Contract of Indemnity: Indian Contract Act, 1872
Law of Contract-II
MODULE-2
What is 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 promisor 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.
OBJECTIVE OF CONTRACT OF INDEMNITY
The objective of entering into a contract of indemnity is to protect the promisee against
unanticipated losses.
PARTIES TO THE CONTRACT OF INDEMNITY
A contract of indemnity has two parties.
1. The promisor or indemnifier
2. The promisee or the indemnified or indemnity-holder
The promisor or indemnifier: He is the person who promises to bear the loss.
The promisee 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 promisor as he promises to bear the loss of Q.
• Q is the promisee 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, 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 due to the
conduct of the promisor 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
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 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
that is between the Indemnifier and the Indemnified.
RIGHTS OF PROMISEE/ THE INDEMNIFIED/ 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)]: 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 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. 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.
Is contract of insurance a contract of
indemnity?
In India contract of insurance is not a contract of Indemnity as it is a
contingent contract under sec.31
Under English Law, the word indemnity carries a much wider meaning than
given to it under the Indian Act. Under English law, a contract of insurance
(other than life insurance) is a contract of indemnity. Life insurance
contract is, however, not a contract of indemnity, because in such a
contract different consideration apply.
A contract of life insurance, for instance, may provide the payment of a
certain sum of money either on the death on a person or on the expiry of a
stipulated period of time (even if the assured is still alive) Indian Contract
Act does not specifically provide that there can be on implied contract of
indemnity.
Commencement of Liability of Promisor/ 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
