clauses or Indemnity contracts.6 Indemnity
clauses are merely provisions in the contract
spelling out the various elements of the
particular indemnification obligation that is
required or agreed to by the parties, eg nature,
scope, entitlements, etc. Examples of these
have been adverted to before.
Contracts of Indemnity
Indemnity contracts however are a distinctly
separate form of a legal document. Section 77 of
the Malaysian Contracts Act 19507 stipulates:
●●
●●
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”.
ILLUSTRATION
A contracts to indemnify B against the
consequences of any proceedings which C may
take against B in respect of a certain sum of
RM200. This is a contract of indemnity.
●●
Section 788 further provides for the entitlements
of the indemnity holder against the promisor.
●●
Often confused with Contracts of Guarantee, a
Contract of Indemnity is however different in the
following main ways:9
●●
6
7
8
9
10
11
12
13
14
15
16
under a Contract of Indemnity, the
indemnifier’s liability is original and
independent: Western Credit v Alberry,10 i.e.
the contract ‘gives rise to an independent,
stand-alone obligation to keep harmless
against loss’: Yeoman Credit Ltd v Latter;11
under a Contract of Guarantee, the
guarantor’s (surety’s) liability is collateral
to and dependent upon the liability and
default of a third person. In short, it exists
side by side with another contract (eg, the
principal contract between the employer
and the contractor): Barclay Mowlem
Construction Ltd v Simon Engineering
(Australia) Pte Ltd;12
mere labeling of the instrument is not
conclusive of its nature and legal effect.
The instrument has to be construed as a
‘whole’ to establish whether it is in fact
a Contract of Indemnity or a Contract of
Guarantee. The task is not made any easier
since it is common practice for a Contract
of Guarantee to also include indemnity
clauses;13
under a Contract of Indemnity, the
promisee is obliged to show the actual loss
or damage suffered by it before it is entitled
to be indemnified by the promisor: Sadlers’
Co v Badcock.14 This is not strictly the case
for a Contract of Guarantee;15
most insurance contracts are Contracts
of Indemnity, the exceptions being life
and personal accident policies: Medical
Defence Union Ltd v Department of
Trade.16 Since the Insurance Contracts are
not Contracts of Guarantee, the insurer’s
liability is independent of the principal
debtor’s default whilst a guarantor’s (or
surety’s liability) is collateral in nature;
Or Contracts of Indemnity.
(Act 136) (Revised 1974).
Entitled ‘Rights of Indemnity – holder when sued’.
See Chappell, Marshall, Powell-Smith & Cavender Building Contract Dictionary (3rd Edn) pp 206, 207.
[1964] 2 All ER 938, CA.
[1961] 2 All ER 294, 296, CA.
(1991) 23 NSWLR 451; see also Contracts Act 1950 s 79.
See Lee Mei Pheng Law of Guarantees p 14.
(1743) 2 Atk 554, 1 Wils 10.
See paras [2.11]–[2.15] above.
[1980] Ch 82 at 89. See also Poh Chu Chai General Insurance Law p 513.
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