The difference between indemnity and damages

A contract of indemnity is a unique type of contract. The word “indemnity” means “security or protection against damage” or “compensation. According to Section 124 of the Indian Contract Act, 1872  “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.” [1]

INDEMNITY OBJECTIVE

The purpose of entering into an indemnity contract is to protect the promisee from unanticipated losses.

PARTIES OF THE INDEMNITY CONTRACT

There are two parties to an indemnity contract.

  • The promisor, also known as the indemnifier, is the individual who agrees to bear the loss.
  • The promisee, also known as the indemnified or indemnity-holder, is the individual who is paid or whose loss is protected.

ESSENTIALS OF AN INDEMNITY CONTRACT

  1. PARTIES TO CONTRACT: An agreement should incorporate two parties: a promisor or indemnifier and a promisee or indemnified or indemnity-holder. .

 

  1. LOSSPROTECTION: An agreement of indemnification is to shield the promisee from misfortune/loss. The loss might be brought about by the promisor’s or someone else’s conduct.

 

  1. EXPRESS OR IMPLIED: Indemnification agreement might be express (i.e., delivered with expressed or composed words) or implied (for example surmised from the conduct of the parties or conditions of the specific case).

 

  1. Basics OF A VALID CONTRACT: An indemnification contract is a rare kind of agreement. They are dependent upon the standards of general agreement law set out in Sections 1 to 75 of the Indian Contract Act, 1872. Subsequently, it should meet the entirety of the necessities for a legitimate contract.

 

  1. NUMBER OF CONTRACTS: There is just one contract between the Indemnifier and the Indemnified.

PROMISEE’S RIGHTS/ INDEMNIFIED’S RIGHTS/ INDEMNITY HOLDER’S RIGHTS

 

Under Section 125 of the Indian Contract Act, 1872, the promisee / indemnified/ indemnity holder has the following rights against the promisor/ indemnifier, provided he operated within the scope of his authority.

 

SECTION 125(1): RIGHT TO RECOVER DAMAGES PAID IN A SUIT: Any expenses that an indemnity holder may be required to pay in any action relating to anything with which the indemnity contract are recoverable from the indemnifier.

SECTION 125(2): RIGHT TO RECOVER COSTS OF DEFENDING A CASE:Whether, in bringing or safeguarding the suit, he didn’t negate the promisor’s orders and acted about as it would have been judicious for him to act without some agreement of repayment, or indemnity holder has the ability to recover all costs incurred by the indemnifier if the promisor allowed him to bring or defend the suit.

  1. (3) RIGHT TO RECEIVE SUMS PAID IN COMPROMISE : If the comprise was not against the promisor’s orders and was one that the promisee would have made if there had been no indemnity, or if the promisor allowed him to compromise the suit, an indemnity holder has the privilege to recuperate all wholes paid under the provisions of the compromise of some other suit from the indemnifier.

PROMISOR/INDEMNIFIER’S  LIABILITY’s  COMMENCEMENT 

Since the Indian Contract Act of 1872 does not specify when the indemnifier’s obligations begin, India has adopted the following rules in this regard

Until the indemnified has incurred a loss, the indemnifier is not responsible.

Even if the indemnifier has not discharged his liability, the indemnified will compel him to make good on his loss.

“If the indemnified has incurred a liability and the liability is absolute, he is entitled to call upon the indemnifier to save him from the liability and pay it off,” the judge stated in the landmark case of Gajanan Moreshwar vs. Moreshwar Madan (1942).

 

Indemnity and damages are similar, but indemnity can be sued for losses resulting from the conduct of a third party to a contract, while damages can only be claimed for losses arising from the parties’ actions upon breach of contract. Indemnity is a promise to compensate for any monetary or other losses incurred as a result of the injury.

Indemnity is mentioned in section 124 and 125 of the act.  Damage is provided under Section 74 of the Act, which specifies , “When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to receive from the party who has broken the contract reasonable compensation not exceeding the amount so named or, as the case may be, the penalty stipulated for.”[2]

The difference between indemnity and damages

  • Third-party claims – While liquidated damages may only be asserted for breach of contract (by a contracting party), indemnity claims can be made against the indemnifying party as well as “any other person.”
  • While a liquidated damages lawsuit can only be filed after a contract has been breached, an indemnity claim can be filed before the contract has been breached. For example, an indemnified party can request that the indemnifying party defend them in a suit brought by a third party.
  • Scope of claim – Although Section 73 of the Act (Compensation for loss or damage caused by breach of contract) limits damages to those “which naturally arose in the ordinary course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from such breach,” Section 124 of the Act does not limit the scope of indemnity As a result, an indemnity claim can cause a party to seek indemnity for unforeseeable and indirect damages.

Duty to mitigate – Section 73 of the Act imposes a duty on claimants to mitigate their damages and notes that they will not be compensated for losses incurred as a result of their failure to do so. However, the indemnified party has no such obligation under Section 124 of the Act.

[1] Indian Contract Act, 1872, 124, No. 09, 1872 (India).

[2]Indian Contract Act, 1872,74, No. 09, 1872 (India).

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