Contract of Indemnity: Meaning & Features (Indian Contract Act)

Indemnity means security against losses. When two parties come together to commence a business, the main intention for both parties to formally enter into a contract is to be shielded from any type of probable loss or damage due to the uncertainty of the business. Contract of Indemnity relates to such special circumstances, where it establishes the duties and rights of the parties in a contract in the event of any uncertainty. Contract of Indemnity establishes that one party will pay the other party to the contract in case of any losses or an unprecedented and uncertain event. The Indian Contract Act, 1872, contains provisions related to the Contract of Indemnity under Section 124.

Geeky Takeaways:

• Indemnity means security against loss, or it can also be referred to as making good the loss. Indemnity protects a party from losing money or being affected by uncertainty.
• In an indemnity contract, one party pays another for possible losses or damage.
• The main objective is to get the party that was compensated back to where it was financially before.
• Insurance contracts are a classical example of a Contract of Indemnity.

Contract of Indemnity

Section 124 of the Indian Contract Act 1872 contains the definition of a contract of indemnity which states, “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 a contract of indemnity.”.

There are two parties in a Contract of Indemnity:

Party 1- Indemnifier: An indemnifier is the person who promises to protect or save the other party from any loss or damage.

Party 2- Indemnity Holder: The indemnity holder is the person to whom the promise to save or protect from any loss or damage is made.

For example, Aman may agree to indemnify Rahul for any loss or damage that may occur if a tree on Rahul’s neighboring property blows over. If the tree then blows over and damages Rahul’s fence, Aman will be liable for the cost of fixing the fence.

For example, Aman may contract to indemnify Bhavesh against the consequences of any proceedings that Chinu may take against Bhavesh in respect of a sum of ₹ 5,000/-  advanced by Chinu to Bhavesh. In consequence, when Bhavesh, who is called upon to pay the sum of money to Chinu, fails to do so, Chinu will be able to recover the amount from Aman as provided in Section 124.

Features of Contract of Indemnity

1. Parties to the Contract: In a contract of indemnity, there must be two parties to the contract, which are the indemnifier and the indemnity holder. In no case may the indemnifier and indemnity holder be the same person.

2. Presence of All Essential Elements: In order to constitute a valid contract of indemnity, it is important that all the essential elements of a valid contract be present in the contract; for example, there should be free consent, the contract must be for a legal subject matter, etc.

3. Written or Implied: The contract of indemnity can either be express (i.e., a contract that is made by words, either spoken or written) or implied (i.e., a contract made by the conduct of the party or by the circumstances of the case).

4. Promise to Indemnify: A contract of indemnity is created only for the purpose of protecting or saving one of the parties to the contract from loss or damage as agreed. It is important that one party promise the other party to save from the losses; the promise to save from the losses is the subject matter of the contract of indemnity.

5. Only One Contract: In a contract of indemnity, there exists only one contract, viz., the contract between the indemnity holder and the indemnifier.

Rights of an Indemnity Holder

As per the provision of Section 125 of the Indian Contract Act 1872, when the promisee of the contract of indemnity acts within the scope of his authority as vested by the Indian Contract Act, he shall have the following rights:

1. Recover Damages Paid in a Suit: The indemnity-holder can seek compensation from the promisor, i.e., the indemnifier, for any damages incurred during a lawsuit related to the indemnity contract.

2. Recover Costs Incurred in Defending a Suit: An indemnity-holder can recover costs from the indemnifier if they followed the promisor’s orders and acted prudently in the absence of an indemnity contract, or if the promisor authorized them to bring or defend the suit.

3. Sue for Specific Performance: The indemnity bearer has the right to sue for particular performance if he has incurred absolute liability and the contract protects such obligation.

4. Recover Sums Paid under Compromise: An indemnity-holder also has the right to recover all sums that he might have paid under the conditions of any compromise of the aforementioned suit from the indemnifier, if the agreement reached was not in contrast to the orders of the indemnifier and was one which it would have been prudent for the indemnity holder to make in the general practice.

Liabilities under Contract of Indemnity

It is interesting to note that the Indian Contract Act 1872 has not provided for the time of commencement of liability for indemnifiers. However, while referring to several landmark judgments and referring to major judicial pronouncements, it can be established that the liability of an indemnifier begins as and when the liability of the indemnity holder becomes absolute and certain. This proposition has been observed by the courts in several cases.

For example, Prateek promises to compensate Anuv for any loss that he may suffer by filing a suit against Atif. The court orders Prateek to pay Atif damages of ₹5,000. As the loss has become certain, Prateek may claim the amount of the loss from Anuv and pass it on to Atif.

Conclusion

Indemnity means security against losses. When two parties come together to commence a business, the main intention for both parties to formally enter into a contract is to be shielded from any type of probable loss or damage due to the uncertainty of the business. A contract of indemnity establishes that one party will pay the other party to the contract in case of any losses or an unprecedented and uncertain event. The Indian Contract Act, 1872, contains provisions related to the Contract of Indemnity under Sections 124. The indemnity contract can either be implied or express and it is important that one party should promise the other party to indemnify from losses. The act also discusses the rights of the indemnity holder. The contract act also establishes that the liability of an indemnifier commences as and when the liability of the indemnity holder becomes absolute and certain.

Contract of Indemnity- FAQs

What is a Contract of Indemnity?

As per 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 a contract of indemnity.”.

Can a Contract of Indemnity be made for an unlawful act?

No, a contract of indemnity cannot be made for an unlawful act, as it is important that all the essential elements required to constitute a valid contract are present in a contract of indemnity.

What is the scope of the loss that the Contract of Indemnity covers?

A contract of indemnity covers only two types of losses: those caused by the conduct of the promisor or those caused by the conduct of any other person. It is worth noting that any loss caused by an act of God or any natural event is not covered under the contract of indemnity.

Is life insurance also a Contract of Indemnity?

No, life insurance is not a contract of indemnity. As under life insurance, the indemnifier does not promise to indemnify for death; rather, he promises to pay a certain agreed-upon sum in such an event.

State the difference between a Contract of Indemnity and a Contract of Guarantee.

The purpose of a contract of indemnity is to get compensated for losses caused by any event. However, the purpose of the contract of guarantee is to get assurance that the performance of the contract will be done.