Unit-I:Special Contract
Table of Contents
Question- Define a contract of indemnity and explain the rights of the indemnity holder under the Indian Contract Act, 1872. Refer to the case Bank of Bihar v. Damodar Prasad, AIR 1969 SC to illustrate the scope of indemnity.
Contract of Indemnity and Rights of Indemnity Holder
Definition
A contract of indemnity, as per Section 124 of the Indian Contract Act, 1872, is an agreement where one party (indemnifier) promises to protect another (indemnity holder) from loss caused by the indemnifier’s or another person’s conduct.
Rights of Indemnity Holder (Section 125)
- Damages: Recover all damages paid in a suit related to the indemnified matter.
- Costs: Recover costs incurred in defending or prosecuting a suit, if acting prudently or with indemnifier’s authority.
- Compromise Sums: Recover sums paid under a prudent or authorized compromise of a suit.
Case: Bank of Bihar v. Damodar Prasad, AIR 1969 SC
This case, though centered on a guarantee, illustrates indemnity principles. The Bank of Bihar sought recovery from a defaulting debtor and surety. The Supreme Court held the surety’s liability co-extensive with the debtor’s, akin to an indemnifier’s obligation to cover losses. Applied to indemnity, it shows the indemnifier must compensate for losses, including damages and costs, if the indemnity holder acts within the contract’s scope.
Scope
The case clarifies that indemnity covers direct losses, legal costs, and compromises, provided actions are reasonable and per the contract, ensuring comprehensive protection for the indemnity holder.
Question-Distinguish between a contract of indemnity and a contract of guarantee. How does the liability of a surety differ from that of an indemnifier?
Distinction Between Contract of Indemnity and Contract of Guarantee
Key Differences
- Definition:
- Indemnity (Section 124): Indemnifier promises to save indemnity holder from loss caused by indemnifier’s or another’s conduct.
- Guarantee (Section 126): Surety promises to fulfill principal debtor’s obligation to creditor upon default.
- Parties: Indemnity has two parties; guarantee has three.
- Liability: Indemnifier’s liability is primary; surety’s is secondary.
- Purpose: Indemnity protects against loss; guarantee secures creditor’s claim.
- Contracts: Indemnity involves one contract; guarantee involves three.
- Recovery: Indemnifier cannot sue others; surety can recover from principal debtor.
Liability: Surety vs. Indemnifier
Case Reference: Bank of Bihar v. Damodar Prasad, AIR 1969 SC confirms surety’s co-extensive liability, highlighting secondary nature compared to indemnifier’s direct obligation.
Indemnifier: Primary, absolute liability for loss; no recovery rights unless specified.
Surety: Secondary, contingent liability; subrogated to creditor’s rights upon payment (Section 140).