Contract of Indemnity

What is Contract Of Indemnity?

Contract of indemnity is a special kind of contract. The term ‘indemnity’ literally means “security or protection against a loss” or compensation. According to Section 124 of the Indian Contract Act, 1872  “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.”  

Try our all-in-one Legal Practice Management Software Free Sign Up Now!

Example: P made a contract of indemnity to indemnify Q against the consequences of any proceedings which R may take against Q in respect of a certain sum of money.

OBJECTIVE OF CONTRACT OF INDEMNITY

The objective of entering into a contract of indemnity is to protect the promisee against unanticipated losses.

PARTIES TO THE CONTRACT OF INDEMNITY

A contract of indemnity has two parties.

1. The promisor or indemnifier
2. The promisee or the indemnified or indemnity-holder

The promisor or indemnifier: He is the person who promises to bear the loss.

The promisee or indemnity-holder: He is the person whose loss is covered or who are compensated.

In the above-stated example,

• P is the indemnifier or promisor as he promises to bear the loss of Q.
• Q is the promisee or the indemnified or indemnity-holder as his loss is covered by P.

Read Also: What are the Remedies for Breach of Contract

ESSENTIALS OF CONTRACT OF INDEMNITY

1. PARTIES TO A CONTRACT: There must be two parties, namely, promisor or indemnifier and the promisee or indemnified or indemnity-holder.
2. PROTECTION OF LOSS: A contract of indemnity is entered into for the purpose of protecting the promisee from the loss. The loss may be caused due to the conduct of the promisor or any other person.
3. EXPRESS OR IMPLIED: The contract of indemnity may be express (i.e. made by words spoken or written) or implied (i.e. inferred from the conduct of the parties or circumstances of the particular case).
4. ESSENTIALS OF A VALID CONTRACT: A contract of indemnity is a special kind of contract. The principles of the general law of contract contained in Section 1 to 75 of the Indian Contract Act, 1872 are applicable to them. Therefore, it must possess all the essentials of a valid contract.

• NUMBER OF CONTRACTS: In a contract of Indemnity, there is only one contract that is between the Indemnifier and the Indemnified.
• RIGHTS OF PROMISEE/ THE INDEMNIFIED/ INDEMNITY HOLDER

As per Section 125 of the Indian Contract Act, 1872 the following rights are available to the promisee/ the indemnified/ indemnity-holder against the promisor/ indemnifier, provided he has acted within the scope of his authority.

1. RIGHT TO RECOVER DAMAGES PAID IN A SUIT [SECTION 125(1)]: An indemnity-holder has the right to recover from the indemnifier all damages which he may be compelled to pay in any suit in respect of any matter to which the contract of indemnity applies.
2. RIGHT TO RECOVER COSTS INCURRED IN DEFENDING A SUIT [SECTION 125(2)]: An indemnity-holder has the right to recover from the indemnifier all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit.
3. RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE [SECTION 125(3)]: An indemnity-holder also has the right to recover from the indemnifier all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.

Read Also: Frustration of Contract

COMMENCEMENT OF LIABILITY OF PROMISOR/ INDEMNIFIER

Indian Contract Act, 1872 does not provide the time of the commencement of the indemnifier’s liability under the contract of indemnity. But different High Courts in India have held the following rules in this regard:

• Indemnifier is not liable until the indemnified has suffered the loss.
• Indemnified can compel the indemnifier to make good his loss although he has not discharged his liability.

In the leading case of Gajanan Moreshwar vs. Moreshwar Madan(1942), an observation was made by the judge that “ If the indemnified has incurred a liability and the liability is absolute, he is entitled to call upon the indemnifier to save him from the liability and pay it off”.

Thus, Contract of Indemnity is a special contract in which one party to a contract (i.e. the indemnifier) promises to save the other (i.e. the indemnified) from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. Section 124 and 125 of the Indian Contract Act, 1872 are applicable to these types of contracts.