The term Indemnity literally means “Security against loss”. In a contract of indemnity one party – i.e., the indemnifier promises to compensate the other party i.e., the indemnified against the loss suffered by the other.

The English law definition of a contract of indemnity is – “it is a promise to save a person harmless from the consequences of an act.” The promise may be express or it may be implied under English law.

A contract of indemnity is a direct engagement between two parties whereby one promises to save another from harm. According to section 124 of the Indian Contract Act, 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 promisor himself or by the conduct of any other person.”

DEFINITION

As provisions made in section 124 of the Indian Contract Act 1872 say that “whenever 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.”

PARTIES TO THE CONTRACT OF INDEMNITY

Indemnifier: The person who promises to make good the loss is called the ‘indemnifier’. In the aforesaid example, A is the Indemnifier.

Indemnity holder: The person whose loss is to be made good is called the ‘Indemnity holder’. In the aforesaid example, B is the Indemnity holder.

ESSENTIALS OF CONTRACT OF INDEMNITY

1. PARTIES TO A CONTRACT:  There must be two parties, namely, the promisor or indemnifier and the promisee or indemnified or indemnity-holder.
2. PROTECTION OF LOSS: A contract of indemnity is entered into for the purpose of protecting the promisee from the loss. The loss may be caused by the conduct of the promisor or any other person.
3. EXPRESS OR IMPLIED: The contract of indemnity may be expressed (i.e. made by words spoken or written) or implied (i.e. inferred from the conduct of the parties or circumstances 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 Sections 1 to 75 of the Indian Contract Act, 1872 are applicable to them. Therefore, it must possess all the essentials of a valid contract.
5. NUMBER OF CONTRACTS: In a contract of Indemnity, there is only one contract that is between the Indemnifier and the Indemnified.

RIGHTS OF INDEMNITY HOLDER
l. 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 bringing or defending such suit, if, 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 contract of indemnity or if the promisor 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 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 the absence of any contract of indemnity or if the promisor authorized him to compromise the suit.

RIGHTS OF INDEMNIFIER

The act makes no mention of the rights of the indemnifier. It has been held, however, that his rights of a surety, under Sec. 141 of the Indian contract Act. That is the rights of the promisor are virtually the same as those of the surety in a contract of guarantee.

• The indemnifier has the right to recover all the damages that he has paid on behalf of the indemnity holder, in respect of any matter to which the contract of indemnity applies.
• The indemnifier has the right to recover all the costs that he has incurred in bringing or defending any suit, if he has acted with the consent of the indemnity holder, or if the contract of indemnity gives him the authority to do so.
• The indemnifier has the right to recover all the sums that he has paid under the terms of any compromise of any suit, if the compromise was not contrary to the orders of the indemnity holder, and was prudent, or if the indemnity holder authorized him to compromise the suit.
• The indemnifier has the right to enjoy the benefit of any security that the indemnity holder has against any third party, in respect of the liability against which the indemnifier has given the indemnity. The indemnifier can sue the third party in the name of the indemnity holder, if necessary, to enforce the security.

Duties of Indemnity Holder

Except as otherwise stated in the contract, the indemnifier shall not be liable for damages under the following circumstances. He is also called the duty of indemnity-holder.

1. Duty to Act Prudently: – Except as otherwise stated in the contract, the indemnifier shall not be indemnified for the loss caused by the negligence of the indemnity holder. In other words, it is the duty of the indemnity-holder to act prudently.
2. Duty not to cause any harm or loss: – If the indemnity-holder acts with the intention of causing any loss or damage, the indemnifier shall not be liable for such loss. In other words, it is the duty of the indemnity or holder not to cause harm.
3. Duty to comply with the intentions of the Indemnifier: – If the indemnity-holder acts against the instructions of the other party or the promisor, the indemnifier shall not be liable for such damages as the indemnity-holder goes beyond the instructions given by the Indemnifier. In other words, it is the duty of the indemnity-holder to follow the intent of the promoter.

Duties of Indemnifier

The duties of an indemnifier arise in the following circumstances:

1. There must be a loss in accordance with the contract to make the indemnifier liable.
2. There must be an occurrence of the anticipated event. Without any occurrence of the prescribed event, there is no indemnity by the indemnifier.
3. Where the right of indemnity is used prudently by the indemnity-holder and the instruction of the indemnifier is not contravened or when there is no breach of contract.
4. If the costs demanded by the indemnifier are not caused by negligence or haphazard behaviour.

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.
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.

Commencement of liability of the indemnifier

After providing the promise of indemnifying losses, when does the indemnifier become liable to pay? And under what circumstances can the indemnity holder be entitled to recover the promised indemnity.

According to the original English Rule, the maxim of law was “you must be damnified before you claim to be indemnified”, which means that only if you have suffered an injury can you claim indemnity. However, the law has transformed over the years. In present times, the indemnifier shall not wait for the indemnity holder to claim the reimbursement; he shall make it as soon as the liability occurs.