CONTRACT - ii

1 CONTRACT - ii UNIT 1. Meaning of Indemnity INDEMNITY. The term 'indemnity'. means to make good the The CONTRACT of Indemnity and CONTRACT of Guarantee are loss or to compensate the party who has sufferedspecific types of CONTRACT . The specific provisions relating to some loss. these contracts are contained in Sections124 to 147 of the Indian CONTRACT Act, 1872. In addition to these specific provisions, the general principles of contracts are also applicable to such specific contracts. CONTRACT OF INDEMNITY [Section 124]. 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".

2 Example A contracts to indemnify B against the consequences of any proceedings which C. may take against B in respect of a certain sum of Rs 200. This is a CONTRACT of indemnity. Meaning of Indemnifier and Indemnity-holder The person who promises to make good the loss is called the 'indemnifier': In the aforesaid example, A. is the indemnifier. The person whose loss is to be made good is called 'indemnity-holder'. In the aforesaid example, B is the indemnity-holder. Whether CONTRACT of Indemnity Covers the Cases of Loss Caused by the Events or Accidents which do not Depend upon the Conduct of the Promisor or any other Person If the definition of CONTRACT of indemnity as per Section 124 is strictly interpreted, it would not cover the cases of loss caused by the events or accidents which do not depend upon the conduct of the promisor or any other person.

3 In other words, contracts of insurance would be outside the purview of the CONTRACT of indemnity. Since the intention of law makers had never been to exclude the contracts of insurance from the purview of contracts of indemnity, the courts in India have decided to apply the same equitable principles that the courts in England do. As per English law, a CONTRACT of indemnity is defined as "a promise to save another harmless from loss caused as a result of a transaction entered into at the instance of the promisor." This definition covers a promise to make good the loss arising from any cause whatsoever. Thus, Indian courts follow the English law in respect of CONTRACT of indemnity which covers the contracts of insurance also.

4 Rights of Indemnity Holder [Section 125]. ~1~. Complied by:- PROF. DIVYADITYA KOTHARI. CONTRACT - ii An indemnity holder is entitled to recover the following amounts from the indemnifier provided he acts within the scope of his authority. 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 bringing or defending such suit if, 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.

5 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. When does the Liability of Indemnifier Commence The Indian CONTRACT Act, 1872 is silent on the time of commencement of liability of indemnifier. On the basis of judicial pronouncement of courts, it can be said that the liability of an indemnifier commences as soon as the liability of the indemnity holder becomes absolute and certain.

6 In other words, if the indemnity-holder has incurred an absolute liability even though he has himself paid nothing, he is entitled to ask the indemnifier to indemnify him. Example:- X promises to compensate Y for any loss. that he may suffer by filing a suit against Z. The court orders Y to pay Z damages of Rs 5,000. As the loss has become certain, Y may claim the amount of loss from X and pass it on to Z. Mode of CONTRACT of Indemnity A CONTRACT of indemnity may be express or implied. (a) A CONTRACT of indemnity is said to be express when a person expressly promises to compensate the other from loss. ~2~. Complied by:- PROF. DIVYADITYA KOTHARI.

7 CONTRACT - ii (b) A CONTRACT of indemnity is said to be implied when it is to be inferred from the conduct of the parties or from the circumstances of the case. Example X an auctioneer, sold certain goods at the instruction of Y. Later on, it is discovered that the goods belong to Z and not Y. Z recovered damages from X for selling his goods. Here, X is entitled to recover the compensation from Y because there was an implied promise to compensate the auctioneer for any loss which he may suffer on the defective title of goods sold by auction. [Adamson v. Jarvis]. Essential Elements of CONTRACT of Indemnity In addition to the implied or express promise to indemnify, all the essentials of a valid CONTRACT must also be present.

8 Example :- X asks Y to beat Z and promises to indemnify Y against the consequences. Y. beats Z and is fined Rs 1,000. Y cannot claim this amount from X because the object of the agreement was unlawful. GUARANTEE. CONTRACT of Guarantee [Section 126] Meaning of guarantee A CONTRACT of guarantee is a CONTRACT to perform a promise or A formal assurance discharge the liability of a third person in case of his default. [typically in writing] that Example X and his friend Y enter a sho and X says to Z certain conditions will be "Supply the goods required by Y and if he does not pay fulfilled. you, I will." It is a CONTRACT of guarantee. ~3~.

9 Complied by:- PROF. DIVYADITYA KOTHARI. CONTRACT - ii PARTIES TO CONTRACT OF GUARANTEE. There are three parties to a CONTRACT of Guarantee-Principle debtor, Creditor and Surety. Meaning of Principal Debtor [Section 126]. The person in respect of whose default the guarantee is given is called the 'Principal debtor'. Y is the principal debtor in the aforesaid example. Meaning of Creditor [Section 126]. The person to whom the guarantee is given, is called the 'creditor'. Z is the creditor in the aforesaid example. Meaning of Surety [Section 126]. The person who gives the guarantee is called the 'Surety'. X is the surety in the aforesaid example.

10 ESSENTIAL FEATURES OF A CONTRACT OF GUARANTEE. 1. 3. 2. All Essentials of a Valid CONTRACT Guarantee Guarantee not to be not to be Obtained Obtained by by Concealme 5. 6. Misreprese -nt of 4. Consent of Existence -ntation material Tripartite Three of a [Section facts Agreement Parties Liability 142] [Section 143]. 1. ALL THE ESSENTIALS OF A VALID CONTRACT . However, the following points are worth noting in this regard: (i) The principal debtor need not be competent to CONTRACT . In case the principal debtor is not competent to CONTRACT , the surety would be regarded as the principal debtor and would be personally liable to pay. (ii) Surety need not be benefited.