This article is written by Ishani Samajpati, who is pursuing B.A. LL.B. (Hons) under the University of Calcutta. This article seeks to provide detailed insight into an indemnity bond, including the different types of indemnity bonds, parties to the bond, importance, purposes, terms, and conditions. It also briefly deals with the laws, legal enforceability, and judicial views relating to indemnity bonds in India. Finally, it also offers a glimpse as to what differentiates an indemnity bond from an indemnity contract, affidavits, insurance, or other available bonds.
This article has been published by Sneha Mahawar.
Table of Contents
Let’s imagine a scenario where your friend, X, is in dire need of monetary support and decides to borrow a certain amount. You, despite being her well-wisher, are not in a position to lend. So, you ask her to approach some third person, Z, who you think can help in this situation. However, Z hesitates to lend X since he doubts whether your friend will ever be able to pay the money back. You, in turn, take the lead and ensure Z that it is entirely your responsibility to see if Z is fully and properly paid back within a reasonable time.
In such a case, an indemnity bond fulfils the legal requirement. As can be understood, it is a type of bond. In a legal context, a “bond” refers to a legal document where the obligation to perform any specific act is mentioned in writing. The word ‘indemnity’ originated from the Latin word ‘indemnis’ which means “unhurt, uninjured, and free from loss.” Hence, the sole purpose of an indemnity bond is to reduce risks in transactions, businesses, and other matters.
An indemnity bond is a widely used legal instrument to fulfil contractual obligations in the event of failure of a certain party. The aspects, related laws, and how an indemnity bond is different from other legal instruments are further discussed in the following article.
Concept of indemnity
Before discussing an indemnity bond, it is important to understand the concept of indemnity. Indemnity is a legal agreement for compensation for any loss or damage. The loss or damage can be caused by certain individuals or by an uncertain event. In this case, one party assures to make up for the losses or damages, either financially or in any other way. The most common form of indemnity is a contract of insurance.
Related terms and conditions
- Period of indemnity: The specific time period for which the indemnity is valid is known as the period of indemnity.
- Concerned subjects: Indemnity normally arises between an individual and a business. Often, in large business operations, the individual may also include the governments of any country. Sometimes, the government may provide the businesses or larger industries on behalf of its citizens, especially during the outbreak of any pandemic. For example, the foreign vaccine manufacturers demanded indemnity for any future claim of adverse effects by its citizens.
- Forms of compensation: Indemnity is usually paid in three forms. They are either monetary payments or by repairing or replacement for the loss or damage caused. It largely depends on the situation.
- Indemnity for acts done in good faith: It is applicable for public servants, especially government officials, police authorities and army officers, who may be required to execute certain illegal acts to fulfil their duties. For example, Section 74 of the Indian Forest Act, 1927 provides forest official indemnity for any act done in good faith.
- Indemnity insurance: Indemnity insurance protects the holder from indemnity claims and provides costs of indemnity when required. Professional indemnity insurance is a common example of indemnity insurance which protects them against alleged negligence or inadequate service. It is used in professions where lawsuits are common, such as in the medical or legal field. The insurance limit is chosen based on the scale of the practice. Besides indemnity claims, it also covers litigation and settlement costs.
- Letter of indemnity (LOI): Letters of indemnity (LOI) are similar to indemnity insurance. In LOI, the third party is responsible and should expedite any damages caused to a party by another. This is the reason why LOIs have also been termed “bonds of indemnity” or “indemnity bonds” which is the subject matter of this article.
Meaning of an indemnity bond
An indemnity bond is a legal document containing certain contractual obligations. It ensures an individual will not suffer in the event of any loss or damage caused by another. It assures that specific conditions between two parties will be met, even if the other party is unable to fulfil them.
The difference between an indemnity and an indemnity bond lies in how they work. Indemnity ensures compensation for any loss or damage caused by another, including unforeseeable events. On the other hand, an indemnity bond mentions specific measures describing how compensation will be provided.
According to the Cambridge Dictionary, an indemnity bond is a legal agreement that a financial organisation can use to recover a loan given to an individual by another financial organisation if the individual fails to repay the loan. In this case, a third-party financial institution will be required to repay the funds.
The literal meaning of the word “indemnity” given by Oxford Dictionaries is “protection against damage or loss, especially in the form of a promise to pay for any damage or loss that happens.”
Black’s Law Dictionary defines an indemnity bond differently in each of its editions. For example, the Second Edition simply defines an indemnity bond as a bond for the compensation of any loss. The Fourth Edition provides the definition as “a bond for the payment of a penal sum conditioned to be void if the obligor shall indemnify and save harmless the obligee against some anticipated loss.” Again, according to the definition given in the Ninth Edition, an indemnity bond is a bond that is used to reimburse the bondholder for any loss, actual or claimed, caused by the conduct of the issuer or some other person.
In simple words, an indemnity bond is a legal document that requires a third party to compensate, monetarily or otherwise, in the event of a loss caused to the party. Indemnity bonds also provide protection to multiple parties or both parties, depending on the individual situation.
Things to know about indemnity bond
Indemnity bonds are commonly used between individuals and financial transactions. Again, if there are losses or damages during the transportation of goods by another party, indemnity bonds ensure that the owners of the goods are compensated. It also applies if the goods are lost or stolen. Indemnity bonds are also used when borrowing, stating that the borrower has the responsibility for any damages caused.
An indemnity bond mainly involves two parties. They are principal and surety. The number of persons representing the principal and surety can be more than one if the situation requires it. Both the principal and surety jointly promise to indemnify the party, but the responsibility and obligation of each of the parties are different.
The subject matter of the indemnity bond is executed for another party, known as the obligee. Hence, there are a total of three parties to an indemnity bond. The principal is also known as the “obligor” because he is obliged to follow the terms of the indemnity bond.
For example, by executing an indemnity bond for a death claim in a bank, both the principal and the surety agree to keep the bank indemnified against all future claims and demands in respect of the said assets deposited in the bank. In this case, the bank is the obligee to whom the indemnity bond is issued. The surety ensures that no future claim is brought against the bank.
The principal is the party that takes responsibility for issues such as failure of payment, non-payment, loss, or any damage caused. On the other hand, the surety promises to provide compensation in case of failure of the principal. Although the surety takes the responsibility to compensate, the principal is not completely discharged of liability. The surety only ensures that the obligee does not suffer from any damages caused by the principal. In some cases, such as to execute an indemnity bond for the transfer of shares or debentures, one or more witnesses may also be required.
Rights provided by indemnity bond
An indemnity bond safeguards the rights of the obligee through indemnification if the principal fails to fulfil his obligations or causes any loss or damage. Indemnification is the right to recover for any harm caused.
It ensures that the obligee remains entirely harmless. Hence, it provides the obligee with the entitlement to recover compensation for any issues if the principal deviates from what was promised.
An indemnity bond covers the obligee’s personal losses in particular. It also generally covers all compensation, including litigation costs and other charges as required.
Rights of the principal and surety
At a glance, it may seem that the indemnity bond only empowers the obligee in the event of any personal loss. Though the main function of an indemnity bond is to protect the obligee, the principal and the surety also have certain rights.
The most important right the indemnity bond provides to the principal is the right to negotiate the bond. The principal has the right to settle the total value of the bonded sum. However, the amount of the sum should be justified and reasonable.
Even if the principal fails to pay the already agreed sum, he has the right to decide the mode of settlement. It usually includes using his own personal and business assets.
Both the principal and the surety have the right to negotiate the terms and conditions of the indemnity bond. It includes how the obligee is supposed to be indemnified and the timeframe.
The surety is entitled to finalise an indemnity bond. Without the surety’s signature, the indemnity bond is completely invalid. In this case, the surety also loses any right of authorisation.
It is important to understand the provisions and aspects of the indemnity bond. The principal and surety should ensure it before finalisation. Otherwise, future failure to indemnify the obligee may have serious implications, including legal action or even insolvency.
An indemnity bond has certain characteristics. They are as follows:
- An indemnity bond is a legally enforceable contract only in the event of any loss or damage. Since it is a type of contract, it consists of all the characteristics of a valid contract.
- The consideration of the object of an indemnity bond must be lawful.
- An indemnity bond is executed on the good faith, reliance and mutual trust of each of the parties.
- All the parties, including the obligee, should be persons of sound mind and not minors. An indemnity bond, however, can be created on behalf of minors. For example, the Government of West Bengal requires a person (who is not a natural guardian and producing a guardianship certificate would delay the process) to execute an indemnity bond if he wants to draw Provident Fund money, an amount upto Rs 10, 000/- on behalf of the minor child/ children. In this case, both the obligor (principal) and the surety are bound to the Government of West Bengal (represented by the Governor) a specific sum of money. The Governor of the state is the obligee here.
The Government of Karnataka also requires an indemnity bond in similar situations, though the limit is Rs. 5,000/-.
- The indemnity in the indemnity bond on the parties may be either implied or expressed. In the case of an expressed indemnity, the terms of the indemnity bond specifically and directly mention how the obligee is supposed to be compensated. Whereas an implied indemnity is an indemnity that is created due to the situation. For example, if the obligee suffers losses due to the behaviour or refusal of the principal, he should be compensated.
- An indemnity bond only covers the actual loss if and only if it is caused by events mentioned in the conditions. Hence, proper drafting of an indemnity bond is mandatory.
- All the terms and conditions of an indemnity bond must be valid and acceptable in any court of law.
- It is only valid for one-time or any specific period as dictated by the terms. It can even be valid for legal heirs or successors if such terms are mentioned in the indemnity bond, which once again reinstates the importance of proper negotiation and drafting of the indemnity bond, discussed later in this article.
Execution of indemnity bond
An indemnity bond is executed on non-judicial stamp paper of appropriate value. Sometimes, the obligee institutions asking to submit indemnity bonds themselves mention the value of non-judicial stamp paper. Often, the obligee institution requires the indemnity bond to be submitted as an annexure or as part of other annexures.
Laws related to indemnity bonds in India
A composite definition of an indemnity bond does not exist in any law in India. Indemnity bonds in India are subject to the provisions of two pieces of legislation: the Indian Contract Act, 1872 and the Indian Stamp Act, 1899. Contracts related to indemnity have been described in the Indian Contract Act, 1872, while bonds and the related stamp duties have been dealt with in the latter Act. Under Section 15 of the Government Securities Act, 2006, the bank is empowered to execute an indemnity bond with one or more sureties.
Provisions under the Indian Contract Act, 1872
Indemnity bonds are a type of contingent contract as defined under Section 31. A contingent contract is a contract that only takes effect if the event mentioned in the contract takes place. Otherwise, the contract becomes void.
A contingent contract is legally enforceable only after an “uncertain future event” mentioned in the contract happens. It cannot be enforced before then at all. If the event never happens or it becomes impossible for the event to happen, it can never be enforced, as laid down in Section 32 and Section 33 of the said Act.
Indemnity bonds are also only enforceable if the obligee suffers loss or harm. If the obligee does not get affected by the principal, he cannot get the benefit of an indemnity bond.
Section 69 of the Act deals with the underlying principle of an indemnity bond. It states that by paying money due to another person by a person interested in the payment of money, that person is entitled to be reimbursed by the other who is originally supposed and bound by law to pay it.
Contract of indemnity
As mentioned before, the Act does not define indemnity bonds as such. However, Section 124 defines the contract of indemnity. It is a type of contract between two parties where one party promises to save the other party from any loss, that is, to provide indemnity. The Act also states that loss or harm must be caused either due to the conduct of the promisor or by the conduct of any other person. This is called a contract of indemnity.
The person who is committed to paying the loss is the indemnifier (promisor), and the person whose loss is required to be compensated is known as the indemnified or indemnity holder.
The definition given by the Act is not exhaustive. It includes:
- Expressed promises to provide indemnity;
- The loss should only be caused by the promisor or any other person on whose behalf he promises to indemnify.
But does not include:
- Implied promises to provide indemnity;
- Cases where the loss, harm or accident is not caused by the promisor or any other person on whose behalf he promises to indemnify.
Hence, if Section 124 is strictly interpreted using the literal rule of interpretation, as held by the Supreme Court of India in the case of B. Premanand and Ors v. Mohan Koikal and Ors (2011), even contracts of insurance and indemnity bonds have to be excluded from the definition.
Relationship with English laws
The definition of a contract of indemnity under English law has a wider scope. The contract of indemnity has been defined as a promise to save “another harmless from loss caused as a result of a transaction entered into at the instance of the promisor.” It also covers losses or accidents that are not caused by the promisor or any other person on whose behalf he promises to indemnify. In respect of indemnity, Indian courts also follow this English definition.
A contract of indemnity may be expressed or implied. An implied contract of indemnity is inferred from the circumstances of the case or from the relationship of the parties.
The Unfair Contract Terms Act, 1977, under Section 4 had “Unreasonable indemnity clauses,” by which an individual could not be charged unreasonably to indemnify another, but it was repealed by Schedule 4 Paragraph 6 of the Consumer Rights Act 2015.
Rights of each of the parties
Section 125 addresses the rights of the indemnity-holder/indemnified in the event of a lawsuit. According to it, he is entitled to recover from the indemnifier –
- all damages in any suit relating to any matter of the contract of indemnity, which he has to pay;
- all costs to file or defend any such suit, which he may be compelled to pay. It is only applicable if there are no contraventions of the orders of the indemnifier/ promisor. However, it will be valid if the indemnity-holder acted as prudent as he would have acted in the absence of any contract of indemnity. Alternatively, the indemnifier/ promisor may authorise him to bring or defend the suit;
- all sums paid for the compromise of any such suit if paid by following the instructions of the promisor.
However, the Indian Contract Act, 1872, is silent about the rights of the indemnifier in a contract of indemnity. On the authority of English law, it can be inferred that the rights of an indemnifier are similar to the rights of a surety under Section 141 of the Act.
Enforceability of indemnity bonds in India
An indemnity bond is only enforceable if there is a breach of contract under Section 73 and Section 74 of the Indian Contract Act, 1872. The breach creates a liability for the principal to provide compensation for the loss, and entitlement to compensation arises for the obligee.
Provisions under the Indian Stamp Act, 1899
The definition of an indemnity bond is not also given under the Indian Stamp Act, 1899. The courts in India also use the definition under the Indian Contract Act, 1872, to interpret indemnity bonds under the Indian Stamp Duty Act, 1899.
However, it provides the definition of a bond under Section 2(5). The term indemnity bond has been mentioned in Schedule 1, dealing with stamp duty payable on legal instruments under No. 34, though no definition is available. The procedure for how stamp duty is to be paid for an indemnity bond is given under Section 29.
The following instruments are included under the bond:
- According to Section 2(5)(a), a bond includes an instrument by which a person obliges himself the payment of money to another. The payment of money is based on the condition that the obligation will become void depending on if a certain act is performed or not;
- By any instrument, a person obliges himself to pay money to another. It is attested by a witness, though not payable to order or bearer, under Section 2(5)(b);
- An instrument containing the obligation of delivery of grain or other agricultural products to another, attested by a witness, under Section 2(5)(c).
Hence, a bond under this Act means an instrument whereby a person obliges the payment of money to another. The payment of money may be based on the principle of contingency. The instrument with the obligation to deliver agricultural products also constitutes a bond.
A promissory note can also be termed as a bond if there is an expressed promise that it is not payable to order or bearer under Section 2(5)(b) or any other clauses of the Section. In the case of Hanuman v. Fattu (1967), the plaintiff borrowed Rs 300/- from the defendant on a promissory note, attested by a witness. However, during the revision application filed by the defendant, the plaintiff contended that the document was a bond. The Rajasthan High Court rejected the plaintiff’s contention since there was an express promise to be payable to the order or the bearer.
Stamp duty payable for indemnity bond
An indemnity bond is also a type of bond under the provisions of the Indian Stamp Act, 1899. No. 34 of Schedule 1 of the Act mentions that the same duty payable for an indemnity bond of particular value is the same stamp duty as the security bond of the same value under No. 57. Again, No. 57 mentions that the stamp duty payable for any security bond not exceeding Rs. 1,000/- is the same duty as a bond of the same amount as mentioned in No. 15. For any other cases, it is Rs 5/-.
Therefore, the stamp duty payable for an indemnity bond exceeding is also the same as the stamp duty paid for Bond in No. 15. The stamp duty for an indemnity bond of a specific value is as follows:
|Value of indemnity bond
|Amount of payable stamp duty
|Less than or equal to Rs. 10
|Two annas (16 annas = 1 paise; 100 Paise = 1 Rupee)
|More than Rs. 10 to Rs. 50
|More than Rs. 50 to Rs. 100
|More than Rs. 100 to Rs. 200
|More than Rs. 200 to Rs. 300
|One rupee eight annas
|More than Rs. 300 to Rs. 400
|More than Rs. 400 to Rs. 500
|Two rupees eight annas
|More than Rs. 500 to Rs. 600
|More than Rs. 600 to Rs. 700
|Three rupees eight annas
|More than Rs. 700 to Rs. 800
|More than Rs. 800 to Rs. 900
|Four rupees eight annas
|More than Rs. 900 and does not exceed Rs. 1,100
Thereafter, two rupees and eight annas are payable for every Rs. 500. The same applies to part thereof in excess of Rs. 1,000
Mentioned above is the list of stamp duties to be paid for a specific value of an indemnity bond, as stipulated by the Act. The list is not exhaustive since there are state amendments to the Schedule that ultimately decide the amount of payable stamp duty. All the state amendments to Schedule I can be accessed from here.
The stamp duty mentioned is not applicable in a contract of indemnity.
Who is liable to pay the stamp duty for the indemnity bond
Section 29 of the Act lays down that, in the absence of any specific agreement as to who will pay the expense of stamp duty for an indemnity bond. Under Section 29(a), the person who is drawing, making, or executing an indemnity bond is liable to pay the expense.
Purposes and types of indemnity bonds
Depending on the purpose for which it is to be used, an indemnity bond can be of the following types. The terms and conditions of an indemnity bond can be different based on the situation where it is necessary. Following are some of the purposes of using indemnity bonds:
- Indemnity bonds for any property are usually executed during any acts of transaction or transfer of any property. For example, if the lease rights of any property are to be sold/ gifted or transferred, an indemnity bond will ensure that the original owners of the property face no loss or are compensated in the event of any damage or loss.
- An employment indemnity bond is executed during an employee’s employment. It contains some specific terms, such as the mandatory service periods for which he must serve the employer and compensation to be paid in the event of failure.
- Financial institutions such as banks usually ask for indemnity bonds to settle death claims from the legal heirs of the deceased for the final disbursement of a large amount of savings. The indemnity bond ensures that the bank or other financial organisation are indemnified if they face any issues from the parties. It is usually required to be executed on a non-judicial stamp paper of a particular value and to be notarised by a notary or Magistrate.
- While transferring the ownership of shares or debentures, an indemnity bond is required.
- In the United Kingdom, medical indemnity is provided to patients for clinical negligence by healthcare professionals. In India, medical students need to follow the terms of an indemnity bond after the completion of their course. This is often subject to various speculations and controversies, which are discussed later in this article.
- Under the Income Tax Act, 1961, the provision of indemnity is mentioned under Section 290. It is used for claiming a tax refund, waiver of income tax arrears demand, mismatching of TDS or outstanding tax demand. The legal heir of a deceased representative assessee also needs to submit an indemnity bond.
- To stop payment and get a replacement on a lost cashier’s cheque from the bank, an indemnity bond is required for the mentioned amount on the cheque.
- The Manual for Procurement of Goods, 2022 suggests taking an indemnity bond for items less than Rs. one lakh or for sending spares for repair to the original manufacturers.
- Some other types of indemnity bonds include: declaration-cum-indemnity bonds, used for commercial purposes, undertaking-cum-indemnity bonds for any business transactions and tenders of large amounts, affidavit-cum-indemnity bonds for shipments cleared from customs etc.
- Indemnity bonds used during commercial transactions and procedures are known as commercial indemnity bonds or simply as, commercial bonds. This includes auto dealer bonds, licence bonds, and mortgage broker bonds.
The purpose of indemnity bonds is to provide the parties with legal rights and protection from losses. An indemnity bond is an ethical step to ensure transparency in business and other activities.
Bond, agreement and contract vis-à-vis Indemnity bond, indemnity agreement and contract of indemnity
There are some fundamental differences between bonds, agreements, and contracts. Agreements and contracts are subject to the provisions of the Indian Contract Act, 1872. Under Section 2(e), an agreement is a consideration formed with each and every set of promises from all the parties. An agreement becomes a contract when it is enforceable by law under Section 2(h). Furthermore, under Section 10 of the Act, all agreements made by the parties competent to contract with free consent for a lawful consideration and legal object are contracts.
Though a bond is completely different from an agreement, it consists of all the characteristics of a valid contract. The basic difference between a bond and an agreement has been clearly defined by the Kerala High Court in the case of A.V. Ravi v. M.M. Abdulkhadar (2020). It states that a bond and an agreement can be distinguished by their differences in obligations. A document that simply acknowledges an existing obligation that can be enforced even without the document is an agreement. But if an obligation is created by the document itself and it expresses a promise to pay, it is a bond.
Indemnity bonds, indemnity agreements, and contracts of indemnity are special types of bonds, agreements, and contracts, respectively, with distinct differences. An indemnity agreement, also known as a Hold-Harmless Agreement, is commonly used in the United States of America. The purpose of an indemnity agreement is similar to that of an indemnity contract and indemnity bond, to provide indemnity. It is used by large businesses to protect themselves from external damages and by individuals to get protection for personal losses. The extent of indemnity can vary, commonly including limited, intermediate, and broad indemnity.
Both contracts of indemnity and indemnity agreement have only two parties. Indemnifier and indemnified/ indemnity holder in a contract of indemnity and indemnitee and indemnitor in any indemnity agreement. However, an indemnity bond always consists of three parties: the principal (obligor), the surety, and the obligee. In this regard, an indemnity bond resembles a contract of guarantee under Section 126 of the Indian Contract Act, 1872.
In Jindal Steel & Power Limited v. State Trading Corporation of India (2020), the petitioner asked to direct the respondent to release performance bank guarantees and not to encash. It was contended that the rights of the respondent could be safeguarded with an indemnity bond, in addition to the corporate guarantee already given, as interim protection measures under Section 9(1)(e) of the Arbitration and Conciliation (Amendment) Act, 2015.
Surety bond vs indemnity bond
A surety bond provides the principal with a guarantee that the terms and conditions of the contract will be followed properly. In case of any loss or failure, the surety bond protects the principal. Like the indemnity bond, a surety bond also has three parties. Surety bonds do not need large collaterals, but indemnity bonds often have high costs.
The definition of a surety bond is also not provided by the Indian Contract Act, 1872. However, Section 126 defines surety as the person giving the guarantee.
A surety bond is not an indemnity bond, but an indemnity bond can usually be said to be a subcategory of surety bonds. In specific situations, indemnity bonds are sufficient to give legal authorisation. In the case of Arvind Nanda v. State (2020), the petitioner filed a petition under Section 372 of the Indian Succession Act, 1925, for a succession certificate. He was the only child of his deceased parents. A trial court ordered him to file court fees and an indemnity bond with surety under Section 375. He submitted the required court fee and an indemnity bond but prayed for an exemption from furnishing a surety bond.
The Delhi High Court held that since the petitioner was the only legal heir and beneficiary, his request for exemption from the surety bond was granted. Submission of an indemnity bond in such a case was considered justified by the court.
Difference between an affidavit and an indemnity bond
The subject matter of an affidavit and an indemnity bond is completely different. An affidavit is a legal document containing a set of facts and statements, signed and notarized by a party. It is usually used in court to prove any contention. An affidavit is sworn to be true and accurate. The subject matter and procedures of filing an affidavit in court have been dealt with in detail in the Code of Civil Procedure, 1908. An indemnity bond, on the other hand, is used by individuals and organisations to protect themselves from uncertainty and loss. It is subjected to examination to prove its validity, applicability, and authenticity in court.
An affidavit is used in court as a document related to court proceedings for the legal battle. While in the same situation, an indemnity bond is merely used as a suit document or can be used to prove the legal obligation of each party at maximum. The indemnity bond can also be the subject matter of a suit, but it is never conclusive, unlike an affidavit.
An affidavit may contain any type of statement depending on the nature of the suit, but an indemnity bond only contains statements regarding the situations, events of indemnity and the process of how indemnity will be paid if such a situation arises.
Judicial views regarding the indemnity bond
There are no specific judicial rulings involving the legality or the issue of an indemnity bond. However, some of the significant judicial pronouncements involving indemnity bonds in India are as follows:
Hindustan Sugar Mills Ltd. v. State of Uttar Pradesh (1971)
In this case, the amount of sales tax for Hindustan Sugar Mills Ltd. was assessed. A stay appeal was filed for the realisation of the sales tax. It was stayed on the condition of security of Rs 10,70,260/- which was subsequently executed with two persons as surety. A separate stamp duty was levied on the document. The board of Revenue declared two separate stamp duties were payable since it was both a surety bond and an indemnity bond.
The issue of the case was to decide whether the document was an indemnity bond or not and the payment of stamp duty thereafter.
The Allahabad High Court held that it is an indemnity bond since it was executed to save the government from loss due to non-payment of sales tax. Hence, the stamp duty payable for an indemnity bond should only be paid.
Fakirasab v. Syedusab And Ors (2004)
In this case, the ancestral property of the defendant’s deceased father was acquired in return for compensation money. Both the plaintiff and defendant were relatives. An application for a temporary injunction was filed under Order 39 Rule 1 and 2 in the execution petition to restrain defendants 1 and 2 from withdrawing the money. According to the defendants, their father had been the individual tenant, and they applied for compensation. So, the plaintiff had no rights.
The trial court, although rejecting the petitioner’s application for a temporary injunction, ordered the defendants to execute an indemnity bond with a bank guarantee for Rs. 10,00,000/- undertaking to withdraw the money. It was also held that since it was joint property, everyone was entitled to a 1/3rd share. The plaintiff filed an appeal.
The issue, in this case, was to decide whether the order asking them to execute an indemnity bond was arbitrary.
The Karnataka High Court held that since it was the property of an Imam, the provisions of a joint family as in Hindu Law would not arise. Also, the plaintiff is entitled to get 1/3rd of the total compensation. It was ruled that the trial court erred in the law and directed the trial court to dispose of the suit fast.
Sri B J Sagar v. The Karnataka State Khadi (2013)
It is a case where the petitioner, a former employee, and a pensioner made a request for retrospective promotion, which was granted. During his service, he was involved in some irregularities, and the respondents sought to recover Rs. 6,97,188/- from his pension based on the audit report for the year 2004.
The issue, in this case, was whether the indemnity bond of 1985 could be enforced to collect the sum.
The Karnataka High Court held that even though the purpose of an indemnity bond was to recover any loss, there is a specific timeframe. Invoking the indemnity bond after 18 years is arbitrary and violative of Article 14 of the Constitution of India. The Court further directed the employer organisation to refix his monetary benefits of pension.
63 Moons Technologies Ltd. v. Deputy Director, Directorate of Enforcement, Mumbai (2019)
This is an appeal filed by the National Spot Exchange of India Ltd. (NSEL) against the order of the Enforcement Directorate (ED) on Provisional Attachment Orders (PAO). The owners of 63 Moons Technologies Ltd. (63 MTL), Jignesh Shah and his family, were barred from any property rights until the final order was given. They were asked to furnish an indemnity bond in the amount of Rs. 1095,27,17,055/-. Any properties of NSEL were not attached.
The Appellate Tribunal for the Prevention of Money Laundering observed that 63 MTL was granted an exemption under Section 27 of the Forward Contract Regulation Act (FCRA), 1952. The Court also ruled that the offence should be tried under the scheduled offence of the Prevention of Money Laundering Act, 2002. Since the chargesheets were not ready, the applicants did not have to furnish any indemnity bonds and were not restrained from any property rights.
The Joint Director, Directorate of Enforcement v. A. Raja & Ors (2020)
There are lots of legal issues involved in the case. For the scope of this article, the issue of whether the attached properties can be released after furnishing indemnity bonds is discussed.
The counsels for the applicant submitted before the Court for permitting the applicants to execute an indemnity bond with the value of the attached property as surety.
The Delhi High Court held that, though there are plenty of instances where the attached properties were released after furnishing an indemnity bond, in this case, the properties were attached under Section 5(1) of the Prevention of Money Laundering Act, 2002. The applicants were also guilty under Section 3 of the said Act. The court subsequently disposed of the matter.
Drafting an indemnity bond
The style of drafting an indemnity bond depends on the specific situation, including the subject matter that is to be covered, how much indemnity is to be provided, etc. Needless to say, an indemnity clause is mandatory for an indemnity bond.
The obligee or third-party financial institutions, such as banks or insurance companies, usually draft the indemnity bond after deciding all the terms and conditions. The principal and surety must negotiate the terms for their own benefit. The main purpose of drafting an indemnity bond is to have a legal instrument which will save a party in case of another’s failure, refusal, or delinquency.
An indemnity bond should also have the promise of ensuring compensation. The events or reasons for which the compensation will be provided should also be mentioned. Both the signatures of the principal and the surety should be on the indemnity bond.
The indemnity bond must have the full names and permanent addresses of the principal, surety, and obligee. The cause and type of indemnity and consideration amount should also be mentioned, among others. The date of the execution of the indemnity bond is another important aspect that should be mentioned. The following are the must-have clauses in any indemnity bond:
- The day on which the indemnity bond is executed;
- Names and addresses of all the parties;
- Purpose(s) and consideration(s) of the indemnity bond;
- Scope, limitation and the time period for which the indemnity bond is valid;
- Clause of indemnification including the event(s) on whose occurrence is to be indemnified and exceptions, if any;
- Procedures for how to enforce the indemnity bond in case of damage, whether any notice of claim is required or not;
- Clauses on consent and authorisation;
- Clauses regarding settlement and enforcement of the indemnity bond.
Apart from the abovementioned clause, any other clauses that the parties think are applicable may be added to an indemnity bond. However, it must be remembered that the drafting of an indemnity bond should always be precise and to the point. It is advisable to avoid adding unnecessary clauses to make it wordy.
The legal position of India on the use of indemnity bond
In absence of any composite legal statutes regarding the execution of an indemnity bond, the use of an indemnity bond is sometimes subject to controversy. Some of the instances are discussed hereunder.
Indemnity bond for medical students
Medical students in certain Indian states must provide an indemnity bond stating that they will provide mandatory government service in rural areas for a specified period immediately following the completion of their respective undergraduate or postgraduate medical course from any government institution. In case the person fails to abide by the terms, he/ she is supposed to pay the entire bond amount to the state government.
Health and related facilities are state subjects under the State List of the Seventh Schedule of the Constitution of India. Hence, the matters related to medical indemnity bonds are also decided by the respective states, and the policy is not uniform at all. The amount payable also varies across various states, ranging from Rs 5 lakh to Rs 1 crore after graduation and up to Rs 2.5 crores for post-graduation and super-specialities. The central government is apparently concerned with the non-uniformity and is trying to implement a uniform bond policy.
Legally speaking, all the parties do not get a fair chance to negotiate the terms and conditions of the bond. All the terms are dictated by the obligee, including the amount, and the parties are just expected to comply with them. However, the purpose of an indemnity bond for a definite period is to provide adequate medical assistance in rural areas, and the candidates are paid stipends during the bond period.
In the case of Dr. Rahul Bansal and Ors v. State of West Bengal (2018), the writ petitioner was a student of post-graduation in psychiatry at the Institute of Post Graduate Medical Education and Research Centre, Kolkata, and completed the said course successfully. He submitted an indemnity bond to work in any government hospital in West Bengal for two years continuously; otherwise, he will pay an amount of Rs. ten lakhs, i.e., the amount payable for indemnity in West Bengal. The indemnity bond also contained the provision of keeping the petitioner’s documents in the custody of the department of that said institution. These documents were supposed to be returned after the completion of the bond period or on payment. He requested multiple times the return of his document upon payment of the bond money and wanted to stop continuing his services, but he received no response. Thereafter, he filed a writ petition.
The main contentions, in this case, were the facts that he was a government servant and whether such kinds of acts violate the underlying purpose of indemnity bonds. He was also presented to the Court by the respondent, who said that allowing him to discontinue his service would open a floodgate where people with financial strength would follow his path, avoiding the mandatory serving of patients in hospitals.
The court held that he was not a government servant but a contractual employee for two years. Furthermore, the rights to equality under Article 16 were violated. The Court also dismissed the appeal filed by the Government of West Bengal on the grounds of frivolity and lack of merit. Moreover, the Court held that he is entitled to get back all the submitted documents and a ‘no-objection’ certificate.
While the intention of such a bond is to eradicate the prevalent disparities between urban and rural healthcare systems in India, some medical professionals have different opinions. According to their opinion, the bond system is equivalent to bonded labour and does not ultimately provide successful results in healthcare, mostly due to a lack of proper infrastructure. Some also think that certain perspectives regarding the bond need to be changed.
Indemnity bond for approving new drugs in India
When bringing new drugs or vaccines to market, drug companies often ask for an indemnity bond. The purpose of requesting this indemnity bond is to provide them with protection if any adverse effects from the drug occur in the future.
The processes of approval of new medicinal drugs in India are usually governed by the Drugs and Cosmetic Act, 1940 and the Drugs and Cosmetics rules, 1945. However, there is no provision for individual indemnity bonds for the approval of any new drug or vaccine in India. Only the government of India can execute an indemnity bond to the manufacturer in exceptional circumstances; more commonly, the provision of indemnity may be mentioned in a clause or set of clauses in the contract signed by the manufacturer and the government. Apparently, there is no precedent for giving indemnity to any drug manufacturers.
The absence of a provision for an indemnity bond created huge turmoil and legal difficulties during the approval of the COVID-19 vaccine in India. All the foreign vaccine manufacturers, including Pfizer, Moderna, and even Serum Institute of India, the manufacturer of the vaccine Covishield, widely used for mass vaccination during the COVID-19 pandemic, asked the government to provide them with an indemnity bond against all vaccine-related lawsuits and other frivolous claims.
Even though the efforts of India need to be highly appreciated, creating a historic achievement for successfully running the largest mass vaccination drive against COVID-19, the absence of indemnity is said to be one of the reasons for delaying the arrival of vaccines, especially from American manufacturers.
Legal validity of employment indemnity bond
There are some controversies regarding the mandatory signing of an indemnity bond for employment in some industries. Such indemnity bonds prevent an employee from leaving the job before a specific time period ends. Such a clause may be present in the employment contract instead of executing a separate indemnity bond. This is often said to violate Article 19(1)(g) of the Constitution of India. Furthermore, according to Section 27 of the Indian Contract Act, 1872 any agreement restricting one from practising his profession or trade is void.
In the case of Superintendence Company of India v. Krishan Murgai (1980), the Supreme Court was of the opinion that such a restriction is not totally against the law and is subject to a particular situation. In the case of Sant Langowal Institute of Engineering and Technology and Another v. Suresh Chandra Verma (2013), the employee, a lecturer in a government college, took a paid three-year study leave to pursue his Ph.D. degree at IIT, Kanpur; however, he failed to produce his Ph.D. certificate. The Supreme Court said that the educational institution was entitled to be awarded indemnity since the employee himself caused them damages.
The answer to the question of the legality of employment indemnity bonds is not conclusive. It is mostly decided based on the facts and situations of the individual scenarios. However, the terms of the indemnity bond must be considerate and not punishing to the employee. On the other hand, the employee is also expected to maintain mutual trust and fidelity with the employer.
Despite the fact that indemnity bonds are widely used, the term has yet to find its place in Indian legislation and the judiciary. Surprisingly, an exhaustive definition of an indemnity bond is not even mentioned in any of the existing Indian statutes. It is a widely used legal instrument in business, finance, and other organisations where the likelihood of future uncertain events is high. It does not merely reimburse the losses but also protects from any uncertain loss. Hence, the importance of an indemnity bond can never be undermined.
Frequently asked questions (FAQs) on the indemnity bond
Who can issue an indemnity bond?
An indemnity bond is usually executed between the principal and surety, with a large business, the government, or any financial institution acting as obligee. The obligee has the right to draft and execute an indemnity bond, jointly with the signatures of the principal and surety.
Can relatives act as surety in an indemnity bond?
Anybody can act as a surety, provided they are ready to take on the responsibility of indemnification. Some indemnity bonds require the signature of one or more witnesses. In that case, the surety and the witness cannot be the same person.
Is it necessary to register indemnity bonds?
In the case of M/s Synapse Communications Pvt. Ltd. v. Abhishek Mittal (2016), the Delhi District Court held that an indemnity bond should have basic sanctity in the eyes of the law.
The indemnity bond in the mentioned case was neither registered nor on stamp paper. The defendant was an employee of the organisation. He was asked to sign some blank pages after joining. Later, those signed blank pages were misrepresented when the defendant left the job. It was also held that an indemnity bond without specific conditions is barred under Section 23 of the Indian Contract Act, 1872.
How many witnesses are necessary for an indemnity bond?
A witness is not required for all types of indemnity bonds. Some types of indemnity bonds do not require any witnesses at all. But two witnesses are mandatory while executing an indemnity bond for the transmission of share certificates and debentures.
What is the value of the stamp duty of an indemnity bond in India?
The stamp duty for an indemnity bond differs in each state and the Union Territories of India, having their own Acts on stamp duties. The state and UT Acts are mostly amendments to the Indian Stamp Act, 1899, but the states individually determine the value of stamp duty to be paid.
Should an indemnity bond be notarized?
The purpose of notarization is to provide legal validity to the document and the identity of the parties. An indemnity bond is not mandatorily notarised. However, financial institutions such as banks, insurance companies, and educational institutions may require a notarized indemnity bond. Sometimes, the value of the stamp paper for the indemnity bond is also specified.
- The Indian Stamp Act, K Krishnamurthy, 12th edition (2017), LexisNexis
- Elements of Mercantile Law, ND Kapoor, 38th edition (2020), Sultan Chand & Sons
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