Contract of Indemnity

 Contract of Indemnity

The term 'indemnify' means to make good the loss of another in certain situations. It is a security against, or compensation for loss. Section 124 defines 'Contract of Indemnity'. It is a contract by which one party promises to save the other from loss caused to him:-

(1) By the conduct of the promisor himself; or

(i) By the conduct of any other person

Parties in contract of indemnity:-There are two parties in a contract of indemnity-

Indemnifier: the person who gives the indemnity.

Indemnity-holder: the person for whose protection the indemnity is given.

For example, 'P' contracts to indemnify 'Q' against the consequences of any proceedings which 'Y' may take against 'Q' in respect of a certain sum of Rs. 500. This is a contract of indemnity.

A contract of indemnity is a direct contract between two parties i.e. indemnifier and indemnity holder. It is a contingent contract wherein the happening of the loss is the contingency on which the liability of the indemnifier is dependent.

Scope of definition in Indian law: The scope of definition of 'indemnity' is restricted in India as compared to English law. Under Indian law the promise to indemnify is limited to cases where loss is caused by 

(1) the promisor himself and 

(2) by any other person. 

The definition does not cover cases of loss arising from accidents like fire, natural consequences etc. In Indian law loss must be caused by human intervention. Therefore, in India, contracts of insurance are covered under contingent contract and not under contract of indemnity. The definition in English law is wide enough to cover loss arising from any cause whatsoever. Under English Law, every contract of insurance except life insurance is a contract of indemnity. Court in Secy of State for India in Council v. Bank of India Ltd, AIR 1938 PC 191 held that contract of indemnity can be express or implied.

Commencement of liability of indemnifier: Commencement of the liability of indemnifier important question. The question is when does an indemnifier is liable to pay. Whether the indemnifier can asked to indemnify before the indemnity holder has actually suffered the loss or his liability arises only after the loss has been suffered by the indemnity holder? According to original English Common law the indemnity was payable only after the indemnity holder had suffered actual loss by paying off the claim. It was governed by the maxim "You must be indemnified before you claim to be indemnified'. This position of law was modified by the courts of equity to overcome the hardships faced by this strict law. Equity courts evolved the law that indemnity holder can claim compensation even before he has suffered actual loss. This position of law was expounded in Re Richardson, (1911) wherein the court held that indemnity is not necessarily given by repayment after payment. Indemnity requires that the party to be indemnified shall never be called upon to pay. Therefore, now the law is settled that as soon as the liability of the indemnity holder to pay becomes clear and certain he should have the right to require the indemnifier to put him in a position to meet the claim.

Rights of indemnity holder: Section 125 provides for certain rights of indemnity-holder. Indemnity holder is entitled to recover from the promisor:-

(1) All damages which he may be compelled to pay in any suit in matters to which the promise to indemnify applies.

(2) 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 a prudent person, or

(3) All sums which he may have paid under the terms of any compromise of any such suit if-

(a) 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

(b) The promisor authorized him to compromise the suit.