Indemnity is often used as a synonym for compensation or reparation.
As a legal concept, it has a more specific meaning, namely, to compensate another party to a contract for any loss that such other party may suffer during the performance of the contract. 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 Damages 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 regardless of whether C subjectively wishes to compensate B. 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 unlawful act (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 obligatory (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 of automobile comprehensive insurance.
The first paragraph stated that the indemnifying party (A) may also be the party responsible for the loss. This is because although 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 C. 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 the renter's reckless driving. In this case, 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."
Indemnity in particular legal systems
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.
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