
never make a profit or a loss out of it, he will be restored to his original position.
In case of monetary damages, award may be awarded more than the actual
loss occurred or less than the actual loss occurred.
Example of indemnity and breach
(Construction Project)

 Suppose Company A (the contractor) enters into a contract with

Company B (the client) to build a commercial building. The contract
includes an indemnity clause stating that Company A will indemnify and
hold Company B harmless from any third-party claims arising out of the
construction work.
 During construction, a faulty wiring installation by Company A leads to a
fire that damages adjacent properties. As a result, Company B is sued by
the owners of the adjacent properties for property damage and loss of
business.
Example of indemnity and breach
(Construction Project)

 Damages for Breach of Contract: Company B can seek damages from

Company A for the breach of contract (faulty wiring installation), including
the costs of repairing the wiring, the fire damage to the building, and any
losses caused by the delayed completion of the project.

 Indemnity Clause: Company B can also invoke the indemnity clause and
demand that Company A compensate them for the third-party claims
and legal expenses arising from the adjacent property owners' lawsuits.
This would be in accordance with the indemnity clause that shifts the
responsibility for third-party claims to Company A.
Relation between Damage and
Breach :Product Manufacturing

 Scenario:
Company X (the manufacturer) supplies products to Company Y (the
distributor) for resale. The supply contract includes an indemnity clause where
Company X agrees to indemnify and defend Company Y against any claims
arising from defects in the products.
Relation between Damage and
Breach :Product Manufacturing

 Damages for Breach of Contract: Suppose Company X fails to deliver the

agreed-upon quantity of products on time, causing Company Y to incur losses
due to missed sales opportunities and customer dissatisfaction. Company Y
can seek damages from Company X for the breach of contract, covering the
direct losses suffered as a result of the delayed delivery.

 Indemnity Clause: Additionally, if a product defect leads to a consumer lawsuit

against Company Y, Company Y can invoke the indemnity clause to demand
that Company X compensate them for the legal expenses, settlement costs,
and any damages awarded to the consumers. The indemnity clause places
the responsibility on Company X to cover the losses resulting from the product
defect.
Section 125: Rights of indemnity-holder
when sued.

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 authorized 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.
Recommendation by the Law
Commission of India

 The Law Commission of India had recommended that the definition of

“contract of indemnity” may be expanded to include cases of loss caused
by events which may or may not depend upon the conduct of any
person, and also to provide clearly that the promise may be implied.