This article is written by Sushree Surekha Choudhury from KIIT School of Law, Bhubaneswar. The article talks about the deed of indemnity, its elements, essential conditions for its validity, legal implications and enforceability.
It has been published by Rachit Garg.
Table of Contents
Imagine you are a seller of some goods. You have entered into a contract with XYZ company to sell some goods, say perishable goods, periodically and in huge quantities. You were transacting one such shipment where XYZ company refused to receive the goods and pay their price. However, after a few days, when the manager came back and got to know about this situation, he immediately contacted you to send the goods. However, by this time, your goods had perished, which resulted in heavy losses on your end. This cannot be undone. It is also true that you faced losses for no fault of your own. The loss was incurred due to the untimely response and delay made by the other party in receiving the goods. So, how to find a solution to this problem?
Well, the Indian contract laws have just the appropriate answer to your question. The Indian contract laws contain a provision known as the law of indemnity. The law of indemnity allows an agreement between two parties wherein one party promises to compensate the other if they incur any loss or damage due to the act or omission of the promisor himself or any other party. Therefore, in the aforementioned condition, you and XYZ company could have entered into a deed of indemnity wherein XYZ would have to compensate you in the instant situation since you incurred losses because of a delay on their part. This would have been possible and facilitated through the deed of indemnity.
In this article, we will learn everything about this deed of indemnity and the advantages of executing it in your favour.
The law of indemnity: an overview
Indemnity, as a legal term, holds significance in Indian contract laws. While the terminology and its legal implications may appear complex, indemnity, in simpler terms, means “compensation for loss or damage caused to a person or his property.” The purpose behind the principle of the law of indemnity is that no person should suffer losses or damage due to negligent behaviour or breach of promise by another. A promise to indemnify is often secured legally by a deed of indemnity. The agreement between two parties in an event where one party promises to indemnify the other party in case they incur any damage or loss is reduced into writing and properly signed and notarised to give legal validity to it. When such a contract is made between the parties, they become legally bound by its terms and implications. When a party fails to perform their part of the obligation or violates any established clause of the contract, the deed of indemnity is said to be breached, and it attracts punishment when the aggrieved party seeks the assistance of the court. There are two parties to a deed of indemnity, an indemnifier and an indemnity holder.
The law of indemnity is a part of Indian contract law, which is primarily codified under Section 124 of the Indian Contract Act, 1872. An indemnity is a form of compensation. An indemnifier is one who makes the promise to indemnify in the event of any loss or damage. The person whose interests are secured by the indemnifier is known as the indemnity holder, as he holds the right to be indemnified in the event of any loss or damage incurred by him. The indemnifier must take up this responsibility and make the promise to indemnify with full knowledge of the circumstances surrounding the contingency, and the indemnifier must do it voluntarily. A deed of indemnity and its performance are contingent on the occurrence or non-occurrence of certain specific events. It is contingent on the occurrence of a loss. The indemnifier does not need to indemnify the indemnity holder unless the indemnity holder proves that he has incurred losses. The burden of proof is on the indemnity holder to prove the incurrence of losses.
Validity of a deed of indemnity
A deed of indemnity is valid when it is a valid contract as per the provisions of Section 10 of the Indian Contract Act, 1872. Section 10 talks about a valid contract. It talks about certain specific elements that any form of contract must retain in order to be deemed a valid contract. The elements of a valid contract, and therefore, of a valid deed of indemnity, are:
Offer and acceptance of a proposal
Section 10 of the Indian Contract Act, 1872, states that the first step towards having a valid contract is to first make a proposal (offer) to another party and have the acceptance of this offer be accepted by them. One party makes an offer, and if the other party accepts this offer, it becomes a promise. A promise between two competent parties ultimately leads to the formation of an agreement between them, and if that agreement is legally enforceable, it becomes a contract.
In a similar circumstance, when one party proposes or offers to indemnify another party in the event of loss or damage incurred by them, an offer is said to have been made by the first party. When the party to whom the offer is made accepts the offer and thereby communicates their acceptance, an agreement to indemnify has been established between both parties. Once this agreement is given legal effect, it is known as a deed of indemnity and such a deed is legally enforceable in a court of law as per the provisions of the Indian Contract Act, 1872.
Consensus ad idem or meeting of minds
The legal maxim consensus ad idem literally means the “meeting of minds.” In the context of a contract, it refers to the mutual consent of both parties to a contract. Parties to a contract must agree to the same things in the same sense. This mutual consent is essential to making a contract valid. If the consent of any one party is missing, the contract cannot be formed.
This principle also applies in the case of an indemnity deed. For example, suppose two people entered into an indemnity agreement in which the first party agreed to indemnify only if event A occurred, whereas the other party interpreted the agreement to mean that he would be indemnified regardless of whether event A occurred. Thus, for the first party, indemnification and the deed of indemnity were contingent on the happening of event A, whereas it could or could not take place from the perspective of the second party, and that did not affect his right to be indemnified in any way. In this instance, the deed of indemnity cannot be valid as there is an absence of consensus ad idem (meeting of minds) or mutual consent rendering the contract void.
Lawful relationship between parties
An agreement will become a contract when it is of a nature that creates and establishes a lawful relationship between the parties, as opposed to, say, a social or domestic relationship. This is crucial because only a lawful relationship can be made legally enforceable. When a lawful relationship is created, any or both parties to such a relationship must adhere to its terms and conditions. If they breach the conditions and clauses, they can be held liable and punished through the routes of law. Parties entering into an agreement must intend to enter into a legal relationship with one another and the contract must be a reflection of this legal relationship.
This situation holds true in the case of a deed of indemnity in a way that both the parties, i.e., the indemnifier and the indemnity holder, must be aware that the deed of indemnity entered into between them will make them both lawfully responsible towards one another for the fulfilment of the mutually agreed terms of the contract.
Competency of parties
One of the most essential parts of considering a contract valid is the competency of the parties entering into it. A contract will not be considered to be a valid contract unless the parties to it were competent to enter into it while entering into the agreement. The Indian Contract Act, 1872, has set different parameters to test the competency of parties to a contract and the same holds true for a deed of indemnity as well. Section 11 of the Indian Contract Act, 1872, talks about the competency of parties to a contract.
A person is considered to be competent to enter into an agreement if:-
A major can be a party to a deed of indemnity
He has attained 18 years of age or older (major). Thus, an individual who is below 18 years of age cannot form a valid contract. The same is applicable to a deed of indemnity. A deed of indemnity in which the parties have not reached the legal age to enter is void ab initio (void from the start).
A person with a sound mind can be a party to a deed of indemnity
For a person to be a party to a deed of indemnity, he must be of sound mind. A person who is permanently of unsound mind cannot enter into a contract with anyone, even if he has attained the age of 18 or above. A person with a temporarily unsound mind can enter into a contract at a time when he is of sound mind. Thus, a deed of indemnity is legally valid only if both parties to it were of sound mind at the time of entering into it.
Specific disqualifications bar competency
He is not disqualified by any law or statute in his jurisdiction. Any person who is expressly barred from entering into a contract under the laws of the jurisdiction to which he is subject is not permitted to do so. Thus, a deed of indemnity between two parties, one of whom has been barred by a specific law in their respective jurisdictions, will become void.
Apart from these general conditions that establish non-competency, there are a few particular conditions under which people are considered to enter into a valid contract within Indian territory. These restrictions arise from their legal status, political status, or otherwise. They are:
Contracts with alien enemies are void in India. Any kind of transaction with alien enemies has always been disregarded and frowned upon in India and elsewhere. Keeping the security and integrity of the state in mind, a contract made with an alien enemy has been regarded as void as per Indian contract laws. Thus, when an Indian citizen tries to enter into a deed of indemnity with another who is considered an alien enemy in India, the deed of indemnity will not be recognised and enforced in India as a valid contract.
Another restriction is on contracts made with foreign sovereigns or ambassadors. Foreign sovereigns and ambassadors have a unique political status when it comes to maintaining diplomatic relations with other countries. Thus, they enjoy certain privileges and immunities. As a part of this diplomatic relationship, they are also restricted from entering into direct agreements with any ordinary citizen or corporation in India. However, they can do so through their agents or representatives. These agents and representatives can enter into contracts in India on behalf of the foreign sovereign or ambassador if the need arises. Such is also the case with a deed of indemnity. Therefore, an ordinary citizen or corporation can enter into a deed of indemnity with a foreign sovereign or ambassador through their agents or representatives in India.
The next restriction is on convicts. A convict cannot enter into a contract, and thereby a deed of indemnity, while he is undergoing his sentence. However, they are free to enter into contracts once they have finished their sentence and are free from any residual punishments from the court of law.
A contract made with an insolvent person is not recognised and enforced in India. An insolvent or corporate insolvent is a person who is undergoing insolvency proceedings and is in the process of reviving his company. Even if the proceedings have not yet begun, the creditors have initiated them against the corporate debtor, who is unable to repay debts, which is a form of insolvency. Thus, as per Indian contract laws, an insolvent person cannot enter into a contract with anyone in India, as such a contract will not be considered valid. More so in the case of a deed of indemnity, which involves monetary compensation. An insolvent person is not in a position to indemnify another. Thus, there arises no question as to their eligibility to enter into a deed of indemnity, as they would not be able to indemnify the other party should the need arise. For the purpose of protecting the interests of the innocent party in a contract who might incur losses due to the insolvency of another party, this restriction has been put in place.
Restriction on companies
A deed of indemnity or any other form of contract entered into between an individual and a company or corporation will only be valid if it is expressly allowed in its Memorandum of Association. Further, it can be made valid only to the extent to which it is allowed in the company’s MoA. This restriction is to avoid any future conflicts arising due to two legally valid yet conflicting pieces of law, i.e., a contract and the company’s MoA.
Fundamentally, one of the most essential components of a valid contract is the free consent of the parties to it. Section 13 of the Indian Contract Act, 1872, states that a contract is valid when it is free from any coercion, undue influence, fraud, misrepresentation, or mistake. A contract made due to consent given by ‘mistake’ becomes void ab initio. However, consent that is obtained by fraud, misrepresentation, undue influence, or coercion is voidable at the option of the party whose consent has been obtained by these means.
These factors are applicable to a deed of indemnity as well. A deed of indemnity that is made between parties by consent obtained by coercion of any form, like detainment, threat to commit an offence under the Indian Penal Code, 1860, etc., becomes voidable under Section 15 (coercion) of the Indian Contract Act, 1872.
Further, a deed of indemnity is voidable as per Section 16 (undue influence) of the Indian Contract Act, 1872, when the consent of one party is obtained by the other party in a situation where the first party was in a position of dominance over the other party in order to manipulate the other party’s free consent.
Section 17 (fraud) of the Indian Contract Act, 1872, talks about fraud as an unlawful means to obtain a party’s consent. When one party attempts to obtain another party’s consent by deceiving them, a contract made between them becomes voidable at the option of the party who has been deceived. Similarly, a deceived party to a deed of indemnity can decide to make it void.
Additionally, a deed of indemnity concluded due to consent obtained by misrepresentation is voidable as per Section 18 (misrepresentation) of the Indian Contract Act, 1872. Thus, consent obtained by any of the aforementioned means is voidable at the option of the party who has been wronged, as per Section 19 (voidability in absence of free consent) of the Indian Contract Act, 1872.
A mere offer and its acceptance cannot constitute an agreement; it has to be backed by a lawful consideration. For instance, party A and party B intend to enter into a deed of indemnity. As mentioned in Section 2(d) of the Indian Contract Act, 1872, parties A and B have to complete the negotiation with a lawful consideration. In the case of an indemnity deed, this consideration is in the form of a promise. A promise to do or refrain from doing something makes an agreement conclusive and opens the door to it becoming a valid contract. However, the mere presence of consideration is not enough. The consideration has to be a lawful consideration. Consideration is considered to be lawful when it does not expressly or impliedly violate any laws of the state or fulfils an unlawful purpose. It should also not be against the public policy of India.
Section 23 of the Indian Contract Act, 1872, talks about both- lawful consideration and lawful object as essential elements of a contract made in India. As per the provisions of this section, a contract will be considered valid only when the object for which the contract is made is lawful. The object of the contract is considered lawful when:
- It is not prohibited by law, expressly or through legal interpretation.
- It is not conflicting with any law or statute in India.
- It is not fraudulent or obtained through fraudulent means.
- It does not cause damage or harm to any person or their properties.
- It is not barred by any precedent or considered immoral by any court in India.
- It is not considered to be a threat or harm to India’s public policy by any Indian court.
Thus, a deed of indemnity is valid as per Indian contract laws when it is created for a lawful object.
Possibility of performance
Certainty of the contract is an essential element that constitutes a valid contract. A contract whose terms and clauses are uncertain is difficult to perform and enforce due to vagueness. The possibility of the performance of a contract depends on the certainty of its terms. When terms and clauses are vague, a contract cannot be performed honestly since it is not clear what is expected from the parties to the contract. Therefore, a contract with vague, uncertain, or impossible terms cannot be recognized to be valid or enforced by any court in India.
Deed of indemnity: relevant provisions from the Indian Contract Act, 1872
The Indian Contract Act, 1872, is the primary legislation that deals with contracts made and enforced in India and a deed of indemnity is no exception. A deed of indemnity entered into between two parties in India must comply with Indian contract laws. Thus, all the general provisions of the Indian Contract Act, 1872 are applicable to a deed of indemnity as well. In addition to this, there are specific provisions of the Indian Contract Act, 1872 particularly articulated to govern indemnity laws and deeds made in furtherance of this objective to indemnify.
As we have already discussed, indemnity is a promise to compensate one party (the indemnity holder) in the event that they bear any loss or damage. The person who promises to compensate the indemnity holder is known as an indemnifier. A contract or deed made between two parties to fulfil this obligation and honour this arrangement is known as a deed of indemnity. It is essential to execute a deed of indemnity in order to bind the arrangement between the parties by attaching legal implications and enforceability to it. This deed of indemnity is made as per Section 124 of the Indian Contract Act, 1872.
Indian laws on indemnity have taken their inspiration from the west. English laws on indemnity have an ambit wider than Indian laws as English laws also cover unforeseeable events, such as natural calamities. It acts as insurance that the indemnity holder holds. Section 124 of the Indian Contract Act, 1872 which defines a contract of indemnity also takes its inspiration from the English law of indemnity.
A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity.”
- Section 124, Indian Contract Act, 1872
Thus, when two parties enter into a deed of indemnity as per the provisions of this Section, they are bound to indemnify the other party if and when they incur any loss or damage, either by the promisor himself or due to the conduct of any third party. The indemnity holder has the right to claim this compensation and legally enforce the indemnity deed. The indemnity holder’s right to recover the indemnity amount, attached interests and costs, and recurring expenses from the indemnifier. These rights are provided to the indemnity holder through Section 125 of the Indian Contract Act, 1872.
As has been discussed above, a deed of indemnity must contain all the essential components that make it a valid contract as per Section 10 of the Indian Contract Act, 1872. A deed of indemnity must be made in good faith. While contracting, neither party should have any malicious intent. The deed of indemnity should, in no way, violate any laws in India or pose a threat to the public policy of the country, or the safety and security of the state. A deed of indemnity is a form of contingent contract. The indemnifier indemnifies only when the indemnity holder incurs a loss or damage. As has been said in the English law of indemnity, “you must be damnified before you claim to be indemnified.” Thus, incurring loss or damage has to be established in order to claim indemnity under a deed of indemnity.
Agreement to indemnify: forms
An indemnity agreement can be included in any form of contract, or it can also be separately executed. Both these forms of an agreement to indemnify have been said to be valid in India. For instance, an agreement to indemnify can be inserted in the form of an indemnity clause in any contract. Usually, every kind of contract made in India, especially those involving buying, selling, leasing, mortgaging, loans, etc., inserts an indemnity clause in the prime contract. This has been the general practice. For instance, a sale deed executed in India will include an indemnity clause that will direct the party who is the indemnifier to indemnify the other party if the sale deed falls apart or the sale deed is breached and the indemnity holder incurs subsequent losses. Indemnity clauses also come into play when a contract contains a representation and warranties clause. It is when either the representation made is inappropriate or the warranty period is not fulfilled and the holder of goods or services incur losses due to this inappropriate information that the indemnity clause comes into the picture. The party who made the representation or gave the warranty has to indemnify the other party for all the losses they incurred due to a wrongful representation and warranty. For example, Party A sells some goods, say laptops, to Party B. Party A makes representations about certain logistical information about the laptops and gives a warranty of three years from the date of sale. However, this information is proven to be false, and some laptops stop working. In this situation, Party A must indemnify Party B for losses incurred by them due to wrongful representation and damage of goods before the expiry of the warranty period. Thus, an agreement to indemnify can be in the form of an indemnity clause in any deed or contract in India.
The second form of an agreement to indemnify is in the form of an entirely separate contract or a deed of indemnity. A deed of indemnity is entered between the parties, known as the indemnifier and indemnity holder, in accordance with Section 124 of the Indian Contract Act, 1872. A deed of indemnity is where an indemnifier promises to indemnify the indemnity holder when they incur losses due to the act or omission of the promisor himself or any third party. This promise to indemnify is executed in writing, and legal implications and enforceability are attached to it by means of a deed of indemnity. It is essential that a deed of indemnity is executed in accordance with the provisions of the Indian Contract Act, 1872, and that it also does not violate the principles governing the validity of a contract under Indian laws and legislation. This deed of indemnity contains several clauses, such as the interpretation clause, the indemnification clause, the clause stating jurisdiction and determining governing laws, etc., as per the needs of the parties and the requirements of the facts and circumstances of the case. These clauses will be discussed in greater detail later in this article.
Nature of a deed of indemnity
The nature of a deed of indemnity is determined by the way it was executed. This means that a deed of indemnity holds the most significance when it is in writing. Oral promises of indemnification have little or no significance unless the party demanding to be indemnified can prove beyond reasonable doubt that he, in fact, holds the right to be indemnified against the other party. If the person claiming indemnification fails to prove the existence of this right, the court cannot and will not force the other party, against whom the claim has been made, to indemnify.
Further, both express and implied promises to indemnify can be enforced in a court of law in India. However, the burden of proof is on the claimant in the case of implied promises to prove the existence of such promises. Thereafter, it is left to judicial interpretation to decide whether, in fact, such an implied promise exists between the two parties. This is because an implied promise to indemnify is not covered within the lawful ambit of Section 124 of the Indian Contract Act, 1872. Express or direct promises of indemnification are either in the form of indemnity clauses or a deed of indemnity. These forms of agreements to indemnify are protected by the provisions of Section 124 of the Indian Contract Act, 1872, and thus have legal enforceability. A breach of such a clause or deed by either party can be challenged in a court of law, and an indemnity can be claimed from the erring or defaulting party.
In order for a deed of indemnity to be enforceable, there must also be no willful disobedience or mala fide intention on the part of the indemnity holder. When the indemnity holder claims to be indemnified, it is essential for him to establish that he has followed all necessary instructions and taken every required step to avoid incurring losses or damage. If it is found that the losses incurred by the indemnity holder are intentional or due to willful disobedience, the one which could have been avoided if the indemnity holder had complied with the terms of the deed of indemnity and exercised reasonable prudence, his right to be indemnified becomes questionable. When a situation like this arises, the decision of the court of law is final after applying judicial interpretation to the facts and circumstances of the case at hand. Thus, depending on the nature of the contract between the parties, as well as the intention and knowledge of both parties, an indemnity deed and the rights arising from it can be subjected to a series of judicial scrutiny.
Essentials of a deed of indemnity
As discussed above, the validity of a deed of indemnity depends upon its compliance with the essentials of Section 10 of the Indian Contract Act, 1872. After a deed of indemnity has passed the essentials test and proven to be valid as per Section 10, it must fulfil certain additional essentials in order to be recognised as a valid deed of indemnity.
- For starters, it must comply with the provisions of Section 124 of the Indian Contract Act, 1872, and the rights of the indemnity holder must be guaranteed as per Section 125 of the Act.
- All other provisions of the Indian Contract Act, 1872, must also be followed. A deed of indemnity must abide by all the provisions of the Indian Contract Act, 1872, which are general conditions applicable to all contracts and agreements made in India.
- For a deed of indemnity to be valid, the presence of two parties who are competent is essential. The relationship arising out of the deed of indemnity between these parties must be that of an indemnity holder-indemnifier relationship. This relationship must be established with the free will and consent of each party with full knowledge of the consequent circumstances and obligations on them arising out of the indemnity deed.
- The agreement between the parties must be solely for the purpose of indemnification through the deed of indemnity. No other collateral legal relationship or obligation should arise out of an indemnity deed.
- Incurrence of loss or damage is essential for the indemnity holder to be eligible to be indemnified. The incurrence of such losses must be proved.
- Such loss or damage must have been caused due to the act or omission of the promisor himself or any other third party. This is the basic component of any deed of indemnity that the indemnity holder is indemnified against the losses incurred by him.
- While the English law of indemnity extends to unforeseeable events as well, Indian laws do not. Thus, if the indemnity holder incurs any loss or damage due to any unforeseeable event like an Act of God which is beyond human capabilities, the indemnifier is under no compulsion to indemnify.
- A contract for insurance is also a form of a deed of indemnity. However, a life insurance contract or agreement cannot be considered a deed of indemnity since a deed of indemnity is between two parties, the indemnifier and the indemnity holder. The indemnity holder himself is eligible to be indemnified should the situation so arise. But in the case of a life insurance contract, the indemnity holder does not survive to claim to be indemnified. Thus, life insurance is not a form of a deed of indemnity.
- A deed of indemnity can either be express or implicit, depending on the nature and circumstances of the case. However, the validity and enforceability of an implicit deed of indemnity are up to judicial interpretation and scrutiny.
Enforceability of a deed of indemnity
When all the aforementioned elements are present, a deed of indemnity is considered valid as per Indian laws and capable of being enforced. When the enforcement of a deed of indemnity is required, it is done through the following steps:
- The validity of the deed of indemnity is established in a court of law.
- The bona fide intention of the indemnity holder is proved. It is to be established that he acted in good faith and took all necessary steps to avoid or omit the possibility of incurring losses. It is also to be established that the loss or damage caused to the indemnity holder is not due to his willful disobedience or negligence to follow instructions.
- When everything mentioned above is proven, the deed of indemnity shall be enforced by the court of law as per pre-established and agreed-upon terms and clauses of the indemnity deed.
- Accordingly, the indemnifier is directed by the court to pay the promised compensation to the indemnity holder along with collateral costs, court fees, adjudication expenses, and any other form of expenditure made by the indemnity holder in fighting the suit in court, or in incurring the damage caused as per the deed of indemnity.
Elements of a deed of indemnity: clauses
A deed of indemnity is made for several purposes. It is made between the seller and buyer of goods to avoid damage that can be caused due to the quality of the goods or the seller’s failure to deliver the goods, etc. The clauses of a deed of indemnity ensure indemnification if a such situation so arises where the buyer of the goods faces any kind of loss or damage due to the act or omission of the seller, or any other third party.
A deed of indemnity can also be executed by a company as a whole or to protect the director from bearing personal losses. There are many instances where the director of a company can be held personally liable, for example, disputes arising out of the conflict of interests between the stakeholders of the company, the company going insolvent due to the non-payment of debts, etc. In these situations, fines and punishments may be imposed on a company director. A deed of indemnity can help in bearing these losses or providing protection against them.
A company also enters into many agreements with different stakeholders every once in a while. These agreements and the obligations arising out of them are protected by a deed of indemnity. Thus, a deed of indemnity must be tailor-made as per the needs and circumstances that differ from one case to another. However, a deed of indemnity must contain certain provisions in the form of clauses which will be common to it. These clauses are:
Definitions and scope
The definitions and scope clause in a deed of indemnity is used to give directions for interpreting the entire document. It sets out important terminologies used in the deed and explains their meaning. This helps in determining and understanding how these terms are to be pursued while reading and implementing the agreement.
Scope of any agreement talks about its legal implications, limitations, the extent of application, etc. Scope determines the rights, duties and obligations of each party to the agreement. It talks about the performance, act, or omission that is expected out of each party.
The definitions and scope clause defines important terms like liabilities of parties, claims that can be made under the contract, etc. The parties to a deed of indemnity can have their rights, claims, and obligations as have been put under this clause of the deed. The definitions and scope clause helps in the judicial and legal interpretation of the agreement as a whole, as well as each part of it.
The definitions and scope clause aims to cover every terminology used in the deed of indemnity. A long definition and scope clause indicates certain clarity of understanding and a well-structured document by minimizing the risk of misinterpretation. The definitions and scope clause should be simplified and written in a manner that makes it easily comprehensible. The use of simple language which imparts clear and concise meaning to the document fulfils the purpose of inserting this clause in a deed of indemnity.
Parties to the deed
There are two parties to a deed of indemnity, an indemnity holder and an indemnifier. The indemnity holder is the one who is promised to be indemnified in the event of him incurring any loss or damage due to the promisor himself or any other third party. This person who promises to indemnify, also called the promisor, is the indemnifier in a given agreement to indemnify.
There is no other party involved in a deed of indemnity except the indemnity holder and the indemnifier. However, protection of indemnity is provided against third parties as well, as per the provisions of Section 124 of the Indian Contract Act, 1872.
It is important to add a clause defining the parties to a deed of indemnity to maintain clarity and ease of understanding. Thus, when a deed of indemnity is executed between two parties, a clause is inserted in the document to clarify the proper names and basic details of the two parties and to state which party they are. This clause formally establishes the indemnity holder-indemnifier relationship between both parties.
An interpretation clause is an essential part of any contract. It helps in understanding the contract in its true sense. An interpretation clause in a deed of indemnity helps in construing the true meaning of its execution. It helps in understanding the legal implications arising out of the deed of indemnity while keeping in mind the needs and necessities of both parties to it.
An interpretation clause gives a notion to the people reading it and helps them gain a better understanding of the true sense in which it was contracted. It helps in the literal interpretation of the clauses of the deed of indemnity. At times, judicial interpretation is sought for certain parts of a contract. The interpretation clause helps with such legal interpretations.
A contract is entered between the parties with a consensus ad idem (mutual understanding of the clauses and terms in the same sense). The interpretation clause ensures that this mutual motive of the parties is not lost due to judicial intervention. Whenever a dispute arises between the parties and the terms of the indemnity deed are challenged in a court of law with conflicting contentions, the interpretation clause helps in construing the indemnity deed and understanding it with the true sense in which it was executed at inception.
The indemnity clause is undoubtedly the most essential clause in a deed of indemnity. It is a detailed clause that lists the essential requirements, obligations, events leading to indemnification, limitations of parties and compensation, and everything else that is essential for the fulfilment of the purpose of executing a deed of indemnity.
The indemnity clause is a detailed clause that contains every direct, as well as related and collateral, information that can be crucial or even remotely relevant to the deed of indemnity and its purpose. It talks about the acts or omissions expected from each party. It lists the obligations and performance of specific conditions that are needed by the parties.
The indemnity clause, most importantly, talks about the event or promise of an act or omission, the happening of which will lead to the indemnifier indemnifying the indemnity holder. The indemnity clause specifies the rights of the indemnity holder when he is entitled to the promised indemnity. The indemnity clause also talks about situations or exceptions that, when applicable, release the indemnifier from the obligation of indemnifying.
The indemnity clause should also specify the extent to which the indemnifier is liable to indemnify the indemnity holder. This limit can be set in monetary terms or as a certain portion of the entire loss or damage. This can also be for whatever loss the indemnity holder incurs, meaning the compensation will be paid in its entirety. The claims of the indemnity holder should also be mentioned in detail as per the needs and necessities of the case.
Jurisdiction and governing laws clause
The jurisdiction clause specifies the territorial jurisdiction, subject matter jurisdiction, etc., that are applicable to a particular deed of indemnity. This clause mentions the jurisdiction applicable to the parties and the deed of indemnity. It states the jurisdiction under which the deed of indemnity and the parties to it will be governed.
The governing laws clause talks about the laws that are applicable to a particular deed of indemnity and its parties. In the case of a deed of indemnity executed in India, it comes within the ambit and jurisdiction of Indian laws. For that matter, Indian contract laws are applicable to these indemnity deeds and govern their legal applicability and enforceability.
It is important to insert a clause specifying the jurisdiction and governing laws because it helps to avoid ambiguity and vagueness. If a dispute arises in the future due to non-performance or breach of the deed of indemnity by either of the parties, the first thing that has to be determined is the jurisdiction and laws that will govern the contract and its parties. In this situation, having a pre-determined written version of these questions of law is helpful.
Inserting a jurisdiction and governing laws clause saves a lot of time and resources that would otherwise be consumed in fighting conflicting contentions about the presence or lack of jurisdiction and the legal validity and applicability of the governing laws. It is often seen that when a lawsuit is filed in a court of law challenging the provisions of a contract or seeking its enforceability, the first thing that is challenged by the other party is the jurisdictional ambit of the court to entertain the suit. This may consume a lot of time and increase the burden on the courts. Thus, when a clause specifying these details already exists, it helps to mitigate these conflicts and ambiguity.
A sunset clause, as the name suggests, determines the optimum time limit till which the agreement remains valid. There is a certain point after which the parties may decide to revoke the contract or bring an end to its terms and bindingness on the parties. This can be a specific time period, a predetermined date, the happening of a particular event, or a reasonable point after which the said event’s occurrence becomes impossible.
Although it is not mandatory to insert a sunset clause in a deed of indemnity, it can be useful if added. A sunset clause in a deed of indemnity can be used to release the indemnifier from the obligation of indemnifying the indemnity holder after a certain period of time.
When the sunset date is reached, the parties are no longer bound by the terms and obligations set forth in the deed of indemnity. The indemnity holder cannot claim to be indemnified on a date which comes later in time than the sunset date since the sunset clause releases the indemnifier from his obligations under the deed of indemnity. This sunset clause, like all other terms and clauses of an indemnity deed or any contract, is decided with the mutual consent of both parties, and thus it is equally binding on both parties.
Entire agreement clause
The entire agreement clause establishes the whole agreement between the parties as final and binding. It helps in establishing the certainty and finality of the enforcement of the document. A contract that contains an entire agreement clause indicates that the contract is final and binding on the parties, and any previous agreement between the parties, either orally or in writing, through negotiations or mutual consent, will become ineffective and inapplicable after the execution of this final, binding agreement.
The agreement containing an entire agreement clause becomes final notwithstanding any other previous agreement or negotiation between parties. Inserting this clause helps to avoid conflicts between parties that may arise due to the multiplicity of documents. When there is more than one binding document between the parties on the same subject matter, it may lead to ambiguity and confusing situations. The agreement containing an entire agreement clause helps to eliminate these conflicts by establishing the finality of a document containing this clause.
It is advisable to insert an entire agreement clause in a deed of indemnity to establish the finality of the agreement executed between parties. Before a final deed of indemnity is executed, several negotiations might have taken place between the parties. The terms of the contract must have gone through several rounds of negotiations and figurative changes before the final numbers and details were executed, which were agreed upon by both parties. Thus, the previously existing documents or verbal statements made during the phases of negotiations can be used by any party to create conflicting opinions and contention. Thus, inserting an entire agreement clause helps to eliminate these ambiguities and establishes the firm and clear bindingness of the final document.
Dispute resolution clause
A dispute resolution clause is one of the most effective clauses in any contract. This is true for a deed of indemnity as well. A dispute resolution clause minimises the risk of litigation by mandating that parties first go for an alternate dispute resolution method to resolve disputes. Alternative dispute resolution methods are rapidly gaining momentum in India because of their effective resolution methodologies.
Arbitration and mediation are examples of alternative dispute resolution methods that are not available in court. This is why they are quick and save a lot of time and resources. Alternate dispute resolution methods protect people and companies from the risk of litigation and the reputational damage and other risks collateral to it. Therefore, it is a smart move to add a dispute resolution clause in a deed of indemnity.
When a deed of indemnity contains a dispute resolution clause, if any dispute arises between the parties in relation to the deed of indemnity, its validity, terms, or performance, the same can be sought to be resolved using alternate dispute resolution methods.
Instead of engaging in litigation, which can last for years, be extremely exhausting, and expose the parties to numerous collateral risks, an alternative dispute resolution methodology can save the day for both parties by creating a win-win situation for both.
What to include in a deed of indemnity
For a deed of indemnity to be complete and fulfil its purpose in an efficient manner, it is crucial to include the following:
Precise definitions are essential for the better understanding and interpretation of a deed of indemnity. The definitions should not be vague or ambiguous and that will lead to misinterpretation of the clauses of a deed of indemnity. It is especially important to add certain provisions to a deed of indemnity in the utmost unambiguous manner. Provisions such as liability under the deed of indemnity, claims of the indemnity holder, the establishment of definite legal relationships, and other collateral provisions. It is important to keep these provisions accurate and clear because if a room is left for any ambiguity at all, it can change the entire essence of the indemnity deed and injustice will become a consequence.
As we have already discussed above, the most crucial clause in any deed of indemnity is the indemnity clause. It defines the essence of the deed of indemnity by determining the circumstances in which the deed will be executed and the performance that will be required from the parties.
Indemnity against legal costs and claims
When the non-performance of a deed of indemnity leads to claiming its execution in a court of law, it comes with additional legal costs. When the indemnity holder rightfully claims to be indemnified and incurs legal costs in the process, these costs can be claimed from the indemnity holder. It is important to include this in a deed of indemnity for better and easier execution. These costs include the costs of participating in investigations, legal fees of an attorney who was hired to defend the claim, etc. Therefore, the deed of indemnity can include a provision which clarifies and determines the manner in which these legal costs and claims can and will be settled.
It is useful to include an insurance clause in a deed of indemnity. This clause limits the liability of the indemnifier only till the limit mentioned in the deed of indemnity and no further. This clause protects against liability beyond what is mentioned in the deed of indemnity.
An execution clause is essential for any legal agreement. The deed of indemnity will be rendered useless if it cannot be executed. Parties to a deed of indemnity sign the execution clause which is usually mentioned at the end of an indemnity deed. This clause renders legal validity and enforceability to the terms and clauses of the deed of indemnity.
Deed of indemnity: sample
Now that we have a theoretical understanding of indemnity law and, more specifically, a deed of indemnity, there is no better way to fully comprehend a subject than through its practical implications. More so, practical insights are essential and helpful in drafting. Therefore, let us understand a deed of indemnity with the help of a sample deed of indemnity.
DEED OF INDEMNITY
This deed of indemnity is made on ____ day of ____ 2023
Mr. X, a businessman, and resident of Dadar, Mumbai, Maharashtra.
IN FAVOUR OF
Mr. Y, a businessman, and resident of Vashi, Mumbai, Maharashtra.
Mr. X is hereinafter referred to as the indemnifier for the purpose of ease of understanding in this contract.
Mr. Y is hereinafter referred to as the indemnity holder for the purpose of ease of understanding in this contract.
This deed of indemnity binds Mr. X and Mr. Y with a legal relationship of indemnifier and indemnity holder and this agreement between the parties is hereinafter referred to as the deed of indemnity between the parties.
THIS DEED WITNESSETH AS FOLLOWS:
- DEFINITION AND SCOPE
In this deed of indemnity, the following terms shall be construed in the sense as it herein provided:
- Term: ____ Definition: ____
- Term: ____ Definition: ____
- Term: ____ Definition: ____
- Term: ____ Definition: ____
- Term: ____ Definition: ____
This definition and scope clause will be applicable to the whole deed of indemnity, notwithstanding anything.
In this deed of indemnity, the following recitals shall have the following meanings:
- Recital: ____ Meaning: ____
- Recital: ____ Meaning: ____
- Recital: ____ Meaning: ____
- Recital: ____ Meaning: ____
- Recital: ____ Meaning: ____
This interpretation clause will be applicable to the whole deed of indemnity, notwithstanding anything.
3.1 Subject to all the clauses and agreed terms of this deed of indemnity and notwithstanding any other previous agreements between the parties, both parties agree to enter into an agreement to indemnify. In pursuant to this objective, the indemnifier executes this deed of indemnity in favour of the indemnity holder.
3.2 The indemnifier hereby promises to indemnify the indemnity holder in the event of any loss or damage incurred by them. This loss or damage incurred by the indemnity holder will be claimed against any act, omission, or performance of the promisor himself or any other third party.
3.3 The indemnifier promises to protect and keep the indemnity holder harmless from any or all the losses that they may incur.
3.4 The indemnifier shall hold this obligation towards the indemnity holder till the extent the parties agree in this deed.
3.5 The indemnity holder shall possess the following rights under this deed of indemnity:
3.6 The indemnity holder shall perform the instructions given under this deed of indemnity with full sincerity and in good faith. He shall fulfil the following obligations under this deed of indemnity:
3.7 The indemnifier shall possess the following rights under this deed of indemnity:
3.8 It is the topmost duty of the indemnifier to indemnify the indemnity holder as promised under this agreement. The indemnifier shall fulfil the following obligations under this deed of indemnity:
3.9 The indemnifier shall be liable to the following extent and under the following conditions:
3.10 Such indemnification shall include all subsequent expenses that the indemnity holder may have to incur as collateral to the principal indemnification. This may include filing and maintaining a lawsuit to claim indemnification. All such costs, litigation expenses, recurring costs, etc., shall be borne and paid in full by the indemnifier.
3.11 This deed of indemnity shall not violate any provisions of the Indian Contract Act, 1872 or any other law or legislation in place in India which are generally or specially applicable to a deed of indemnity.
4. JURISDICTION AND GOVERNING LAWS
4.1 This deed of indemnity shall be governed, interpreted, executed, and enforced as per Indian laws.
4.2 Both parties agree that the courts of India have exclusive jurisdiction to settle any dispute which may arise out of or in connection to the creation, validity, interpretation, or enforceability of this deed of indemnity.
4.3 The legal relationship established under this deed of indemnity shall be interpreted as per Indian laws.
4.4 A person who is not an exclusive party to this deed of indemnity will not have any legal right under this deed and thereby, cannot challenge its performance or validity in any court in India.
4.5 This deed of indemnity to the extent to which it is in violation of any law or public policy in India shall be held void. This shall not affect the part of the deed which are lawful and in accordance with Indian laws. This clause establishes a severability between the void and lawful terms of the deed, with the mutual agreement of both parties.
5. DISPUTE RESOLUTION
5.1 The parties agree to take the first attempt at resolving their disputes using mediation. It is hereby agreed that Mr. P and Ms. M will act as the mediators should the situation so arise in future.
5.2 If such mediation fails, the parties agree to go for arbitration to resolve their disputes. The parties will mutually choose one arbitrator each and a third neutral arbitrator will be appointed. Thus, three arbitrators will be appointed if the dispute goes to arbitration. Such arbitration will be in accordance with Indian laws with Pune, Maharashtra as the venue of arbitration.
6. SUNSET CLAUSE
It is hereby agreed by the parties that this deed of indemnity will be considered to have been revoked, whether or not its performance was needed on this ___ of ___ 20__.
7. ENTIRE AGREEMENT
It is hereby mutually agreed by the parties with full knowledge of facts that this deed of indemnity is the final binding agreement on both parties, notwithstanding any other previous agreement, whether written or oral between the parties.
IN WITNESS WHEREOF
This deed of indemnity has been executed by the parties on this day of the year which has been written at the beginning of the document.
Signed by the first party (Mr. X) ______ Date: ____
In presence of:
- ____ Date: ____
- ____ Date: ____
- ____ Date: ____
Signed by the second party (Mr. Y) ______ Date: ____
In presence of:
- ____ Date: ____
- ____ Date: ____
- ____ Date: ____
Limitations of a deed of indemnity
Even when a deed of indemnity is executed, the indemnity holder will not be able to claim compensation if the losses incurred by him or her are due to any negligent act or willful disobedience of the indemnity holder. When the indemnity holder himself becomes the reason for his losses or did not comply with the instructions and terms of the indemnity deed, the indemnity holder can no longer claim to be compensated. This provision is framed to protect an indemnifier from the mala fide intention of an indemnity holder who knowingly acts to incur losses so that he can be compensated.
A further limitation is applicable when the deed of indemnity concerns a director of a company or body corporate. When a deed of indemnity is executed with a company or body corporate, its director(s) can be held directly liable to compensate. However, the company compensates the director for this liability incurred by him or her. A director will not be able to claim compensation from the company for his liability when:
- When the liability is owed to the company itself or a related body corporate,
- When the liability arises due to any pecuniary penalty order or compensation order,
- When the liability has been caused due to the director not acting in good faith, and/or
- When the liability arose due to the director not maintaining good conduct.
Deed of indemnity v. deed of guarantee
A deed of indemnity is very similar to a deed of guarantee, and the two have often confused people in understanding. However, a deed of indemnity and a deed of guarantee differ from one another conceptually and also from a legal perspective. Mentioned below are the key differences between a deed of indemnity and a deed of guarantee:
Tabular representation of the difference between a deed of indemnity and a deed of guarantee
|Deed of indemnity||Deed of guarantee|
|It is defined under Section 124 of the Indian Contract Act, 1872. It is a promise by one party to compensate (indemnify) another in the event of them incurring any loss or damage.||It is defined under Section 126 of the Indian Contract Act, 1872. A creditor recovers from the surety, the amount promised by the principal debtor in the event of a default made by the principal debtor.|
|A deed of indemnity is executed between two parties only. It is a direct contract between these two parties.||A deed of guarantee consists of three different parties, and contracts are made between every two of them.|
|The parties to a deed of indemnity are known as the indemnity holder and the indemnifier.||The parties to a deed of guarantee are known as the principal debtor, creditor, and surety.|
|There is a direct relationship between the parties to a deed of indemnity. The indemnity holder recovers this amount from the indemnifier directly.||If the principal debtor defaults in payment, then the creditor has the right under a deed of guarantee to recover this amount from the surety. Thus, the relationship between the creditor and surety is secondary and arises in the event of default.|
|The liability is primary and direct.||The liability is secondary and contingent.|
The way forward
Having a deed of indemnity helps in minimising the risks of losses for individuals as well as for corporations. It is advisable to have indemnity deeds and clauses in place to secure various personal as well as business transactions. A good deed of indemnity is known for its precision and clarity of provisions. With the ever-increasing complexity of deals and transactions between people, a deed of indemnity helps to obtain compensation and save an individual or business from losses. Access to necessary documents, insurance against collateral losses, indemnity against legal costs and claims, sunset clauses, well-drafted indemnity clauses with complete information, etc., are the features that constitute a good indemnity deed. When the first step is completed by drafting a good deed of indemnity, the next crucial step is its ability to be executed in an effective manner. This becomes possible by mentioning a proper execution clause in the deed of indemnity which can be invoked if and when one party fails to perform their part of the obligation under the deed.
Indemnity is an integral part of any contract, business contract or otherwise. This is because an indemnity clause or an indemnity deed protects a party from bearing losses and damage which may be caused despite having no fault of their own. When a situation like this arises, a deed of indemnity protects the party incurring loss or damage by claiming compensation from the other party, also known as the indemnifier. An indemnifier is a person who promises to compensate the indemnity holder if and when they incur any loss due to the act or omission of the promisor (indemnifier) himself or any other person. The legal provisions governing a deed of indemnity have been articulated in the Indian Contract Act, 1872, especially in Section 124. A deed of indemnity executed in India must be in accordance with Indian contract laws. Apart from that, it should not violate any laws or legislation in India and must not pose a threat to the safety and security of the nation. It should not violate the public policy of the country in any manner.
A deed of indemnity is helpful in saving the indemnity holder from losses due to any act or omission in performance on someone else’s part. Thus, as long as the indemnity holder has followed the instructions and has obeyed all the terms and conditions of the deed of indemnity, he or she is eligible to be compensated. As a general rule, a deed of indemnity must be a valid contract as per the provisions of Section 10 of the Indian Contract Act, 1872. A deed of indemnity can be expressed or implicit. Its enforceability will, however, depend on the facts and circumstances governing the case and will be subject to judicial interpretations. Once the validity of a deed of indemnity is proven, it can be enforced through a court of law in India.
In today’s fast-growing world, everyone is busy and everyone hustles to make profits. A deed of indemnity in business deals as well as in private deals is essential to save time and protect the hard-earned money of an individual. A deed of indemnity executed on pre-determined terms secures a transaction between parties and saves one party from unnecessarily incurring losses. Therefore, it is advisable to execute a deed of indemnity while transacting deals that involves a risk of loss or damage.
Frequently Asked Questions (FAQs)
Does a deed of indemnity expire?
Yes, a deed of indemnity is usually made for a specified period of time. When the deed of indemnity is linked to a specific project, it expires at the end of the project or within one year of its completion. In other cases, a deed of indemnity may contain a sunset clause which determines the expiry of the indemnity deed.
Is a deed of indemnity legally binding?
Yes, a deed of indemnity is legally binding on both parties to it as it is made and executed as per the provisions of the Indian Contract Act, 1872. The deed of indemnity becomes legally binding when it is compliant with Indian contract laws and made as per Section 124 of the Indian Contract Act, 1872.
If a company already has indemnity provisions in their constitutional documents, is it necessary to further have a deed of indemnity?
Despite having indemnity provisions in the company’s constitutional documents, it is advised to have additional indemnity deeds for different transactions. While the indemnity provisions of the company’s constitutional documents can become generic and different vendors and parties might not agree to abide by them, a specific indemnity deed helps establish a clear relationship between the concerned parties and create a definite provision of indemnification. The indemnity deeds can also contain ‘entire agreement clauses’, which makes them binding on the parties, notwithstanding any other previous document.
Do I need a deed of indemnity?
While it is not an absolute mandate to have a deed of indemnity, it is always recommended to have one when a person or a company is entering into any transaction or conditional agreement with another which involves the risks of losses due to the performance or non-performance of the other party. Therefore, having a deed of indemnity in place helps eliminate losses by giving a legal right to claim compensation.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: