Q2. Define contract of indemnity. Describe the rights of the indemnifier and the indemnity holder.

Meaning of indemnity
Secs.124 and 125 provide for a contract of indemnity. Sec.124 provides that a contract of indemnity is a contract whereby one party promises to save the other from loss caused to him (the promisee) by the conduct of the promisor himself or by the conduct of any other person. A contract of insurance is a glaring example of such type of contracts. A contract of indemnity may arise either by (i) an express promise or (ii) operation of law, e.g., the duty of a principal to indemnify an agent from consequences of all lawful acts done by him as an agent. The contract of indemnity, like any other contract, must have all the essentials of a valid contract. These are two parties in a contraction of identity indemnifier and indemnified. The indemnifier promises to make good the loss of the indemnified (i.e., the promisee). 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 Rs 200. This is a contract of indemnity.

Rights of the indemnified (i.e., the indemnity holder)

He is entitled to recover from the promisor: (i) All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies; (ii) All costs of suit which he may have to pay to such third party, provided in bringing or defending the suit (a) he acted under the authority of the indemnifier or (b) if he did not act in contravention of orders of the indemnifier and in such a way as a prudent man would act in his own case; (iii) All sums which may have been paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the indemnifier and was one which it would have been prudent for the promisee to make.

Rights of the indemnifier

The Act makes no mention of the rights of indemnifier. However, his rights, in such cases, are similar to the rights of a surety under Sec.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.

Commencement of indemnifiers liability

Indemnity requires that the party to be indemnified shall never be called upon to pay. Indemnity is not necessarily given by repayment after payment. The indemnified may compel the indemnifier to place him in a position to meet liability that may be cast upon him without waiting until the promisee (indemnified) has actually discharged it. Distinction between a contract of guarantee and a contract of indemnity. L.C. Mather in his book Securities Acceptable to the Lending Banker has very briefly, but excellently, brought out the distinction between indemnity and guarantee by the following illustration. A contract in which A says to B, If you lend 20 to C, I will see that your money comes back is an indemnity. On the other hand undertaking in these words, If you lend 20 to C and he does not pay you, I will is a guarantee. Thus, in a contract of indemnity, there are only two parties, indemnifier and indemnified. In case of a guarantee, on the other hand, there are three parties, the principal debtor, the creditor and the surety. Other points of difference are: 1. The liability of a promisor is primary and independent in a contract of indemnity. In a contract of guarantee, the liability of the surety is secondary, the primary liability being that of the principal debtor. 2. In the case of guarantee, there is an existing debt or obligation, the performance of which is guaranteed by the surety. In case of indemnity the possibility of any loss happening is a contingency against which the indemnifier undertakes to indemnify. 3. In a contract of guarantee, after discharging the debt, the surety is entitled to proceed against the principal debtor in his own name while in case of indemnity, the indemnifier cannot proceed against third parties in his own name, unless there is an assignment in his favour.