Indemnity bond defines under section 124 of the Indian Contract Act. 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 purpose of Indemnity bond is to guarantee financial reimbursement in case of any harm caused by illegal actions on the part of bonded party.
The bond represents a contract between:-
Principal is legally required to obtain a bond.
Obligee is the party that imposes the bonding.
Surety guarantees the financial compensation will be covered if the principal fails to abide by the set agreement and the law. The indemnity bond can indemnify the obligee in case the principal does not perform their obligations.
When getting indemnity bonds, the principal signs an indemnity agreement with the surety provider. It states that the full financial responsibility in case of bond claims belongs to them rather than the surety.
The typical indemnity bonds that a wide range of individuals and businesses have to obtain are commercial bonds. They are also known as license and permit bonds, as they are a common requirement when applying for a professional license. Local, city, state and federal authorities may require license bonds before they allow an entity to operate within a regulated business field.
What is the purpose of Indemnity Bond?
An indemnity bond is a bond that is intended to provide financial reimbursement to the holder for any actual or claimed loss caused by the issuer’s conduct or another person’s conduct. Indemnity bonds are a major subset of surety bonds.
What are the types of Indemnity Bond?
- Commercial contracts
- Legal contracts
- Loan agreements
- Supply agreements
- Licensing agreements
Format of an Indemnity bond
This deed of Indemnity executed on [DATE] at [PLACE] by ___________ having its registered office at ___________, through Mr. ___________ as the authorized representative, hereinafter referred to as the ‘Indemnifier’, the expression which shall, unless repugnant to the context or meaning thereof, include its administrators, successors, representative and assignees in favour ___________ having its registered office at ___________, through Mr. ___________ as the authorized representative, hereinafter referred to as the ‘Indemnified’, the expression which shall, unless repugnant to the context or meaning thereof, include its administrators, successors, representative, and assignees.
WHEREAS the indemnified herein has awarded to the Indemnifier herein a Purchase Order No. ___________ valued at Rs ___________ (Rupees ___________only) for the supply of ___________ on terms and conditions as mutually agreed by the parties.
WHEREAS, a clause of the above mentioned Purchase Order provides for the guarantee (i.e.) for the products supplied by the Indemnifier to the Indemnified, to be free from any defect subject to faulty material or workmanship for a period of twelve (12) calendar months from the date of commissioning of the Purchase Order.
The Indemnifier hereby irrevocably agrees to indemnify the indemnified in the event of any defect subject to faulty material, workmanship or any defect which may arise in the delivered due to the shortcomings of the Indemnifier for the said period of twelve (12) calendar months from the date of commissioning of the Purchase Order. The indemnifier shall as may be deemed necessary repair the defective products at the site, free of cost, within a reasonable time specified by the indemnified or shall reimburse the pro-rata cost of the products to the extent as per the Purchase Order, or shall deliver spares for the defective portion only free of cost at site with respect of the Purchase Order.
(Signature with Name and Designation)