Contract of Indemnity: Meaning and Examples

The term "indemnity" means literally "protection against loss." In an indemnity contract, one party is the indemnifier, while the other party promises to indemnify the indemnifier, i.e., seek indemnity for the damage caused to the other party. Indemnity is a promise to protect a person who is not at fault from the consequences of an act.

Contract of Indemnity

An indemnity contract also covers damages caused by factors other than humans, such as fires and other natural disasters. A contract of indemnity is defined under Section 124 of the Indian Contract Act of 1872 as −

"A contract in which one party promises to protect the other from damage caused by the promisor's or any other person's conduct."

In other words, a contract of indemnity involves one party promising to pay the other party for its losses. These losses may arise as a result of the other party's or somebody else's conduct. To indemnify anything means to make up for a loss. In other words, one side will compensate the other in the event that it suffers losses.

For example, A promises to provide certain goods to B on a monthly basis for Rs. 2,000. C arrives and promises to pay B's losses if A fails to deliver the goods. This is how B and C will enter into contractual indemnity obligations.

Essentials of the Contract of Indemnity

Following are the major essentials of contract of indemnity −

• Parties to a contract − There must be two parties the promisee or indemnified or indemnity-holder and the promisor or indemnifier.

• Protection of Loss − A contract of indemnity is entered into in order to protect the promisee from loss. The loss might be caused by the promisor's or the other person's conduct.

• Express or Implied − The contract of indemnity might be express (spoken or written) or implied (i.e., inferred from the conduct of the parties or the circumstances of the particular case).

• Essentials of a Valid Contract − A contract of indemnity is a type of contract. The principles of general contract law set down in Sections 1 to 75 of the Indian Contract Act of 1872 apply to them. As a result, it must fulfill all of the criteria of a valid contract.

• Number of Contracts − There is just one contract in an indemnity contract, and it is between the indemnifier and the indemnified.

Nature of the Contract of Indemnity

An indemnification contract may be explicit or implied, depending on the circumstances. The Indian Contract Act also addresses special circumstances of implied indemnity.

• Section 69 defines indemnification as the payment of money that another person is legally obligated to make.

• Section 145 grants a surety the right to seek compensation from the principal debtor for any sums legally paid towards the guarantee.

• Section 222 requires the principal to indemnify the agent for any amounts paid in the proper exercise of his authority.

• Section 125 of the Act states just the rights of the indemnified and says nothing concerning the rights of the indemnifier, as though the indemnifier had no rights and only a duty to the indemnified.

• If we read Section 141, which deals with surety rights, we can easily deduce that the indemnifier's right is the same as that of the surety in the current logical state of affairs.

Rights Of Promisee/The Indemnified/Indemnity Holder

According to Section 125 of the Indian Contract Act, 1872, the promisee or indemnified party has the following rights against the promisor or indemnifier, provided he acted within the scope of his authority −

• Right to Recover Damages Paid in a Suit [Section 125(1)] − An indemnity-holder has the right to recover from the indemnifier all damages that he may be forced to pay in any suit relating to any issue to which the indemnity contract applies.

• 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 incurred in any such suit if, in bringing or defending it, he did not violate the orders of the promisor and acted as it would have been prudent for him to act in the absence of any indemnity contract, or if the promisor authorised him to bring or defend the suit.

• Right to Recover Sums Paid Under Compromise [Section 125(3)] − An indemnity-holder may also recover from the indemnifier any sums 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 the promisee would have made in the absence of any contract of indemnity or if the promisor authorised him to compromise the suit.

• Right to sue for specific performance − If the indemnity holder has incurred absolute liability and the contract covers such liability, he may sue for specific performance.

Case Law

• Bihal Chandra v. Chattur Sen, AIR 1967, All 506 − when the seller promised to indemnify the purchaser against any dues, it was decided that such an indemnity clause would include only then-existing dues and not those subsequently imposed, even if retrospectively.

• In Osman Jamal & Sons Ltd v. Gopal Purushottam, 1928 ILR 56 Cal 262, the court held that indemnity is not always given by repayment after payment. Indemnity requires that the party being indemnified never be required to pay.

Conclusion

An indemnification agreement makes one party liable for any harm or expense suffered by the other party as a result of the activities of the promisor or the other party. Because the law prohibits people from transferring their duties or attempting to avoid liability, a simple indemnification provision in a contract does not necessarily address liability issues.

Frequently Asked Questions (FAQ)

Q1. What is an indemnity contract and why is it important?

Ans. Protection against loss or damage is provided by indemnification. When a contract is breached, the parties look to the indemnity provision to determine the compensation owed by the nonperformer to the injured party. The objective is to put the damaged party back where they would have been if the nonperformance had not occurred.

Q2. What is the principle of contract indemnity?

Ans. According to the Principle of Indemnity, the insured should be compensated appropriately for losses caused to the goods by the insurer, but only to the extent that the insurer does not profit from the loss that occurred.

Q3. What are the two elements of a contract of indemnity?

Ans. It is provided for under Section 124 of the Indian Contract Act of 1872. In an indemnity contract, there are two parties: the indemnifier (who promises to pay for the damages) and the indemnity holder (in whose favor such a promise is made).

Q4. Is a contract of indemnity voidable?

Ans. If the contract is deemed void ab initio, the obligations fulfilled must likewise be compensated. As a result, the costs of indemnity arise from the claimant's (transient and performed) obligations rather than a breach of obligation by the defendant.