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.

Types of Indemnity

 Broad Indemnification. The Promisor promises to indemnify the Promisee against the
negligence of all parties, including third parties, even if the third party is solely at fault.

 Intermediate Indemnification.

 Limited Indemnification.

Nature of Contract of Indemnity

Contracts of insurance, indemnity and guarantee are contingent in nature. A contingent contract
is a contract to do or not to do something, if some event, collateral to such contract, does or does
not happen.

Contracts of guarantee and contracts of indemnity perform similar commercial functions in

providing compensation to the creditor for the failure of a third party to perform his obligation. A
contract of indemnity is an agreement to be liable for the acts of another and one of its essential
features is that it exists only between two parties and no other party is relevant to the subject
matter of the contract. This is the primary difference between a contract of indemnity and
contract of guarantee.

Under indemnity, the indemnifier undertakes an independent obligation to discharge the liability
in any event and makes himself primarily liable voluntarily.

All contacts of insurance are contracts of indemnity except life insurance but it is not the same
vice versa. Life insurance requires payment of premium during one’s lifetime and in return the
person shall receive the reimbursement at the time of death or maturity. Since the existence of a
quantified loss is absent, which is an essential for a contract of indemnity, life insurance does not
categorize under indemnity contracts.

New India Assurance Co. Ltd v. State Trading Corporation of Indian states as follows,

“Almost all insurance other than life and personal accident insurance are contracts of indemnity.
The insurer’s promise to indemnify is an absolute one.”

The obligation of the liability may arise out of legal or equitable duty to indemnify in a particular
set of circumstances. Indemnity can also be a useful remedy in cases of innocent
misrepresentation. A third party cannot sue the indemnifier based on the principle of privity of
contract as was held in National Petroleum Company v. Popat Lal Mulji in the High Court of
Bombay.

A number of changes have been made within the concept of indemnity in contracts, in spite of
which it still has a rather restricted scope and does not serve its purpose as well as it should. The
Law Commission of India has submitted in its reports in the past, their concerns about the
enforcement of this Act. Their recommendations for improvement have now been successfully
added in the Act. The definition provided under the Indian Contract Act is not inclusive of many
circumstances and leaves room for interpretation, which may lead to ambiguity and confusion.
Extent of liability in Contract of Indemnity

Section 125 lays down the extent of liability or the rights available to the indemnity-holder. The
promisor shall be liable in any event whether or not the promisee makes default.

The promisee is entitled to recover damages that he was compelled to pay in a suit for which he
was being indemnified-

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 suit if, in bringing or defending it, he
did not contravene the orders of the promisor and acted as it would have been prudent for
him to act in the absence of any contact of indemnity, or if the promisor authorized him
to bring or defend the suit.

A prime example would be the case of Adamson v. Jarvis where the court held that since the
plaintiff acted according to the defendant’s instructions and incurred a loss because of the same,
the plaintiff was entitled to compensation.

3. 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 promisor and was one which it
would have been prudent for the promisee to make in the absence of any contract of
indemnity, or if the promisor authorized him to compromise the suit.

Conclusion

Despite the many provisions in the Indian Contract Act. 1872, it still equivocal when it comes to
rights of the indemnifier. Nevertheless, the absence of such a provision does not take away from
the promisor. Those rights are based on natural equity and general application and are a crucial
part of the law of indemnity. From Jaswant Singh v. Section of State, it can be understood that
the indemnifier is to the indemnified the same way a creditor is to the debtor, i.e, the indemnified
is entitled to the securities of the indemnity-holder just as the creditor is against his principal
debtor. It was held that the rights of the indemnifier are similar to rights of surety, surety is
entitlement to the perks of all securities that the creditor has.  It would be fair to conclude that the
application of the term indemnity is broad and narrow at the same time. The english definition of
indemnity is wide enough to include a promise of indemnity against loss arising from any cause
whatsoever but the definition according to the Indian Contract Act is narrower in comparison.
The Indian Law on contractual indemnities has in some respects diverged from the English law
and followed its own path. Such differences are, however, greatly outweighed by their
similarities.