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CONTRACTS II

Indemnity

31/10/08- Friday

A contracts with B to evict C from a property owned by A. A promises to giveremuneration for this. In addition to the remuneration there is an additional clause in thecontract which states that if B during the course of evicting C suffers any injury, then heshall be compensated. This clause is of indemnity but it cannot be said that this

particular contract is a contract of indemnity.

The main purpose of the contract in this case is to evict C. If B does not get injured thenthe clause of indemnity is useless and void. In this contract, the main focus is on theremuneration B gets after he completes the contract rather than the compensation thatwould be given to him if he suffers injury.

On the other hand, a contract with an insurance company qualifies to be an indemnitycontract as the main objective of the contract is to provide compensation to the personwho has entered into a contract with it.

An insurance contract can be defined as a contract of compensation for loss suffered by promisee for doing an act desired by the promisor (insurance co).

In this case, the consideration for the promisee is compensation given for any losssuffered and the consideration for the promisor is the premium given by the promise,and the act desired by the promisor is the payment of the premium by the promisee.

So in simple terms, the promisee is compensated as he pays premium to the promisor.

Another reason for the interest of the promisor is the low risk of the event for which the person is insured. The thing against which insurance takes place is called insurableinterest for example car.

Insurance contracts are indemnity contracts as well as contingent contracts. Contingentcontracts (S-31 36) deal with performance. So when the contingency is fulfilled, thatis the uncertain event happens (be it an accident or fire) then an obligation arises on the

part of the insurance company, to perform the contract. As that happens the insurancecompany indemnifies the other party for the loss suffered by it.

So it can be concluded that

1) All insurance contracts are indemnity contracts2) All insurance contracts are contingent contracts but not all contingent contracts

are insurance contracts3) All indemnity contracts are contingent contracts.

\Why is indemnity required?

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1) Provide an incentive2) Equity if the person who has suffered for no reason is not compensated then it

is not fair. Contracts to indemnify employees as there exists no contract betweenan employee and employer.

Indemnity v Damage- Damages are provided when there is a breach of legal duty whileindemnity is just compensation given and there is no breach of legal duty involved.

1.11.08

A contract of Indemnity may not necessarily be express. It can be implied depending onthe relation between 2 parties. For example the principal agent and employer-employeerelationship. It is the duty of the principal to indemnify the agent or of the employer toindemnify the employee if they suffer any injury while doing the act of their respectiveemployers. ( Principal in case of agent and employer in case of employee.. DUH!)

Article- ( discussed in brief)

This article is about the Contract of Indemnity. It also talks about how the contract can be changed depending on the construction of the clause.

It discusses the difference between a guarantee and indemnity.

1) Guarantee agreement should be in writing while the contract of indemnityshould not be in writing.

2) Guarantee requires a written agreement because in guarantee there exists a third party to the contract.

3) Indemnity there is a contract only between 2 people and there is no involvementof the third party.

4) Requirement of the guarantee to be written is only required in English law.There is no such requirement in Indian law.

For a contract of the indemnity the liability of the indemnifier cannot change from theliability of the previous person. This can be understood from the example of the caseThe Head lessor v The Original Lessee. (Refer to facts in module). The basic concept isthatLets say A leases his property to B on 1 st November, 1998 on the condition that

he keep the premises in a state of repair. B shall indemnify A in case of any losssuffered by A caused by B on As property. The reason B pays A is because in a lease property rights are transferred and not the ownership.

B further leases out that property to C 10 years later on 1 st November 2008. Thecontract between B and C does not qualify as a contract of indemnity. C shall notindemnify B because his liability is completely different from that of when B enteredinto the contract with A. There is a time gap and the building has further detoriated on1st November, 2008. For a contract of indemnity to hold the liability should be thesame.

Taking another situation if A contracts with D for the sale of a piece of land puttingcertain a restrictive restriction on it. The restriction is not build a high rise building. D

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sells that land to B. Even when D sells to B, D has to fulfil the obligation towards A ashis contract with A still exists. If D does not follow his contract with A and does notfollow the restrictive condition then D can be sued for breach of a contract. So D tells Bof the restrictive condition placed on him by A. Though this is not an essential part of the contract between D and B, B promises to indemnify him, that is compensate D for

the loss if he (B) violates the restrictive condition.

In case the restrictive condition is not followed by B and he builds a high rise building.D is sued for breach of contract by A. D asks B to indemnify him and he refuses. ThenD cannot sue B for breach of contract because the main contract is for sale. D can onlyfile a suit against B for claim of compensation. A similar condition existed in the case

Moxhay v Inderwick.

In another case, Poole v Clarke , where Clarke purchased the property from Poole (whohad initially purchased it from a vendor ) and released Poole from the restrictivecovenants. Clarke in this case undertook complete responsibility and indemnify Pooleor his administrators etc ( given in article). However the liab should b same.

Also in the article it is discussed how on the construction of the covenant responsibilityto indemnify can b taken. Three types r given

1) The purchaser takes complete responsibility of the past payment as well as performance ( indicating future performance) when he takes it from the middle person.

2) Purchaser takes responsibility of the future payment and not of existing payment3) Purchaser does not take any responsibility of any past or present payment.

Question why would the purchaser take any responsibility. For example. B has a property which C wants desperately. B acquired this property from A and some payment was left and he did not pay. B might get sued by A. C tells B that he shalltakes all responsibility of all payment B has because C wants that property. This is asituation where purchaser might take responsibility.

Conclusion

1) Indemnity is not in writing2)