Contract of Indemnity

Introduction:
A contract of indemnity is one of the most important forms of commercial
contracts. Several industries, such as the insurance industry, rely on these
contracts. This is because of the nature of these contracts. They basically help
businesses in indemnifying their losses and, therefore, reduce their risks. This is
extremely important for small as well as large businesses.
Meaning and definition of contract of indemnity:
According to dictionary meaning, indemnity is protection against loss, in the
form of a promise to pay, or payment for loss of money, goods, etc. it is a
security against, or compensation for loss, etc.
According to section 124 of the Indian contract Act 1872, a contract of
indemnity means “a contract by which one party promises to save the other
from loss caused to hum by the conduct of the promisor himself or by
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 promisor himself; or
ii. by the conduct of any other person.
This definition covers indemnity for loss caused by human agency only. It does
not deal with those classes of cases where the indemnity arises from loss
caused by events or accident which do mot or may not depend upon the
conduct of the indemnifier or any other person, or by reason of liability
incurred by something done by the indemnified at the request of the
indemnifier.
Parties to the contract of indemnity
In a contract of indemnity, there are two parties:

 Indemnifier: A person who promises to indemnify or pay for the losses is

known as an indemnifier.
 Indemnified or indemnity holder: A person for whom such a promise is
made is known as an indemnified or indemnity holder.

Illustration
A and B have a contract in which B promises to deliver goods to A for Rs.
10,000 per month. C promises B that he will pay for the loss that will be
suffered by him due to A. Here, C and B are in a contract of indemnity, where
B is the indemnity holder and C is the indemnifier.

Nature of contract of indemnity:

An indemnity contract may be either express or implied. In other words, parties

may expressly create such a contract as per their own terms. The nature of
circumstances may also create indemnity obligations impliedly. For example, ‘A’
does an act at the request of ‘B’. If ‘B’ suffers some losses and ‘A’ offers to
compensate him, they impliedly create an indemnity contract.

Insurance contract, if contract of indemnity:

Position of contract of indemnity in India: It has been noted above that section
124 recognizes only such contract as a contract of indemnity where there is a
promise to save another person from loss which may be caused by the conduct
of the promisor himself or by conduct of any other person. It does not cover a
promise to compensate for loss not arising due to human agency. Therefore, a
contract of insurance is not covered by the definition of section 124.

C United India Insurance Company v. M/s Aman Singh Munshilal

In this case, the cover note stipulated delivery to the consigner. Moreover, on its
way to the destination the goods were to be stored in a godown and thereafter
to be carried to the destination. While the goods were in the goods were in the
godown, the goods were destroyed by fire. It was held that the goods were
destroyed during transit, and the insurer was liable as per the insurance
contract.

Position of contract of indemnity in England:

Under English law, the word indemnity carries a much wider meaning than
given to it under the Indian Contract Act. It includes a contract to save the
promise from a loss, whether it be caused by human agency or any other event
like an accident and fire. Under English law, a contract of insurance (other than
life insurance) is a contact of indemnity.

Rights of the 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 promisor (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:

“125. Rights of indemnity holder when sued- the promise in a contract of

indemnity, acting within the scope of his authority is entitled to recover from
the promisor:

1. All damages which he may be compelled to pay in any suit in respect of any
matter to which the promise to indemnity applies;
2. All costs which he may be compelled to pay in any such suit if, in bringing
or defending it, he did nit contravene the order of the promisor, and acted
as it would have been prudent for him to act 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 promise
to make in the absence of any contract of indemnity or if the promisor
authorized him to compromise the suit.

Commencement of liability of indemnifier:

In general, as per the definition given in section 124, it looks like an indemnity
holder cannot hold the indemnifier liable until he has suffered an actual loss.
This is a great disadvantage to the indemnity holder in cases where the loss is
imminent and he is not in the position to bear the loss.
C Gajanan Moreshwar v. Moreshwar Madan,

In this case, Bombay high court observed that the contract of indemnity held
very little value if the indemnity holder could not enforce his indemnity until
he actually paid the loss. If a suit was filed against him, he had to wait till the
judgment and pay the damages upfront before suing the indemnifier. He may
not be able to pay the judgment fees and could not sue the indemnifier. Thus,
it was held that if his liability has become absolute, he was entitled to get the
indemnifier to pay the amount.

Conclusion:

To summarize, indemnity is an obligation or duty imposed on an individual to

bear the losses of another. In its simplest terms, indemnity requires one party
to indemnify the other if certain costs specified in the indemnity contract are
incurred by another party.