Under Chapter 8 of the Indian Contract Act of 1872 in section 124, a “contract of indemnity” has been defined. Promise by one party to make good all the losses to the other party or any third party concerned is known as an indemnity bond. These bonds are under the limitation of some terms and conditions. Such kinds of bonds have been signed against the risk that can cause loss to the other party.
Nowadays, an indemnity clause has been found in every type of commercial contract and agreement. These contracts and agreements include but are not limited to non-disclosure agreements, master service agreements, etc. The current blog will discuss the meaning, format, type and legality of the contract of indemnity with all the related aspects.
Meaning of Contract of Indemnity
An agreement between two parties who are competent to make a contract under section 10 of the Indian Contract Act to make good the loss caused to the other party or any third party under the limitation of some terms and conditions is called an indemnity bond. For illustration, Amita promises Babita that if it infringes the intellectual property rights of Kavita, she will indemnify Babita for all the losses caused due to such infringement. This is the contract of indemnity between Amita and Babita. There are a minimum of two parties required for the indemnity bond. The party that promises to make the loss good is known as an indemnifier, and the party to whom it promises to make the good all the losses is known as indemnified.
Important Section of the Indian Contract Act with respect to Indemnity Bond
As a Contract of indemnity is a type of legally enforceable agreement between the two parties, it is governed by the India Contract Act of 1872. Some of the important sections regarding bonds of indemnity or contracts in the ICA are given below:
Section 10 of the Indian Contract Act
Section 10 of the ICA has been talking about the competent parties who can enter into a contract. A list of such parties is given below:
- Free consent of the parties
- Parties of the indemnity bond must be competent to contract
- The consideration, if any, must be a lawful consideration
- The object of the contract of indemnity must be a lawful object
- The contract must not be expressly declared void by any law
- Must not be in violation of any law
- Parties must attain the age of majority
- Parties must not be of unsound mind
Section 124 of the Indian Contract Act
Under Section 124 of the Contract Act, the definition of an indemnity bond or contract of indemnity has been given in detail. In this section, indemnity contact has been defined clearly with the help of an example. As per this section, an agreement between the two parties to make the loss good against the promisee or any other third party will be known as the contract of indemnity between these two parties. For this contract, it is necessary at least two parties should be there. These parties must be competent parties as per section 10 of the Indian Contract Act.
Section 125 of the Indian Contract Act
Section 125 of the contract act talks about the rights of the indemnity holder. The promisee in a bond of indemnity, who is acting within the scope of his or her authority, has all the right to recover from the promisor the following:
- Recovery of all the damages
- Recovery of all the costs
- Recovery of all the sums
Format of Indemnity Bond
There are many formats of bond of indemnity. Different professionals have different styles of drafting a contract for indemnity. But all of these are generally matching with the traditional format of a bond of indemnity. Basically, such bonds are divided into three parts, which are mentioned below in detail:
First Part
The first section of a bond of indemnity includes crucial information about the parties involved in the contract. This information encompasses the names and addresses of both parties, as well as the date and place where the bond of indemnity was executed. This initial part of the document is essential because it provides the fundamental details about the people and the agreement itself. In fact, if the names of the parties are not accurately stated, the bond cannot be considered a valid contract. Therefore, it is vital to ensure that this first part of the bond of indemnity is completed accurately and in full.
Main Body of the Indemnity Bond
In the main body of the bond of indemnity, various important clauses have been given with all the details. Both parties must go through this part of the bond twice before signing the bond of indemnity. Any mistake with this part can prove fatal to the parties of the bond. Some of the important clauses of the contract of indemnity are given below:
- Definition part
- Interpretation clause
- Indemnity clause
- Sunset clause
- Dispute resolution clause
- Governing law clause
- Termination Clause
- Renewal Clause
- Consideration clause
- Alternate dispute resolution clause if preferred by the parties
Last Part
In the last part of the contract of indemnity, the signature of both parties of the bond has been taken in the presence of two witnesses. This part of the bond plays a very important, or we can say significant, role in making this bond a legally binding agreement. Before signing the bond of indemnity, both parties must go through the first part and the main body of the bond very carefully. Only after reading and understanding it properly must parties sign it.
Types of the Contract of Indemnity
Mostly, in all types of contracts, an indemnity clause is found. Whether we are talking about contracts or personal bonds, this clause is almost present in every type of agreement. Some of the most common types of bonds of indemnity are given below:
- Loan agreement
- Commercial contracts
- Supply agreement
- Licensing agreement
- Legal contracts
- Lease Agreement
- Rent Agreement
Conclusion
In the current world of startups and businesses, indemnity bond plays a very crucial role. Whenever any commercial agreement was signed between the two parties, a bond of indemnity came into force because, nowadays, most agreements have indemnity clauses. A bond of indemnity is a kind of safety provided to the other party to make its losses good. Such kinds of bonds always come with certain terms and conditions. The draft of an indemnity bond typically includes three parts: an introduction with parties’ names and addresses, the main body containing essential clauses, and a final section for signatures and witnesses. These clauses that have been mentioned in the main body serve to protect one party from potential losses, making them a common feature in many contractual arrangements.
