Write a note on Contract of Indemnity.
What are the rights of Indemnity Holder under the
Contract?
What is a Contract of Indemnity?
The Contract Act 1872 provides for certain special types of contracts. These are contracts of
(1) indemnity,
(2) guarantee,
(3) bailment and
(4) agency.
Meaning of Indemnity:
The meaning of indemnity is to make good the loss that another has suffered or, in other words,
to compensate the party who has suffered a loss.
According to Contract Act:
Section 124 of the Act defines a contract of indemnity as “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”.
Example Neelam takes a loan of rupees two lakhs from Jasalleq . Ibrahim makes a contract with
Neelam to indemnify her against any proceedings with respect to the loan which Jasalleq may
take against her. This is a contract of indemnity. .
In this example Ibrahim is the indemnifier and Neelam is the indemnified. A person who makes
a promise to make good the loss is called the promisor or the indemnifier and the promisee or the
person whose loss is to be recovered is the indemnity holder or the person who is indemnified.
According to this example it can be said that the contract of indemnity is made to protect the
promisee from any future losses.
Is insurance a contract of guarantee:
It is considered that insurances other than life insurance are said to be a contract of indemnity.
Liability of Indemnifier:
It is an important question to ask as to when the liability of indemnifier arises? There are two
views about it. One says that the liability arises after actual loss is suffered by the indemnity
holder, and the other view is that the liabilty of indemnifier arises soon after he promises to save
the indemnity holder from the loss. There are courts decisions which sets the priciple that the
liability of indemnifier arises as soon he makes the promise to save the other party from loss.
Parties to the Contract
Contracts of indemnity comprise two parties. These are the indemnifier and the indemnity
holder.
The indemnifier: The person who promises to save the other party from loss is called
indemnifier.
The indemnity holder: The person or party who is promised to be saved from loss is called the
indemnity holder.
Essentials of Valid Contracts of Indemnity
The following are the essentials of valid contracts of indemnity 》
1. Contracts of indemnity must be between two parties, the indemnifier and the indemnity holder
or indemnified.
2. A contract of indemnity should contain an offer, a consideration, the free consent between
parties, the competency of both parties and legality of object to become a valid contract.
3. There should be a promise between two parties whereby one party promises another to save
him from any losses suffered by him.
4. The losses may be due to the conduct of the promisor himself or any other person.
5. Contracts of indemnity can be express or implied. In an express contract of indemnity, a
promise is made by a person to compensate the other person in express terms but in an implied
contract, it is the intention of the promisor to indemnify the other party from losses
Rights of Indemnty Holder:
Section 125 gives the indemnity holder certain rights which are
1. Right to recover damages: The indemnity holder has the right to recover all the damages which he is
compelled to pay in any suit in respect of any matter covered by the contract of indemnity.
2. Right to recover costs: The indemnity holder has the right to recover all the costs which he is
compelled to pay in bringinf or defending any suit. But here are some conditions
(i) The indemnifier authorized him to bring or defend the suit
(ii) The indemnity holder did not contravene the orders of the indemnifier, and the indemnity holder
acted as it would have been prudent for him to act in the absence of any contract of indemnity.
3. Right to recover sums paid: The indemnity holder has the right to recover all the sums which e has
paid under the terms of a compromise of such suit. Following are the conditions:
(i) The indemnity holder was authorized by the Indemnifier.
(ii) The idemnity holder did not contravene the orders of the indemnifier, and the indemnity holder
acted as it would be prudent for him to act in absence of any contract of indemnity.
Rights of indemnifier:
The Section 125 describes the rights of indemnity holder only and is silent about the rights of
indemnifier. However, it is considered that he rights of indemnifier are the same as of the rights of a
Surety under section 141.
