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Indemnity under Indian Contract Act, 1872

Section 124: Contract of Indemnity defined – A contract of indemnity is one whereby one party promises to save the other from any loss incurred/suffered to him due to the promisor, or due to some other person.

The person who promises to save the other from such a loss is called the indemnifier and the person to whom such a promise is made is called the indemnity holder.

For example, B has given his books to C for certain period. A promises to pay B Rs. 5,000 if C did not return the books he had borrowed from B or if C loses them. There is a contract of indemnity between A and B.

In the case, P.N.V.S.V. Prasad v. Union of India, an indemnity bond which permits an employee to leave the employment earlier than the minimum agreed period only at the cost of the forfeiture of his bond money is valid provided both the period of restriction and the bond money are reasonable. Only that part of bond money can be retained which is necessary to indemnify the employer for his loss.[1]

All insurances are contract of indemnity other than life insurance and personal accident insurance. Why life insurance is not a contract of indemnity? The reason is that the life of a person cannot be valued.

Section 125: This section talks about the right of an indemnity holder in case of a legal suit. The indemnity holder (also called the promisee) can recover from the indemnifier (the promisor):
  1. All the damages that are applicable with respect to the contract of indemnity
  2. All the costs to be paid for bringing any suit or for the purpose of defending in that suit.
  3. All the sums that the promisor might have paid under the terms of any compromise of a suit.
Section 125 says that you must be damnified before you can claim to be indemnified. It means that the indemnity holder, will be compensated by the indemnifier only when the indemnity holder suffers any loss or has worked as per instructions of the indemnifier, or has incurred any costs during suit proceedings, or has paid any amount of compromise.

In the case, Mohit Kumar Saha v. New India Assurance Co Ltd, a truck was under an indemnity insurance amounting to Rs. 2,00,000. The truck was stolen and there was no place for recovery of the stolen truck. It was held that the proper amount of indemnity was fixed at Rs. 1,87,492 along with an interest of 185 for the delay period. Later, it was held that settlement at a lower amount of claim was arbitrary and unfair U/A 14 of the Constitution.[2]

End-Notes:
  1. (1995) 1 An WR 126, minimum period of compulsory service three years, three months’ remuneration to be recovered if the employee left earlier.
  2. AIR 1997 Cal 179

    Award Winning Article Is Written By: Ms.Sandhya Prabhakaran - BBA LL.B. (H), 1st year, Amity Law School, Noida
    Awarded certificate of Excellence
    Authentication No: AP111813150107-28-0421

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