Business, Legal & Accounting Glossary
Protection from future loss, either by repayment or a promise to not require repayment.
An Indemnity is a sum paid by A to B by way of compensation for a particular loss suffered by B. The indemnifying party (A) may or may not be responsible for the loss suffered by the indemnified party (B).
Forms of indemnity:
In common parlance, indemnity is often used as a synonym for compensation or reparation.
As a legal concept, it has a more specific meaning. For instance, compensation connotes merely a sum paid to make good the loss of another without regard to the payer’s identity, or their reasons for doing so. As the following paragraphs should explain, an indemnity is a sub-species of compensation, in the same way, that compensation and reparation are.
The obligation to indemnify differs from the obligation to pay compensation, or make reparation, in that an obligation to indemnify is a voluntary obligation. If C crashes into B’s car and damages it and the crash is due to C’s negligence, most legal systems will impose liability upon C to pay B for the damage caused. C’s obligation to B arises by force of law irrespective of whether C subjectively wishes to compensate B or not. This is not, therefore, a situation of indemnity; the relationship between B and C is involuntary. In legal terms, it is a case of tortious (common law) or delictual (civil law) liability.
But, if A had a contract with B under which A agreed to pay for any damage to B’s car, then A paying B would be voluntary (even if A subjectively regretted the contract at this point). In legal terms A’s liability is contractual and the sum paid is an indemnity. The contract just described between A and B is, of course, one relatively familiar to most (at least in the Western World) as one of car insurance.
It was stated in the first paragraph that the indemnifying party (A) may also be the party responsible for the loss. This is because whilst A will probably have a legal duty to compensate B (depending on the rules for damage wrongfully caused in the relevant legal system), A may also have a contractual duty to compensate B. Such indemnity clauses can be found in many contracts aside from those specifically for insurance. For instance, (staying with the automobile theme) a car rental contract may stipulate that the renter will be responsible for damage to the rental car caused by their reckless driving. In other words, the renter will indemnify the rental company.
An obligation to indemnity can also be distinguished from a guarantee granted by one party in regard to the potential debts of another. For example, A might agree to stand guarantor (or surety) for her son C (an impecunious law student) so that if C cannot afford to pay his rent to B (his canny landlord), A will be obliged to pay for him. Here, C is the one primarily responsible for payment of the rent. A’s liability is only ancillary. The liability of an indemnifier, properly so-called, is primary. This distinction between indemnity and guarantee was discussed as early as the eighteenth century in Birkmya v Darnell. In that case, concerned with a guarantee of payment for goods, rather than payment of rent, the presiding judge explained that a guarantee effectively says “Let him have the goods; if he does not pay you, I will.” By contrast, an indemnity is like saying “Let him have the goods, I will be your paymaster.”
Under section 4 of the Statute of Frauds 1677 indemnity clauses must be constituted in writing.
In the UK, under the Unfair Contract Terms Act 1977 s4, a consumer cannot be made to unreasonably indemnify another for their breach of contract or negligence.
Indemnity in the common law of the UK may award indemnity as well as rescission during an action of Restitutio in integrum. The property and funds are exchanged but indemnity may be granted for costs necessarily incurred to the innocent party pursuant to the contract. The leading case is Whittington v Seale, in which a contaminated farm was sold. Due to the contract, the buyers renovated the Real estate and due to the contamination incurred medical expenses for their manager who had fallen ill. Once the contract was rescinded, the buyer could be indemnified for the cost of renovation as this was necessary to the contract, but not the medical expenses as the contract did not require them to hire a manager. Were the sellers at fault, damages would clearly be available.
The distinction between indemnity and damages is subtle, but these two may be differentiated by considering the roots of the law of obligations. How can money be paid where the defendant is not at fault? The contract before rescission is voidable but not void meaning that for a period of time there is a legal contract. During this time both parties have a legal obligation. If the contract is to be voided ab initio the obligations performed must also be compensated. Therefore the costs of indemnity arise from the (transient and performed) obligations of the claimant rather than a Breach of obligation by the defendant.
Slave owners are said to suffer a loss whenever their slaves or indentured servants are granted their freedom. A tacit belief exists that harm is caused to slave owners whenever slaves or indentured servants are released. Slave owners may be paid to cover their losses.
When the slaves of Zanzibar were freed in 1897, it was by compensation since the prevailing opinion was that the slave owners suffered the loss of an asset whenever a slave was freed.
In the 1860s in the United States, U.S. President Abraham Lincoln had requested many millions of dollars from Congress with which to pay slave owners “for the loss of their property.” On July 9th, 1868, part IV of the Fourteenth Constitutional Amendment dismissed all of the claims that slave owners had been injured by the freeing of the slaves.
In 1807-08, in Prussia, statesman Baron Heinrich vom Stein introduced a series of reforms, the principal of which was the abolition of serfdom with indemnification to territorial lords.
Haiti was required to pay an indemnity of 150,000,000 francs to France in order to atone for the loss suffered by the French slave owners.
The nation that wins a war may insist on being paid compensations for the costs of the war, even after having been the creator of the war.
An accident and health indemnity policy provides monthly compensation to the policyholder if they are unable to work due to being in the hospital.
Most contracts include indemnity clauses that protect one or both parties from future damage claims.
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Definitions for Indemnity are sourced/syndicated and enhanced from:
This glossary post was last updated: 24th April, 2020 | 2 Views.