An indemnity bond acts like a security to a bondholder. It is primarily used in the loan and mortgage industry, working as an obligation that protects a lender.
A person, signing an indemnity bond or an indemnification bond, is giving assurance to the lender that he/she will suffer the loss if he/she breaches the contractual commitments. It gives a lender the right to recover losses incurred by the defaulting person.
Indemnity Bond Meaning
The meaning of the word indemnity is security or protection against a financial loss or burden. The present word originated from the Latin word ‘indemnis’ which meant: unhurt, and/or free from loss. Thus, it has been in use as a term for a legal contract that assures a lender that he/she stays free from monetary loss.
Indemnity Bond for Property
A surety company signs an Indemnity bond after finalising a property deal.
With an indemnity bond, a surety company will put forward a demand on a bonded contractor to finish a project. It guarantees a payment in the event of a fraud.
For example, a contract may entail that if a bonded contractor cannot complete a project the surety company will get another contractor to do it.
When are Indemnity Bonds Needed?
Indemnity bonds are effective in various situations such as:
- Release of payment
- Transfer property to legal heirs
- Government Indemnity schemes
- Losing the copy of the fixed deposit receipt
- Electricity connection transfer
- Borrowing money from a bank
- Property transfer
- Death claims
These bonds ensure that a project is complete without any fraudulent activities as these bonds provide legal protection to the agreed parties.
Indemnity Bond Format
Take a look at one of the most commonly used bond formats:
This deed of Indemnity executed on [date ] at [place] by ___________ having its registered office at ___________, through Mr___________ as the authorised representative, hereinafter referred to as ‘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 authorised representative, hereinafter referred to as ‘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 (ie) 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 delivery 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 the site with respect of the purchase order.
Place: ___________
Date: ___________
________________________________________
(Signature with name and designation)
(Company seal)
Witness:
1…
2…
Uses of an Indemnity Bond
An Indemnity bond has the following primary uses:
- The primary objective of holding an indemnity bond is to safeguard either of the parties from a potential loss.
- This bond of indemnity promises financial compensation at times when there is a contract violation due to any unlawful activities.
- These bonds act as surety bonds where the guarantor has to pay a promised amount if there is a breach of contract.
What are the Different Types of Indemnity Bonds?
Currently, there are 6 types of indemnity bonds:
- Lease agreement
- Supply agreement
- Legal contracts
- Loan Agreement
- Commercial contracts
- Licencing agreement
Conclusion
With this brief account on an indemnity bond, you must have realised how crucial it is for getting things done, be it property transfer or borrowing money. If you have further questions or need legal help you should consider finding a reliable advisor to make informed decisions.
FAQs
The guarantor will pay if he/she fails to fulfil the contract terms.
Indemnity bonds demand stamp duty payment which is 3% of the security’s value. It can cost up to a maximum of ₹100. This payment is in accordance with the stamp duty rules of the relevant state and union territories and the Indian Stamp Act 1899.
An indemnity can flow both ways, however, it depends on the type of indemnity. For example, in case of party indemnities it is not specified that one party will be an indemnity holder and the other will be an indemnifier. Both parties can indemnify each other for all losses or damages suffered due to a breach of the contract.
In case of an indemnity bond, you have to use a non-judicial stamp paper and it should be further attested by the notary public.
