Contract of Indemnity: Essentials, Rights

  • Post last modified:10 January 2022
  • Reading time:7 mins read

What is Contract of Indemnity?

Indemnity literally means making good the loss or compensating a person for any loss. “A contract of indemnity is a contract by which one party promises to save the other from the loss caused to him by the conduct of the promisor himself or by the conduct of any other person.” (Section 124). The person who promises to make good the loss is called the ‘indemnifier’ and the person to whom the promise is made, i.e., whose loss is to be made good is called the ‘indemnified’ or the ‘indemnity-holder’.

Examples

  1. A parked his scooter at the college scooter stand. He lost his token given by the scooter stand contractor. The scooter stand contractor refuses to return the scooter to A unless he (A) gives him an indemnity bond against any loss which he may suffer if any other person claims the scooter from the contractor.

  2. A and B two friends went to a shop. A says to the shopkeeper. “Let B, have the goods; I shall see you are paid.” It is a contract of indemnity. In the first example A is the ‘indemnifier’ and the scooter stand contractor the ‘indemnified’ or ‘indemnity-holder’.

  3. Definition given in Section 124 is very narrow. It includes only
    1. express promises to indemnify, and (ii) the loss caused by the conduct of the promisor or any other person. However, it does not include (i) implied promises to indemnify.

      Loss caused by accidents and events not dependent upon the conduct of the promisor or any other person. However, the above definition of indemnity restricts the scope of contracts of indemnity in as much as it covers only the loss caused:

Thus, loss occasioned by the conduct of the promise, or accident, or an act of God is not covered. Therefore, strictly speaking, contracts of insurance cannot be included in the definition.

However, it was not the intention of the legislature as it has been held by Justice M. C. Chagla that “Sections 124 and 125 of the Contract Act are not exhaustive of the law of indemnity and the Courts here would apply the same equitable principles that the Courts in England do.” [Gajanan Moreshwar v. Moreshwar Madan (1942) Born. 302-4].

English Law has given a comprehensive definition which is as follows: “A promise to save another harmless from loss caused as a result of a transaction entered into at the instance of the promisor.” From the above definition, it would be seen that it covers the loss caused by accidents and events not depending upon the conduct of any person.

Thus it is much wider in its scope and as such Indian Courts apply the definition given by English Law to Indian cases. A contract of indemnity may be (i) express, or (ii) implied. An implied indemnity may be inferred from the conduct of the parties or the circumstances of the case.

It has been held in the number of cases that an indemnity may also arise by operation of law. Even Section 69 of the Act (already discussed earlier under quasi-contracts) implies a duty to indemnify in case a person, who is interested in the payment of money which another is bound by law to pay, has paid the amount.

Example: A broker forged the signature of the holder of a Promissory Note and endorsed it to the Bank of India. The Bank sent the note for renewal to the Government. The holder filed a suit against the Government and recovered damages. The Government in turn sued the Bank on the basis of an implied contract of indemnity.


Essentials of Contract of Indemnity

These are the essentials of contract of indemnity which are given below:

  1. Parties to a Contract
  2. Protection of Loss
  3. Express or Implied
  4. Essentials of a Valid Contract
  5. Number of Contracts

Parties to a Contract

Parties to a Contract: There must be two parties, namely, promisor or indemnifier and the promisee or indemnified or indemnity-holder.

Protection of Loss

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 due to the conduct of the promisor or any other person.

Express or Implied

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 circumstances of the particular case).

Essentials of a Valid Contract

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

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

As per Section 125 of the Indian Contract Act, 1872 the following rights are available to the promisee/ the indemnified/ indemnity– holder against the promisor/ indemnifier, provided he has acted within the scope of his authority:

  1. Right to Recover Damages Paid in a Suit [section 125(1)
  2. Right to Recover Costs Incurred in Defending a Suit [section 125(2)
  3. Right to Recover Sums Paid Under Compromise [section 125(3)
  4. Right to Sue for Specific Performance

Right to Recover Damages Paid in a Suit [section 125(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.

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 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.

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 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.

Right to Sue for Specific Performance

Right to sue for specific performance- The indemnity holder is entitled to sue for specific performance if he has incurred absolute liability and the contract covers such liability.


Commencement of Liability of 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:

  1. Indemnifier is not liable until the indemnified has suffered the loss.

  2. 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”.

  3. 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 promisor 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.

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