JAIIB PPB Paper-2 Module-B Unit 9: Contracts of Indemnity

19/03/2023

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JAIIB Paper 2 (PPB) Module B Unit 9: Contracts of Indemnity (New Syllabus)

The Institute of Indian Banking and Finance (IIBF) has recently announced the revised syllabus and exam format for the JAIIB Exam 2023. The upcoming exam will comprise of four papers, with Paper 2 (Principles & Practices of Banking) covering Unit 9: Contracts of Indemnity. This particular unit holds significant importance for candidates, as it will greatly impact their performance in the exam.

To assist candidates in comprehending the topic, we will provide all the necessary details related to Unit 9: Contracts of Indemnity of JAIIB Paper 2 (PPB) Module B: Functions of Banks. We strongly recommend candidates to refer to this article and also utilize our Online Mock Test Series to enhance their understanding of Foreign Currency Accounts for Residents and other related aspects.

For candidates appearing for the JAIIB Certification Examination 2023, it is essential to comprehend each unit in the syllabus, including the Marketing unit. This unit holds great importance in the banking industry, and candidates must prepare thoroughly to excel in the exam and establish a successful career in the banking sector.

Contract of Indemnity

A Contract of Indemnity is a contract by which one party promises to save the other from loss likely to be caused to him. This loss can be, either by the conduct of the promisor himself or by the conduct of any other person.

Contract Of Indemnity Defined

Sec.124 of the Indian Contract Act, 1872 defines contract of indemnity as follows: “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, is called a ‘Contract of Indemnity’.” The promisor is also called the indemnifier. The essence of any contract of indemnity is that the assured must prove a loss. The Section also gives an illustration of a Contract of Indemnity as follows:

A contract wherein A contracts to Indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of ` 200, is called a contract of Indemnity.

In this illustration:

The person giving the promise i.e. A is called the indemnifier, and
The person to whom the promise is made i.e. B is called the indemnified or the indemnity holder.

All insurance contracts come within the ambit of a contract of indemnity, but are not dealt with under Sec. 124 of the Contract Act. Sec. 124 deals only with one particular type of indemnity, viz., where a person gives a promise to save another person from loss caused by either the conduct of the person giving the promise or by the conduct of any other person. There are cases where the Courts applying the principles of general law have held a person liable to indemnify, though the person never undertook such a liability. The decision of the Privy Council in Secretary of State vs Bank of India Ltd. (AIR 1938 PC 191) best illustrates this point.

In this case, Ms. G was the holder of a Government promissory note which she had handed over to Mr. A, her broker. Mr. A forged Ms. G’ssignature and endorsed it in his favour. Mr. A then endorsed it for value to the bank. The bank in good faith applied to the Government Public Debt Office to have the note exchanged in their name, which was done. Ms. G on being aware that she has been defrauded sued the Government and recovered the appropriate damages. The Government in turn sued the bank to indemnify the Government against the loss suffered by them. The Court held the bank to be liable because under common law covering right of indemnity, the bank is responsible for an injury to a third party’s rights.

All insurance contracts are examples of contracts of indemnity because all insurance contracts are contracts, which indemnify a person from certain losses, which he may suffer, e.g. under a fire insurance policy taken by a shopkeeper for his godown, the insurance company undertakes to pay a certain amount to the policy holder (i.e. the shopkeeper) in the event of fire in the godown, subject to the conditions of the policy and payment of premium by the shopkeeper (policy holder).

Distinctive Features Of Indemnity Contract And Guarantee

Number of Parties to the Contract
Contingent Risk
Nature of Liability
Number of Contracts
Purpose of Contract
May be express or implied
Covers only the actual loss

Rights Of Indemnity Holder

The indemnity holder (i.e. the promisee or the person who is indemnified) has the following rights when sued (i.e. when a legal action is taken against the person who has indemnified).

The promisee is entitled to recover from the promisor, in respect of the matter to which the promise to indemnify applies:

All damages which he may be compelled to pay in any suit, in respect of any matter to which the promise to indemnify applies.
All costs which he may be compelled to pay in any suit.
All sums paid in compromise, not contrary to indemnity.
Right to sue for specific performance- the indemnity holder is entitled to sue for specific performance if he has incurred absolute liability and the contract covers such liability.

Implied Indemnity

A Contract of indemnity may be express or implied depending upon the circumstances of the case, through section 124 of the India Contract Act does not seem to cover the case of implied indemnity.

Enforceability of Contract of Indemnity

The Liability of the Indemnifier commences as soon as the loss of the indemnified becomes absolute, certain or imminent. It is not necessary that the promise should pay for the loss.

JAIIB PPB Module B Unit 9 Contracts of Indemnity (Ambitious Baba) PDF