CONTRACT OF INDEMNITY
Contract of indemnity meaning
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
promissory himself, or by the conduct of any other person, is called a contract of indemnity.”
Example
P contracts to indemnify Q against the consequences of any proceedings which R may take
against Q in respect of a certain sum of money.
Contract of indemnity defined
A contract by which one party promises to save the other from loss caused to him by the contract
of the promise himself, or by the conduct of any other person, is called a “contract of indemnity.”
Example
A contracts to indemnify B against the consequences of any proceeding which C may take
against B in respect of a certain sum of 200 rupees.
Objective of Contract of Indemnity
The objective of entering into a contract of indemnity is to protect the promise against
unanticipated losses.
Parties to the Contract of Indemnity
A contract of indemnity has two parties
1. The promissory or indemnifier: He is the person who promises to bear the loss.
2. The promissory or the indemnified or indemnity holder.
The promissory or indemnifier: He is the person who promises to bear the loss.
The promise or the indemnified 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 promissory as he promises to bear the loss of Q.
Q is the promise or the indemnified or indemnity holder as his loss is covered by P.
Essentials of Contract of Indemnity
1. Parties to a Contract
There must be two parties, namely, promissory or indemnifier and the promise or
indemnified or indemnity holder.
2. Protection of Loss
A contract of indemnity is entered into for the purpose of protecting the promise from the
loss. The loss may be caused due to the conduct of the promissory 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 circumstance 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 of Indemnity, there is only one contract that
is between the Indemnifier and the Indemnified.
Rights of promise/ the Indemnified/ Indemnity holder
As per section 125 of the Indian contract Act, 1872 the following rights are available to the
promise/ the indemnified / indemnity holder against the promissory/ 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 promissory, and acted as it would have been prudent for him to act in the
absence of any contract of indemnity, or if the promissory 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 promissory, and was one which it would have been
prudent for the promise to make in the absence of any contract of indemnity, or if the
promissory authorized him to compromise the suit.
Commencement of liability of Promissory/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 promissory 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.
Indemnity as per Indian Contract Act, 1872
Indemnity literally means,
1. Payment for damage, a guarantee against losses.
2. A bond protecting the insured against losses caused by others failing to fulfill their
obligation.
3. The granting of exemption from prosecution.
4. An option to buy or sell a specific quantity of stock at a stated price within a given period
of time.
It is entered into with the object of protecting the promises against anticipated loss. The
contingency upon which the whole contract of indemnity depends is the happening of loss.
According to Section 124 of Indian contract Act, 1872, a contract of indemnity means “ a
contract by which one party promises to save the other from loss caused to him by the conduct of
the promissory himself or by the conduct of any other person.” This provision incorporates a
contract where one party promises to save the other from loss which may be caused, either
i. By the conduct of the promissory himself.
ii. By the conduct of any other person.
Rights of indemnity holder
In a suit against the indemnity holder, he may have been compelled to pay damages, and incurred
costs, etc.. in his own turn, he can bring an action against the promissory (indemnifier) to recover
damages and costs, etc.. paid by him, if the indemnifier has promised an indemnity in such a
case. The provision in this regard is contained in Section 125, which reads as under:
124. Rights of indemnity holder
The promise in a contract of indemnity, acting within the scope of his authority, is entitled to
recover from the promissory:-
1. All damages which he may be compelled to pay in any suit in respect of any matter to which
the promise to indemnify applies;
2. All costs which he may be compelled to pay in any such suit, if in brining of defending it, he
did not contravene the order of the promissory, and acted as it would have been prudent for
him to act in the absence of any contract of indemnity, or if the promissory authorized him to
bring or defend the suit;
3. All sums which he may have paid under the terms of any compromise of any such suit, if e
compromise was not contract to the orders of the promissory, and was one which it would
have been prudent for the promise to make in the absence of any contract of indemnity, or if
the promissory authorized him to compromise the suit.
The indemnity holder , acting within the scope of his authority, is entitled to recover the
following amounts:-
A person who enchases an indemnity bond which is in nature of a bank guarantee can retain
only that part of the amount of bond which represents the damages or loss suffered by the bond
holder as a result of the contracting party’s breach. Anything more would be undeserved
windfall for one party and penalty of the other.
Rights and Duties of indemnifier
Rights of the indemnifier
The rights of the indemnity holder are the duties of indemnifier and the indemnity holder are the
rights of the indemnifier. There are not prescribed any specific rights of the indemnifier either in
Nepalese law or in Indian law. However, he is not liable for indemnity.
a. If indemnity holder act negligently.
b. If indemnity holder is acting with the intention of causing any loss or damage.
c. If he is acting against the instructions of the other party.
Duties of indemnifier
The duties of an indemnifier arise in the following circumstance:-
There must be a loss in accordance with the contract to make the indemnifier liable.
There must be an occurrence of the anticipated event. Without any occurrence of the
prescribed event, there is no indemnity by the indemnifier.
Where the right of indemnity is used by the indemnity holder prudently and instruction of
the indemnifier is not contravened or when there is no breach of contract.
If the costs demanded by the indemnifier are not caused by negligence, haphazard
behavior.
Commencement of liability
When can indemnifier be made liable? Can he claim to be indemnified before he is demnified?
There has been a controversy regarding the point, as to whether the indemnifier can be asked to
be indemnify before the indemnify before the indemnity holder has actually suffered the loss, or
his liability arises only after the loss has been suffered by the indemnity holder.