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Indemnityinacontract

Source:http://www.
Author:shuchi.lawstudent
Publishedon:October11,2010
Indemnityinacontract
1.whatismeantbyIndemnityinacontract?
Incommonparlanceindemnityisoftenusedasasynonym
forcompensationorreparation.

Asalegalconcept,ithasamorespecificmeaning.For
instance,compensationconnotesmerelyasumpaidtomake
goodthelossofanotherwithoutregardtothepayer'sidentity,
ortheirreasonsfordoingso.Asthefollowingparagraphs
shouldexplain,anindemnityisasubspeciesof
compensation,inthesamewaythatdamagesandreparations
are.

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Anobligationtoindemnitycanalsobedistinguishedfromaguaranteegrantedbyoneparty
inregardtothepotentialdebtsofanother.ForexampleAmightagreetostandguarantor(or
surety)forhersonC(animpecuniouslawstudent)sothatifCcannotaffordtopayhisrent
toB(hiscannylandlord),Awillbeobligedtopayforhim.Here,Cistheoneprimarily
responsibleforpaymentoftherent.A'sliabilityisonlyancillary.Theliabilityofan
indemnifier,properlysocalled,isprimary.Thisdistinctionbetweenindemnityand
guaranteewasdiscussedasearlyastheeighteenthcenturyinBirkmyavDarnell.[1]Inthat
case,concernedwithaguaranteeofpaymentforgoods,ratherthanpaymentofrent,the
presidingjudgeexplainedthataguaranteeeffectivelysays"Lethimhavethegoodsifhe
doesnotpayyou,Iwill."Bycontrast,anindemnityislikesaying"Lethimhavethegoods,
Iwillbeyourpaymaster.[2]
IthasbeenheldinGajananMoreshwarParelkarv.MoresharMadanMantri[3],
thattheprovisionsoftheIndiancontractActdealingwithindemnityarenotexhaustiveon
thelawofindemnityandhencethesameequitableprinciplesascourtsinEnglanddo
2.IndemnityunderIndianContractAct1872
Aspersection124oftheIndiancontractAct1872acontractbywhichonepartypromises
tosavetheotherfromlosscausedtohimbytheconductofthepromisorhimself,orbythe
conductofanyotherperson,iscalleda"contractofindemnity".
3.KeyFundamentals
1.Itisapromisetocompensatefororsecurityagainstdamage,lossorinjury.
2.Inwidersenseitincludesallcontractsofinsurance,guarantee.Itisnotacollateralbutan
independentcontract.
3.Itisatoolforallocatingriskscontingentliability.
4.Indemnityclauses,amongstotherthings,mustbeclear,specific,wherepossiblestipulate
thecircumstancesunderwhichtheindemnitywillarise,beconsideredinlightofany
exclusionofliabilityclausesfoundelsewhereintheagreementandstatewhatdamageswill
bepayableintheeventoftheclausebeingsuccessfullyinvoked
4.Enforcement
1.Acontractofindemnitycanbeenforcedaccordingtoitsterms.
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2.ClaimofIndemnityholdercaninclude:damages,legalcostsofadjudication,amount
paidunderthetermsofcompromise
3.Themeasureofdamagesistheextenttowhichthepromiseehasbeenindemnified.
4.Indemnifiershouldideallybeinformedofthelegalproceedingsorshouldbejoinedas
thirdparty
5.Thereisnoonustoshowbreachoractualloss.
5.Comparisonbetweentheremediesonbreachofcontractofindemnityandremedies
undersection74oftheIndiancontractAct
Damagesonbreachofcontractundersection74ofIndiancontractAct1872areas
under
(1)CompensatoryDamagesmoneytoreimburseforcoststocompensateforyourloss.
(2)ConsequentialandIncidentalDamagesmoneyforlossescausedbythebreachthat
wereforeseeable.Foreseeabledamagesmeansthateachsidereasonablyknewthat,atthe
timeofthecontract,therewouldbepotentiallossesiftherewasabreach.
(3)AttorneyfeesandCostsonlyrecoverableifexpresslyprovidedforinthecontract.
(4)LiquidatedDamagesthesearedamagesspecifiedinthecontractthatwouldbepayable
ifthereisafraud.
(5)SpecificPerformanceacourtorderrequiringperformanceexactlyasspecifiedinthe
contract.Thisremedyisrare,exceptinrealestatetransactionsandotheruniqueproperty,as
thecourtsdonotwanttogetinvolvedwithmonitoringperformance.
(6)PunitiveDamagesthisismoneygiventopunishapersonwhoactedinanoffensive
andegregiousmannerinanefforttodeterthepersonandothersfromrepeatedoccurrences
ofthewrongdoing.Yougenerallycannotcollectpunitivedamagesincontractcases.
(7)Rescissionthecontractiscanceledandbothsidesareexcusedfromfurther
performanceandanymoneyadvancedisreturned.
(8)Reformationthetermsofthecontractarechangedtoreflectwhatthepartiesactually
intended.
Damagesonbreachofcontractofindemnityundersection125ofIndiancontractAct
1872isasunder
Thepromiseeinacontractofindemnity,actingwithinthescopeofhisauthority,isentitled
torecoverfromthepromisor
(1)alldamageswhichhemaybecompelledtopayinanysuitinrespectofanymatterto
whichthepromisetoindemnifyapplies
(2)allcostswhichhemaybecompelledtopayinanysuchsuitif,inbringingordefending
it,hedidnotcontravenetheordersofthepromisor,andactedasitwouldhavebeenprudent
forhimtoactintheabsenceofanycontractofindemnity,orifthepromisorauthorisedhim
tobringordefendthesuit
(3)allsumswhichhemayhavepaidunderthetermsofanycompromiseofanysuchsuit,if
thecompromisewasnotcontrarytotheordersofthepromisor,andwasonewhichitwould
havebeenprudentforthepromiseetomakeintheabsenceofanycontractofindemnity,or
ifthepromisorauthorizedhimtocompromisethesuit.
6.Canapartyinvokeindemnityondemand?
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InMaryColeirovTheStateofNSWandOtherscase,
MaryColeirosuedTheStateofNSWinDistrictCourtproceedingsforinjuriesshealleged
tohavesustainedasaresultofanincidentwhichoccurredon5September2000.
MsColeirowasacleaneremployedbyHydareePtyLimited,awhollyownedsubsidiaryof
TempoServicesLimited(TSL).TSLenteredintoacontractfortheprovisionofcleaning
servicesofpublicschoolswiththeStateContractsControlBoard(onbehalfoftheStateof
NSWDepartmentofEducation).Whilstontheschoolpremises,theplaintiffallegedto
havetrippedandfallenonaraisedsectionofconcrete.Shewasnotperformingcleaning
dutiesatthetime,butwasonherwaytodoso.
TheStateofNSW(TheState)filedacrossclaimagainstTSL,allegingthatitwas
obligedtoindemnifyitunderthetermsofaservicecontract.
ServiceproviderscantakesomecomfortfromthecaseofColeirowhichsupportstheview
thatatemporalconnectionbetweentheperformanceoftheserviceandthelosssustainedis
insufficienttoinvokeanindemnityclause.
InTanksleyv.GulfOilCorp[4].thiscourtheldthatanoilcompanycannotinvokean
indemnificationagreementwithacontractoraftersettlinganinjuredworker'sclaims
because,bysettling,theoilcompanyforecloseditsopportunitytohaveacourtdetermine
thatitwasfreefromfault[5].
Fromtheabovecasedecisionsitcanbeinferredthatindemnitycanbeinvokedon
demand
Indemnitymaybeinvokedwheretheclaimanthasapreexistingconditionthatcauseda
lossofuseofamemberofthebodyandthereisproofthatthelossofuseissufficiently
pronouncedthatanordinarypersoncoulddiscoverit[6]
Inaccordancewithdevelopedpracticeitisproposedthatanyindemnityislimitedto
excludelossescausedbytheaccountablebodysnegligenceandthattheindemnitycanonly
beinvokedoncetheaccountablebodyhasmadereasonableendeavorstorecoverany
reclaimedgrantfromtherelevantprojectmanager,whichmayincludetakinglegalaction.
Includedprocedures,termsandconditionsinthecontracttobefollowedforinvokingthe
indemnitybythecustomer.
Aletterofindemnity,ontheotherhand,permitsamisrepresentationand,inconsequence,
itshouldnotbeinvokedagainstconsigneesorthirdpartiesand,ifusedagainstthem,it
shouldhavenoeffect.Themisrepresentationmust,ofcourse,bedirectlyrelatedtotheloss
ordamagecomplainedof.
Aletterofindemnityisacorollarytoafraudonathirdpartyandcannotbeinvoked
againstathirdpartyingoodfaithwho,onthecontrary,mayusetheletterasevidenceofthe
badorderandconditionofthegoods.
7.Conclusion
Indemnityisalegalexemptionfromthepenaltiesorliabilitiesincurredbyanycourseof
action.Aninsurancepayoutisoftencalledaninindemnity,oritcanbeinsurancetoavoid
anyexpensesincaseofalawsuit.Indemnificationisapromise,usuallyascontract
provision,protectingonepartyfromfinancialloss.Thisissomethingstatedasa
requirementthatonepartyholdharmlesstheother.(Holdharmlessdoesnotimply
indemnification.
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ThefirstsaysIwontmakeanyclaimsagainstyouandthesecondsaysIwillpaytheclaims
againstand/oryourcosts,etc.)Indemnificationisatypeofinsurancewhichprotectstheone
partyfromtheexpensesofother.Indemnificationclausecannotusuallybeenforcedfor
intentionaltortiousconductoftheprotectedparty.
Corporateofficers,boardmembersandpublicofficialsoftenrequireanindemnityclausein
theircontractsbeforetheyperformanywork.Inadditionindemnificationprovisionsare
commoninintellectualproperties.Licensesinwhichthelicensordoesnotwanttobeliable
formisdeedsofthelicensee.Atypicallicensewouldprotectthelicensoragainstproduct
liabilityandpatentinfringement.

[1](1704)1Salk27.
[2]also:''MountstephanvLakeman(1871)LR7QB196.
[3]5TropicalInsuranceCov.ZenithLifeInsuranceCo,AIR1941Lah68.
[4]848F.2d515(1988)
[5]ThetwointermediateLouisianaappellatecourtsthathaveconsideredtheissuehave
bothrejectedtheconclusioninTanksleythatanindemnitiessettlementofacaseprecludes
asubsequentdeterminationoffault.
[6]SPECIALINDEMNITYFUNDv.RICHARDS.ESTILLandTHEWORKERS'
COMPENSATIONCOURT
Theauthorcanbereachedat:shuchi.lawstudent@legalserviceindia.com

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