1.
Meaning of Indemnity
Indemnity refers to a legal obligation of one party (the indemnifier) to compensate another party (the indemnified) for losses or damages suffered due to the acts or omissions of the indemnifier or a third party. It is a contractual obligation that
provides security against potential losses.
2. Relevant Legal Provisions
In India, the concept of indemnity is governed by Section 124 and 125 of the Indian Contract Act, 1872:
● Section 124: Defines a contract of indemnity as "a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person."
● Section 125: Specifies the rights of the indemnified party, including compensation for damages, legal costs, and amounts paid under compulsion in a lawful proceeding.
In English law, indemnity is recognized under common law principles, as established in cases like Sheffield Corporation v. Barclay (1905).
3. Elements of Indemnity
To constitute a valid indemnity contract, the following elements must be present:
1. Loss or Damage – The indemnified party must have suffered a loss due to an event covered under the indemnity contract.
2. Promise to Compensate – There must be an express or implied promise by the indemnifier to cover the losses of the indemnified
party.
3. Legal Obligation – The indemnifier’s obligation must arise from a valid contract enforceable under law.
4. Scope of Indemnity – The indemnity may cover losses due to acts of the indemnifier or third parties.
4. Types of Indemnity
5. Express Indemnity – When indemnity is explicitly stated in a contract. Example: Insurance contracts, where an insurer indemnifies
the insured against losses.
6. Implied Indemnity – When indemnity arises due to circumstances or legal principles, even if not explicitly mentioned in a contract.
Example: Sheffield Corporation v. Barclay (1905), where indemnity was implied because one party induced another to act unlawfully.
7. Indemnity Against Third-Party Claims – Protection against liabilities arising from legal claims by third parties. Example: A seller
indemnifying a buyer against claims on a purchased property.
8. Indemnity Against Own Actions – In some cases, indemnity may also cover damages caused by the indemnified party’s own
actions, but this is less common.
The case of Corporation of Sheffield v. Barclay and Others [1905] AC 392 is a landmark decision in English law concerning the principles of implied indemnity.
Facts: In this case, stock of the Sheffield Corporation was registered jointly in the names of Timbrell and Honnywill. Timbrell, acting fraudulently, forged Honnywill's
signature on a transfer deed and secured a loan from Barclay & Co. (a banking firm) using the forged transfer as collateral. Barclay & Co., unaware of the forgery,
submitted the transfer to the Sheffield Corporation, requesting the registration of the stock in their name. The Corporation, also unaware of the forgery, registered the
transfer. Subsequently, the fraud was discovered, and Honnywill successfully sued the Corporation to have his name reinstated on the register and to recover lost
dividends. The Corporation, having compensated Honnywill, sought indemnity from Barclay & Co.
Legal Issue: The primary issue was whether Barclay & Co., having innocently presented a forged transfer for registration, were obligated to indemnify the Sheffield
Corporation for the losses incurred due to the fraudulent transfer.
Decision: The House of Lords held that Barclay & Co. were liable to indemnify the Sheffield Corporation. The court reasoned that when a person requests another to
perform an act that appears lawful but is, in fact, unlawful—leading the latter to incur liability to a third party—the law implies a contract of indemnity from the requester
to the performer. This principle applies even if the requester was unaware of the illegality.
Significance: This case established the doctrine that an implied indemnity arises when one party, at the request of another, performs an act that results in liability,
even if both parties acted innocently and without knowledge of any wrongdoing. The ruling emphasizes the responsibility of the party making the request to bear the
consequences of any resulting liability.
This principle has been influential in subsequent cases, including Indian jurisprudence. For instance, in The Secretary of State for India v. The Bank of India Ltd. [1938]
1 MLJ 160, the Madras High Court referred to the Sheffield Corporation v. Barclay decision, affirming the applicability of the implied indemnity principle in Indian law.
I
Conclusion
Indemnity is a crucial concept in contract law that ensures financial protection against losses. It is widely applied in insurance,
business transactions, and financial dealings. Courts have recognized both express and implied indemnity, holding parties
accountable based on their role in causing a loss. Cases like Sheffield Corporation v. Barclay highlight the judicial approach to
indemnity, ensuring fairness and legal protection in commercial transactions.
