CONTRACT OF INDEMNITY

A contract of indemnity is a special kind of contract.

The term ‘indemnity’ means to make good the loss or to compensate the party who
has suffered some loss.

The purpose of the contract of indemnity is to protect the promisee from the
anticipated (future) loss.

Section 124 of the Indian Contract Act, 1872 defines ‘Contract of Indemnity’ as
follows:

A contract of indemnity is a contract whereby one party promises to save the other
party from loss caused to him by the conduct of the promisor himself or by the
conduct of any other person.

There are two parties in a contract of indemnity, namely:

i) Indemnifier or promisor

ii) Indemnified or indemnity holder or promisee

The person who promises to make good the loss is called the indemnifier or
promisor.

The person whose loss is to be made good is called the indemnified or indemnity
holder or promisee.

Examples of contract of indemnity

(a) ‘A’ contracts to indemnify ‘B’ against the consequences of any proceedings which
‘C’ may take against ‘B’ in respect of a certain sum of Rs. 200. This is a contract of
indemnity. Here, ‘A’ is the indemnifier and ‘B’ is the indemnified.

(b) ‘A’ and ‘B’ go to a shop. ‘A’ says to the shopkeeper, “Let B have the goods from
your shop, I will see you paid”. This is a contract of indemnity. Here, ‘A’ is the
indemnifier and the shopkeeper is the indemnified.

Contract of Indemnity is a species of general contract

A contract of indemnity is a species of general contract. As such, it must have all the
essential elements of a valid contract like consideration, competency of parties, free
consent, lawful object, etc.

A contract of indemnity is not valid if it is against public policy and unlawful. Similarly,
an indemnity given under coercion cannot be enforced.
Contract of Indemnity is a contingent contract:

A contract of indemnity is a contingent contract. The contingency upon which the

whole contract of indemnity depends is the happening of loss.

Insurance contracts:

All contracts of insurance except life insurance contracts are contracts of indemnity.

Mode of contract of indemnity:

A contract of indemnity may be express or implied.

(a) A contract of indemnity is said to be express when a person expressly promises

i.e. in writing or oral to compensate the other person from loss.

(b) A contract of indemnity is said to be implied when it is to be inferred from the

relationship between the parties or from the circumstances of a particular case.
Further, duty to indemnify may also be annexed by operation of law.

Definition of contract of indemnity is not exhaustive but very restrictive:

The definition of contract of indemnity as given in Section 124 is not exhaustive

because it covers only:

a) express promise to indemnify, and

b) Loss arising from the conduct of the indemnifier himself or from the conduct of any
other person.

But it does not include:

a) implied promise to indemnify, and

b) Loss arising from events or accidents which do not depend upon the conduct of
human beings.

However, the definition of a contract of indemnity given in English Law is an

exhaustive one. In English Law, a contract of indemnity includes a promise to save
another person from loss resulting not only from the conduct of the promisor or third
person but also from loss caused by events or accidents which do not depend upon
the conduct of human beings.

Therefore, the courts in India have decided to follow the provisions of the English
Law relating to indemnity whereby the losses caused by events or accidents are also
covered under the contract of indemnity. [Gajanan Moreshwar Parelkar v.
Moreshwar Madan Mantri]

Time of commencement of the indemnifier’s liability:

The Indian Contract Act is silent on this point. On the basis of judicial
pronouncement of courts, it can be said that the liability of an indemnifier
commences as soon as the liability of the indemnity holder arises and becomes
absolute and certain. That is, it is not necessary that the indemnified party must first
make the payment and only thereafter he may claim the repayment and
reimbursement from the indemnifier. The contract of indemnity requires that the
party to be indemnified should never be called upon to make the payment out of his
own sources, at any stage.

In other words, the indemnity holder can compel the indemnifier to make good his
loss even before he actually discharges his liability, provided his liability has become
absolute.

Rights of indemnity holder when sued (Section 125):

The indemnity holder acting within the scope of his authority is entitled to recover the
following from the indemnifier:

i. Damages

ii. Costs

iii. Sums paid in compromise

i. Damages: All damages which he is compelled to pay to another party in a suit to

which contract of indemnity is applicable.

ii. Costs: All costs which he is compelled to pay in bringing or defending such suit
provided he did not contravene the orders of the indemnifier and acted prudently in
the absence of any contract of indemnity or he acted under the authority of the
indemnifier.

iii. Sums paid in compromise: All sums which he has paid to another party under the
terms of a compromise of such suit provided the compromise was not contrary to the
orders of the indemnifier and was prudent or was authorized by the indemnifier.