A contract of indemnity is 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. (Sec 124).
(1) A contracts to indemnify B against the consequences of any proceeding which C may take against B in respect of a certain sum of Rs. 200. This is a contract of indemnity.
(2) A contracts with the Governments to return to India from abroad after completing his studies and serve the Government for a fixed period. He fails to return to India. This is a contract of indemnity and he is bound to reimburse the Government.
A person who promises to make good the loss i.e. the promisor is called the “idemnifier” and the person whose loss is to be made good i.e. the promisee is called the ‘idemnity-holder’ or the person who is ‘indemnified’.
By a contract of indemnity, a security is provided to the promisee against any anticipated loss. The promise is protected and assured of being compensated for the loss if any arising out of the contract. To ‘indemnity’, therefore means to save from loss in respect of which indemnity has been given.
As the happening of the loss is the contingency on which the liability of the indemnifier depends, indemnity contracts are considered a general class of contingent contracts and must, therefore, satisfy all the essentials of a valid contract. A contract of indemnity may be express or implied from the circumstances of the case. A contract of insurance is a kind of contract of indemnity. Law of indemnity depends on the happening of a loss. A promisee under a contract of indemnity must have suffered loss.
Indemnity is restricted to those cases only in which the loss sought to be reimbursed is caused by the conduct of the promisor himself or of any other person. The loss must be such as the promisor or indemnifier has taken upon himself to indemnify.
1. Contract of indemnity must contain all the essentials of a valid contract.
2. The promise or the indemnity holder must have suffered a loss.
This section includes express or implied or implied promises to indemnify. However duty to indemnify may also be annexed by operation of law, for example, under the companies Act, a transferee of shares is bound to indemnify the transferor against future calls on shares. It does not include (1) cases where loss arises from accidents like fire etc. (2) events not depending on the conduct of any person.
English law on indemnity is wider. Indemnity under English law means a promise to save a person harmless from the consequences of an act. It includes indemnity against loss arising from any cause whatsoever. It also includes instances where a person suffers loss on acting under the instructions of a person who is wrongful owner. Such cases are not included under Indian law of indemnity.
Rights of indemnity holder: (Sec 125)
The promise in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor —
1. Damages: An indemnity-holder when sued is entitled 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 promise to indemnify applies.
2. Costs: All costs which he may be compelled to pay in any suit in instituting or defending it provided the indemnity-holder had not contravened the orders of the promisor and acted prudently or provided the promisor authorized him to bring the suit. Costs must be such as would have been incurred by a prudent man.
3. All sums: All sums which he may have paid under the terms of any compromise of any suit. The compromise must not be contrary to the orders of the promisor or it must be authorized by the promisor and must be one which would be prudent for the promise to make.
It must be noted that the indemnity holder must act within the scope of his authority. He should not contravene the orders of the promisor and act prudently to avail himself of the above rights.
4. Suit for specific performance: Besides the above rights, an indemnity-holder can sue for specific performance of the contract of indemnity if he incurs absolute liability which is covered by the contract of indemnity.