Contract of Indemnity

What is Contract of Indemnity ?


Meaning and Definition of Contract of Indemnity [Section 124]

"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". A contract of indemnity is really a part of the general class of contingent contracts'. It is entered into with the object of protecting the promisee against anticipated loss. The contingency upon which the whole contract of indemnity depends is the happening of loss.

The person who promises to make good the loss is called the "Indemnifier" (promisor), and the person whose loss is to be made good is called the "Indemnified or Indemnity-holder' (promisee). 

For example, Mr. Ram promised to indemnify Mr. Shyam against consequences of any proceeding. which Mr. X may take against Mr. Ram in respect of a certain sum of ₹200. This is contract Indemnity. Mr. Ram is an indemnifier or promise while Mr. Shyam is an indemnity-holder promise.

Nature of Contract of Indemnity


A contract of indemnity may be express or implied depending upon the circumstances of the cue though Section 124 of the Indian Contract Act does not seem to cover the case of implied indemnity.

A broker in possession of a government promissory note endorsed it to a bank with forged endorsement. The bank acting in good faith applied for and got a renewed promissory note from the Public Debt Office. Meanwhile the true owner sued the Secretary of State for conversion who in turn sued the bank on an implied indemnity. It was held that it is general principle of law when an act is done by one person at the request of another which act is not in itself manifestly tortious to the knowledge of the person doing it, and such act turns to be injurious to the rights of a third person, the person doing it is entitled to an indemnity from him who requested that it should be done.

The Indian Contract Act also deals with special casus of implied indemnity:

1) U/s 69 if a person who is interested in payment of money which another is bound by law to pay and therefore pays it, he is entitled to be indemnified. For example, if a tenant pays certain electricity bill to be paid by the owner, he is entitled to be indemnified by the owner.

2) Section 145 provides for right of a surety to claim indemnity from the principal debtor for all sums which he has rightfully paid towards the guarantee.

3) Section 222 provides for liability of the principal to indemnify the agent in respect of all amounts paid by him during the lawful exercise of his authority.

The plaintiff, an auctioneer, acting on the instruction of the defendant sold certain cattle which subsequently turned out to belong to someone else other than the defendant. When the true owner sued the auctioneer for conversion, the auctioneer in turn sued the defendant for indemnity. The Court held that the plaintiff having acted on the request of the defendant was entitled to assume that, if it would turned out to be wrongful, he would be indemnified by the defendant.

Essential Elements of Contract of Indemnity


All the essentials of a valid contract must also be present in the contract of indemnity. The contract of Indemnity is possible by the express or implied manner. It is a class of contingent contract. Following are the essential elements of the indemnity contract:

1) Loss to One Party: 
A person can indemnify another person, only if such other person incurs some loss or is about to incur soma loss. Therefore, a contract of indemnity can be performed only when the loss has incurred to the promisee or the loss to the promisee has become certain.

2) Indemnity by the Promisor: 
The purpose of the contract of indemnity is to protect the indemnity holder from any loss that may be caused to the indemnity holder in future (i.e., such a loss has not already been caused to the indemnity holder).

3) Reason for Loss: 
The contract of indemnity may specify that the indemnity holder shall be protected from the loss caused due to the action of the promisor, or the action of any other person or any act, event or accident, which is not in the control of the parties.

Rights of Indemnified (Indemnity-Holder) [Section 125]


The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor:

1) Damages: 
An indemnity-holder when sued is entitled 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 promise to indemnify applies.

2) Costs: 
All costs which he may be compelled to pay in any such suit in instituting or defending it provided the indemnity-holder had not contravened the orders of the promisor and acted prudently or provided the promisor authorized him to bring the suit.

3) All Sums under the Terms of any Compromise of any Suit: 
All sums which he may have paid under the terms of any compromise of any suit. The compromise must not be contrary to the orders of the promisor or it must be authorized by the promisor and must be one which would be prudent for the promises to make.

4) Suit for Specific Performance: 
Besides the above rights, an indemnity-holder can sue for specific performance of the contract of indemnity if he incurs absolute liability which is covered by the contract of indemnity.

Rights of Indemnifier


The Act makes no mention of the rights of an Indemnifier. It has been held [Jaswant Singhji versus Section of State 14 Bombay 299] that his rights, in such cases, are similar to the rights of a surely under Section 141, viz., he becomes entitled to the benefit of all the securities which the creditor has against the principal debtor whether he was aware of them or not. Section 141 gives to the indemnifier the following rights:

1) Right to subrogation:
Subrogation is the right of the indemnifier to step into the shoes of the indemnitee after indemnification, enabling the indemnifier to pursue any available remedies or rights the indemnitee may have against third parties.

2) Notification Rights: 
The indemnifier typically has the right to be promptly notified by the indemnitee of any potential claim or circumstance that may give rise to a claim for indemnification. Timely notification is crucial for the indemnifier to exercise its rights effectively.

3) Right to refuse indemnity:
The indemnifier often has the right to control the defense of any claims or legal actions related to the indemnified matters. This includes the right to choose legal counsel and make decisions regarding the settlement of claims.

4) Right to Settle: 
In many cases, the indemnifier has the right to settle a claim or legal action on behalf of the indemnitee. This can be subject to certain conditions and limitations as specified in the indemnity agreement.

5) Right to Investigate: 
The indemnifier usually has the right to investigate and assess the validity of any claims or liabilities for which indemnification is sought. This may involve gathering information, conducting negotiations, and making decisions based on the findings.

6) Right to Recover Costs: 
If the indemnifier incurs costs in defending or settling a claim, it may have the right to recover those costs from the indemnitee, especially if the indemnity agreement allows for such recovery.