MEANING AND DEFINITION OF INDEMNITY

The term ‘indemnity’ literally means security against loss. Indemnification refers to the act of being held not liable or being protected from costs by shifting them to another party. If a person is promised by another that he will be protected or compensated in case of loss or damage, he is said to be indemnified.

A contract of indemnity is an express promise to compensate for defined loss or damage used to ensure that a contracting party has an express remedy to correct defects in goods or services delivered under the contract.

Section 124 of the Indian Contract Act, 1872[1] defines a contract of indemnity as the contract wherein 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. The person who promises to protect or compensate is called the indemnifier. The person to whom the promise of indemnity is given is called the indemnity holder.

► Illustration: A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of ` 200. A is the indemnifier and B is the indemnity holder. When A pays B to cover damages that B had to pay C, and then A has indemnified B.

► Illustration: A may agree to indemnify B for any loss or damage that may occur is if a tree on B’s neighboring property blows over. If the tree then blows over and damages B’s fence, A will be liable for the cost of fixing the fence.

► Illustration: A asks B to enter into a transaction with C and promises to indemnify B. B transact with A and ends up incurring losses of  ` 1000. Now A has to take care of the losses.

Indemnity clauses are very common in agreements between tenants and landlords. Tenants agree to indemnify the landlord from costs or damages associated with being harmed on the property while the landlord takes the responsibility to anything that could be potentially dangerous. Thus, a landlord stands indemnified from damages if a tenant tripped and fell down the stairs. But if the stairs were in disrepair, and the landlord had been told to get the same fixed time and again, a mere indemnity clause will not prevent the tenant from suing for damages if such disrepair caused the accident.

The objective of an indemnity clause is to get some work done; indemnity is a mere motivational tool. For example, an agent works for his principal and in case of any loss accruing to the principal, the agent will not be liable.

The definition of contract of indemnity is not exhaustive. The section sets out a case of an express contract of indemnity but there are implied contracts too. After all, Section 9 of the Indian Contract Act, 1872 [2]talks about implied promises.  More obviously, the ICA 1872 deals with cases of implied indemnity under Sections 69, 145 and 222. But implied indemnity was recognised for sure by the Privy Council in the case of SECRETARY OF STATE vs. THE BANK OF INDIA LD AIR [1938] PC 191. Sections 10 and 13 of the Indian Partnership Act, 1932 also deal with principles of indemnity.

SECRETARY OF STATE vs. THE BANK OF INDIA LD AIR [1938] PC 191. FACTS: A Broker endorsed a government promissory note in his possession to a bank with false endorsement. The bank applied in good faith for a renewed promissory note. The bank was given the renewed promissory note from the Public Debt Office. In the meantime, the true owner sued the Secretary of State for conversion. The Secretary of State, in turn, sued the bank on basis of implied indemnity. HELD: Express indemnity clause is not necessary in face of implied right to indemnity already existing under the Indian laws. It is a principle of law that when an act if done a person at the behest of another and the act is not itself manifestly tortuous to the knowledge of the person doing the act, the person doing the act has a right to indemnity from the man who requested such an act be done when the act in question turns out to be injurious to the rights of a third party.

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A Contract of Indemnity is needed because a party may not be able to control all aspects of the performance of a promise. He can be sued for the actions of another where the conditions of performance were out of his control or supervision. A party can protect himself by providing that the culpable party will bear the costs and expense for damages, including the costs of a verdict, settlement, or defense of the suit in case of loss or damage. A Contract of Indemnity is merely a way to shift risk to another by agreement.

Clauses of indemnity should be studied carefully before being inserted in a contract. They substantially increase exposure in the extent of an unexpected event or breach of the contract.

NO CONSIDERATION NO CONTRACT-EXCEPTIONS

Every agreement to be enforceable at law must be supported by valid consideration. An agreement made without consideration is void and is unenforceable except in certain cases. Section 25 specifies the cases where an agreement though made without consideration will be valid. These are as follow:

1. Natural love and affection [Sec. 25(1)]

           An agreement though made without consideration will be valid if it is in writing and registered and is made on account of natural love and affection between parties standing in a near relation to each other. An agreement without consideration will be valid provided-

(a) it is expressed in writing;

(b) it  is registered under the law for the time being in force;

(c) it is made on account of natural love and affection;

(d) it is between parties standing in a near relation to each other.

  All these essentials must be present to enforce an agreement made without consideration.

2. Compensation for services rendered [Sec. 25(2)]

           An agreement made without consideration will be valid if it is a promise to compensate wholly or in a part a person who has already voluntarily done something for the promisor or something which the promisor was legally compellable to do.To apply this rule, the following essentials must exist:

(a) The act must have been done voluntarily;

(b) for the promisor or it must be something which was the legal obligation of the promiser;

(c) the promisor must be in existence at the time when the act was done;

(d) the promisor must agree now to compensate the promisee.

3. Time-barred debt [Sec. 25(3)]

           A promise to pay a time-barred debt is also enforceable. But the promise must be in writing and be signed by the promisor or his agent authorized in that behalf. The promise may be to pay the whole or part of the debt. An oral promise to pay a time-barred debt is unenforceable

4. Completed gifts [Exp. 1 to Sec. 25]

           Explanation 1 to section 25 provides that the rule 'No consideration, No contract' shall not affect validity of any gifts actually made between the donor and the donee. Thus if a person gives certain properties to another according to the provision of the Transfer of Property Act, he cannot subsequently demand the property back on the ground that there was no consideration.

5. Agency (Sec. 185)

           There is one more exception to the rule. IT is given in section 185 which says that no consideration is needed to create an agency.

6. Guarantee (Sec 127)

           A contract of guarantee is made without consideration.

7. Remission (Sec 63)

           No consideration is required for an agreement to receive less then what is du. This is called remission in the law. 

PERSON DISQUALIFIED FROM CONTRACTING BY ANY OTHER LAW

It refers to statutory disqualification imposed on certain person in respect of their capacity to contract.



1. Alien enemies.           An alien is competent to contract with citizens of the indian living in India. He can maintain as action on a contract enter onto by him during peace him time. But if a war is declared, an alien enemy cannot enter into a contract with the Indian citizen. Contract entered into before the declaration of war are either stayed or terminated but contract into during the war are unenforceable.

2. Foreign sovereigns and ambassadors.           These person are immune from the jurisdiction of local courts, unless they voluntarily submit to its jurisdiction. These persons have a right to contract but can claim the privilege of not being sued. The rules regarding suits by or against foreign sovereigns are laid down in section 84 to 87 of Civil Procedure Code.

3. Insolvent.           An insolvent cannot enter into a contract as his property vests in the official receiver or official assignee. This disqualification of an insolvent is removed after he is discharged.

4. Convict.           A convict while undergoing imprisonment in incapable of entering into a contract. But this disability comes to an end on the expiry of the sentence.

5. Corporations.           A Corporation is an artificial person recognised by law. It exists only in the eyes of law. It is competent to enter into a contract only through its agent.

6. Married women.           A women is competent to enter into a contract. Marriage does not affect the contractual capacity of a women. She can even bind her husband in cases of pressing necessity. A married woman may sue or be sued in her own name in respect of her separate property.
           Doctors and advocates are included in the class. In england barristers are prohibited by the etiquettes of their profession from suing for their fees.

7. Professional persons.

ESSENTIAL ELEMENTS OF A VALID ACCEPTANCE

1.             Acceptance must be absolute and unconditional. An acceptance must be unconditional and unqualified. Accepting an offer with conditions, variations and reservations amounts to counter offer and rejection of the original offer. The accepter must comply with the terms of the offer. A variations or alteration, however, small of the offer, will make the acceptance invalid.

2.             Acceptance must be communicated to the offeror. If the offeror remains silent and does nothing to show that he has accepted the offer, no contract is formed. The acceptor should do something to signify his intention to accept. Thus, where a person accepts an offer but fails to post the letter of acceptance, it is no acceptance.

3.             Acceptance must be within a reasonable time. Acceptance to be valid must be made within the time allowed by the offeror and if no time is specified, it must be made within a reasonable time.

4.             It must be according to the mode prescribed or usual or reasonable mode. Acceptance has to be made in the manner prescribed, the proper may within a reasonable time after the acceptance is communicated to him, insist that the acceptance must be made in the manner prescribed. Failure on the part of the offeror to do so, will imply that he has accepted the acceptance although it is not in the desired manner.

5.             The acceptor must be aware of the proposal at the time of the offer. Acceptance follows offer. It the acceptor is not aware of the existence of the offer and conveys his acceptance, no contract comes into being.

6.             Acceptance must be given before the offer lapses or before the offer is revoked. It means that acceptance must be made within the offer is in force i.e. before the offer has been revoked or offer has lapsed.

      7.      Acceptance cannot be implied from silence. No contract is formed if the offeree remains silent and does nothing to show that he has accepted the offer

Contract classified according to validity or enforceability.

1. Valid Contract. An agreement enforceable at law is avalid contract. an agreement becomes a contract when all the essentials of a valid contract as laid down in section 10 are fullfilled. A offer to sell his house for 5 lakh to B. B agrees to buy it for the price. it is a valid contract. A contract to enter into a contract is however, not a valid contract.
2.Void Contract. An agreement which was legally enforceable when entered into but which has become void due to supervening impossibility of performance for example a contract between a citizen of pakistan and Indai is a valid contract during pesce but if war brakes out between two countries, the agreement will become void contract.
3. Void Agreements. According to section 2 (g), "An agreement which is not enforceable by law bu either of the parties is void."  No lagel rights or obligations can arise out of a void agreemant. It is void ab initioi.e. from its very inception, for example an agreement without consideration or with a minor.
4. Voidable Contract. According to Section 2 (i), "An Agreement which is enforceable by law at the option of one or more parties but not at the option of the other or others is a voidable contracts." Note that the word used here is 'contract' and not just 'agreement'. Thus is the result of absense of free consent in the contract. This is so because the rights and duties are created and the was not free but was obtained by corecion, undue influence, fraud, misrepresentation. The other party who include the consent take advantage of his own fraud because "He who comes into Equity(i.e. before law) must come with clean hands."    Thus a voidable contractis valid and enforceable until it is repudaited by the party entitled to avoid it.
5. Unenforceable Contracts. It is contract which is otherwise valid, but cannot be enforced because of some technical defects likeabsence of a written form or absence of a proper stamp. Such contracts cannot be proved in court.
6. Illegal Agreements. A contract which is either prohibited by law or otherwise aganst the policyof law is an illegal agreement. It is void ab initio. Thus, a contract to commit dacoity is an illegalcontractand cannot be enforcad at law. An illegal contract should be distinguished from a void contract. All illegal agreements are void but all void agreements or contract are not necessarily illegal. Every void agreements is not illegal unless its object or consideration is (a) immoral (b) opposed to public policy etc. A void contract does not affect a collateral contract.

ESSENTIAL ELEMENTS OF A VALID CONTRACT

All agreements are not contracts. Only that agreements which is enforceable at law is a contract. An agreement which is enforceable at law cannot be contract. Thus, the term agreement is more wider in scope than contract. All Contracts are agreements  but all agreements are not contracts.

An agreement, to be enforceable by law, must posses the essential elements of a valid contract as contained in section 10 of the Indian Contract Act. According to Section 10, "All agreements are contract if they are made by the free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and are not expressly declared to be void." As the details of these essentials form the subject-matter of our subsequent chapters, it is proposed to dismiss them in brief here.
The following are the essential elements of a valid contract :
1. Offer and Acceptance.  In order to create a valid contract, there must be a 'lawful offer' by one party and 'lawful acceptance' of the same by the other party.
2. Intention to Create Legal Relationship.  In case, there is no such intention on the part of parties, there is no contract. Agreements of social or domestic nature do not contemplate legal relations.   Case :- Balfour vs. Balfour(1919)
3.Lawful Consideration. Consideration has been defined in various ways. According to Blackstone,"Consideration is recompense given by the party contracting to another." In other words of Pollock, "Consideration is the price for which the promise of the another is brought."consideration is known as quid pro-quo or something in return.
4. Capacity of parties. The parties to an agreement must be competent t contract. If either of the parties does not have the capacity to contract, the contract is not valid.According the following persons are incompetent to contract.(a) Miners,                 (b) Persons of unsound mind, and(c) persons disqualified by law to which they are subject.
5. Free Consent. 'Consent' means the parties must have agreed upon the same thing in the same sense.According to Section 14, Consent is said to be free when it is not caused by-
(1) Coercion, or                   (2) Undue influence, or          (3) Fraud, or(4) Mis-representation, or         (5) Mistake.An agreement should be made by the free consent of the parties.
6. Lawful Object. The object of an agreement must be valid. Object has nothing to do with consideration. It means the purpose or design of the contract. Thus, when one hires a house for use as a gambling house, the object of the contract is to run a gambling house.
The Object is said to be unlawful if-
(a) it is forbidden by law;(b) it is of such nature that if permitted it would defeat the provision of any law;(c) it is fraudulent;(d) it involves an injury to the person or property of any other;(e) the court regards it as immoral or opposed to public policy.
7. Certainity of Meaning. According to Section 29,"Agreement the meaning of which is not Certain or capable of being made certain are void."
8. Possibility of Performance. If the act is impossible in itself, physically or legally, if cannot be enforced at law. For example, Mr. A agrees with B to discover treasure by magic. Such Agreements is not enforceable.
9. Not Declared to be void or Illegal. The agreement though satisfying all the conditions for a valid contract must not have been expressly declared void by any law in force in the country. Agreements mentioned in Section 24 to 30 of the Act have been expressly declared to be void for example agreements in restraint of trade, marriage, legal proceedings etc.
10. Legal Formalities. An oral Contract is a perfectly valid contract, expect in those cases where writing, registration etc. is required by some statute. In India writing is required in cases of sale, mortgage, lease and gift of immovable property, negotiable instruments; memorandum and articles of association of a company, etc. Registration is required in cases of documents coming within the scope of section 17 of the Registration Act.
All the elements mentioned above must be in order to make a valid contract. If any one of them is absent the agreement does not become a contract.

Quasi Contracts

Generally a contract comes into existence as a result of offer made by one party and its acceptance by the other party, with free will of both the parties. However under certain conditions even though no will is expressed by both the parties for creating contractual relations, the law creates and enforces legal rights and obligations. Such contracts are known as Quasi Contracts. The principle behind Quasi Contracts is that a person shall not be allowed to enrich himself at the expense of another.

Section 68 to 72 of the Contract Act deals with 5 different kinds of Quasi Contracts explained below:

1. Supply of Necessaries to Incapable Person (Section 68):

        

If a person incapable of entering into a contract, or anyone whom he is legally bound to support, is supplied by another person with necessaries, suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person.

Example: A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B’s property.

2. Payment by Interested Person (Section 69):

A person, who is interested in payment of money, which another is bound by law to pay, and who therefore, pays it, is entitled to be reimbursed by the other.

Example: A holds land in Bengal on a lease. B is the owner of the land. The land revenue payable by B to the government is in arrears and therefore the government advertised the land for sale to recover the dues. To prevent the sale of land A pays the arrears of land revenue. In this case B is bound to reimburse the amount to A.

3. Payment for Non-gratuitous act (Section 70): 

Where a person lawfully does anything for another person or delivers anything to him not intending to do so gratuitously and such other person enjoys the benefit thereof, the later is bound to make compensation to the former in respect of, or, to restore the thing so done or delivered.

Example: A, a tradesman, leaves his good at B’s house by mistake. B treats the goods as his own and uses them. B is bound to pay for the goods.

4. Liability of Finder of Goods (Section 71):

A person who finds the goods belonging to another, and takes them into his custody is subject to same responsibility as a bailee. He must take reasonable care of the goods and keep them in sound condition and try to find out its true owner.

5. Payment of Delivery by Mistake or under Coercion(Section 72):

A person to whom money has been paid or anything delivered by mistake or under coercion must repay or return it.

Example: A and B jointly owe Rs.5,000 to C. A alone pays this amount to C. B not knowing this again pays Rs.5,000 to C. In this case C is bound to repay Rs.5,000 to B as this amount is paid to him by mistake.