Indemnity is a type of compensation that falls under the umbrella of compensation.

Indemnity
is insurance that protects you from potential losses. The word indemnis comes from the Latin
word indemnis, which means ‘unharmed’ or ‘loss-free.’ In its broadest definition, it refers to
reimbursing a person for any losses he or she has suffered. The need to pay occurs for a
variety of reasons, including an agreement, duties originating from the parties’ relationships,
or statutory requirements.

It is a legal concept, entered in the form of a contract, or mentioned as a clause in commercial

contracts, wherein a party promises to the indemnified party to do good the losses arising as a
consequence of the acts of the promisor or any third party. It can also be invoked in cases
where a third party sues the indemnified person, and so, is used to cover expenses incurred in
law suits. Thus, it is a contract, contingent on the occurring of losses

An indemnity agreement should also have the basic elements of a contract, such as free
assent, lawfulness, and so on. As a result of indemnification, the promisor is obligated to
protect the promisee from any misfortune caused by the promisor’s own actions or the actions
of a third party. Due to the rule that one person cannot complete all exchanges on their own,
he should have the opportunity to work with his business where he is addressed by someone
else when managing a third individual.

In English law, indemnification refers to a commitment to protect a person from the

consequences of their actions, which might be explicit or implicit. Indemnity is not restricted
to contract cases. Between a principal and an agent, an employer and an employee, and so
forth, an indemnification right may exist.

In a broad sense, indemnification might be defined as “protection from calamities.”

Indemnity is a type of insurance that protects you from misfortune

The responsibility to indemnify is taken voluntarily by the indemnifier, and even the mere
possibility of occurrence of a loss will make him liable. The loss should arise due the conduct
of the indemnifier or any third party. A contract of indemnity should also have the essential
elements of a contract like free consent, legality, etc. So in the case of indemnity, the
promisor is under the obligation to save the promisee from any kind of loss due to the
promisor’s own conduct or conduct of any other party.
For instance: A contracts to indemnify B against the consequences of any proceedings which
C may take against B in respect of a certain sum of rupees. This is a contract of indemnity.

Thus the two parties in a contract of indemnity are indemnifier and indemnified and the basic
essence of the indemnity contract is to make good the losses occurred by his own conduct or
due to the conduct of the third party.

In one of the cases, the concept of indemnity was justified. In this case of Adamson vs. Jarvis
The defendant gave the plaintiff, an auctioneer, instructions to sell particular livestock. After
some time, the plaintiff discovered that the defendant did not possess the livestock in the first
place. Because the plaintiff was the auctioneer, the livestock owner sued him, and the
plaintiff sued the defendant for compensation for the loss he had suffered as a result of the
defendant’s activities. The Court held that Jarvis would have to indemnify Adamson for the
losses incurred because he was executing the tasks as entrusted by Jarvis and it would be
reasonable to presume that all the ramifications that would arise in the future course of
execution would be taken care of by Jarvis i.e. plaintiff, having acted on the defendant’s
request, was entitled to presume that if what he did turned out to be wrongful, the defendant
would compensate him.

Black’s Law Dictionary defines Indemnity in numerous ways:

As was described in Moorhead v. Waelde, “A contractual or equitable right under which the
entire loss is shifted from a tortfeasor who is only technically or possibly at fault to another
who is primarily or actively responsible.”

Thus the scope of "indemnity" is by the very process of definition restricted to cases where
there is a promise to indemnify against loss, caused: [a) by the promisor himself, or {b) by
any other person. The definition excludes from its purview cases of loss arising from
accidents like fire or perils of the sea. Loss must be caused by some human agency. Contracts
of insurance against loss are covered by the chapter on Contingent Contracts.
Within the meaning of the definition, indemnity is a term, which can be vastly and flexibly
interpreted to mean any express or implied promise by one party to not let the other party
suffer losses. The loss referred should be caused exclusively by conduct of a ‘human agency’.
In other words, it must not include any loss accruing to unforeseeable circumstances or
inevitable accident or Act of God. As such, the indemnified or protected party is the sole
beneficiary and is also vested with certain rights.

the basic point is that the proper subject of analysis is a promise of indemnity in a contract,
not a contract of indemnity. A contract of indemnity, in the specific sense just mentioned, can
then be approached in much the same way as a promise of indemnity that is merely one of
many terms in a contract dealing with a larger subject-matter. Perhaps for this reason, the
technical distinction between a contract of indemnity and a promise of indemnity appears not
to have troubled the Indian courts. Indeed, Sections 124 and 125 also refer to the 'promisor'
and 'promisee'

The English law definition of a contract of indemnity states, “It is a promise to save a person
harmless from the consequences of an act.” Under English Law, indemnity encompasses a
wider meaning compared to the Indian Law definition. It includes a contract to protect the
promisee from any loss, irrespective of whether it was caused by human agency, or any other
event like fire, accident, earthquake, and other natural calamities. Moreover, under English
law, insurance (other than Life Insurance) also comes under the contract of indemnity.

The term 'indemnity' is elastic and may be used more generally to describe any arrangement
under which a party is not to suffer loss. A distinction must be drawn between two kinds of
'indemnity' arrangements: first, those in which the essential concern of the undertaking is to
protect the promisee exactly against loss; secondly, those in which the essential concern of
the undertaking is not of that nature, though the promisee is incidentally or effectively
indemnified against a loss. Sections 124 and 125, are concerned with the former
arrangements. These are promises of indemnity in the strict sense.

The promise of indemnity, as envisaged by the section, may be express or implied. An

illustration of implied indemnity is the decision of the Privy Council in Secy of State for
India in Council v Bank of India Ltd. A note with forged indorsement was given to a bank
which received it for value and in good faith. The bank sent it to the Public Debt Office for
renewal in their name. The true owner of the note recovered compensation from the State and
the State was allowed to recover from the bank on an implied promise of indemnity. An
indemnity bond which permits an employee to leave the employment earlier than the
minimum agreed period only at the cost of the forfeiture of his bond money is valid provided
both the period of restriction and the bond money are reasonable. Only that part of the bond
money can be retained which is necessary to indemnify the employer-for his loss. The
question before the Supreme Court was whether the document contained a contract of
indemnity or of bank guarantee. The document purported to indemnify the party against
losses, claims, damages etc. which may be suffered by it. It did not employ the usual words
which are found in a bank guarantee like unequivocal conditions, unconditional and absolute.
It was held to be a contract of indemnity. The claim made by the assured on termination of
the contract need not be honoured by the bank without proof of the loss.

Essentials

There must be two parties and, there should be an agreement between them wherein the
promisor promises to save the promisee from any kind of loss. This is the most vital element
in the contract of indemnity. The loss occurring may be due to the conduct of the promisor or
any other third party. The provisions of the Act restrict the loss to an extent because it is
restricted to a human agency only and an act of God is not covered under the contract of
indemnity. Marine Insurance, fire insurance, etc. also fall into the category of the contract of
indemnity

We can comprehend from the above provisions that, in a contract of

indemnity, the promise i.e.,
indemnity- holder acting within the scope of his authority is
entitled to recover from the promisor
i.e., indemnifier the following rights:
(a) all damages which he may be compelled to pay in
any suit
(b) all costs which he may have been compelled to pay in
bringing/ defending the suit and
(c) all sums which he may have paid under the terms of any
compromise of suit.
It may be understood that the rights contemplated under section 125
are not exhaustive
The sub-sections address two related but distinct points.
Sub-section (1) establishes the conclusiveness of the liability, subject to the provisos
mentioned. In a general sense this is a matter of proof of actual or potential loss within the
scope of the indemnity.
Sub-section (2) deals more directly with a matter of scope, namely, that costs incurred in
proceedings should be recoverable, again subject to the provisos mentioned.
Sub-section (3) could be read as addressing either of these matters. That is, subject to the
provisos, the compromise is treated as conclusive proof of an actual liability, or the scope of
the indemnity is extended to cover a compromise of an alleged liability.
The opening words of Section 125 and internal cross-reference in Section 125(3) to 'any such
suit' favour the former interpretation.
Strictly, Section 125(3) applies only when a suit has been brought and not where a
compromise is made beforehand. It has been accepted, however, that the indemnifier may
still be bound in the latter situation.
It also appears that Indian courts, drawing upon some remarks in older English cases, have
endorsed a further refinement which is not explicit in Section 125(3): if the indemnified party
gives due notice of the claim or action and the indemnifier fails to intervene, then the
indemnifier is precluded from asserting that the compromise was imprudent. It is true that
some support for that proposition can be found in those older decisions.
1. Right to recover Damages paid in a suit
The indemnity holder has the right to claim damages which he was compelled to pay in a
lawsuit proceeding. The indemnifier then becomes liable to pay those damages which were
agreed upon bona fide. Moreover, all the damages paid by the indemnity-holder to any third
person or the indemnifier himself can be recovered by the indemnifier. The damages
definitely are the end result of the total liability that the indemnity holder has to carry.
The logical principle is that a person who had acted on the faith of another party should be
indemnified. 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 covered in the contract
of indemnity

In Parker vs. Lewis the court held that “…if a person has agreed to indemnify another against
a particular claim or a particular demand, and an action is brought on that demand,
[indemnified] may then give notice to the [indemnifier] to come in and defend the action, and
if he does not come in, and refuses to come in, [indemnified] may then compromise at once
on the best terms he can, and then bring an action on the contract of indemnity.
On the other hand, if [indemnifier] does not choose to trust the [indemnified] with the defense
to the action, he may, if he pleases, go on and defend it, and then, if the verdict is obtained
against him, and judgment signed upon it…at law that judgment, in the case of an express
contract of indemnity is conclusive”.
However, this dictum directed the defendant to be liable to indemnify as regards express
indemnity contract.
In simple words, the court opined that if the indemnified brought an action to claim damages
from the indemnifier, or agrees to compromise the suit, the indemnifier would be absolutely
liable to compensate irrespective of whether the case was decided in his favour or not. Even
when the suit is appealed further, the indemnifier would still be liable to pay as per the
contract.
In Gokuldas v. Gulab Rao case, the court held that the indemnifier cannot plead that he was
not a party to a dispute hence the result should be implemented upon him.
In Nallappa Reddi v. Vridhachala Reddi, the court clearly stated that the defendant (in this
case, the indemnifier) cannot escape liability to indemnify the indemnified by alleging any
contentions.

2. The Right to Recover Costs incurred in Defending

When pursuing a suit in which the purpose of the action of the indemnity is being involved
the indemnity holder is being provided with the statutory right to claim costs as well as the
damages from the indemnifier provided they are reasonable
An indemnity holder has the right to recover from the indemnifier all incidental 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 authorised him to bring or
defend the suit.
In Gopal Singh v. Bhawani Prasad (1888) case the court held that only those cost would be
recoverable that are supposed to be incurred by a prudent man.
In Alla Venkataramanna vs. Palacherela Manqamma, the court stated that the indemnifier is
liable to indemnify the promisee for losses incurred while defending lawsuits by third parties,
in spite of not being a party to the contract.
In Pepin vs. Chunder Seekur Mookerjee, it was held that costs reasonably incurred (by
indemnified) in resisting or reducing or ascertaining the claim may be recovered (from the
indemnifier).
The Right to Recover Sums paid under Compromise
This is similar to the previous right but it arises in case of compromise and indemnity holder
also has a right to recover all amounts from the indemnifier 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 authorised him to
compromise the suit
Amount paid in case of compromise of the suit can also be recovered, without contravening
the orders of indemnifier. For this arrangement, the indemnifier must act in good faith and
his/her aim must not be to deceive the indemnifier. The bargain must also be reasonable and
not immoral. In other words, anything more would be undeserved windfall for one party and
penalty of the other.
For instance, in Anwar Khan vs. Gulam Kasam], the court stated, “The measure of damages
would depend upon the extent to which the person has been indemnified, if more than the
amount, the indemnifier may refuse as well.”
Likewise, in Gopal Singh v. Bhawani Prasad, the court maintained that only those costs can
be recovered that are supposed to be incurred by a reasonable person.
In Alla Venkataramana verses Palacherla Manqamma case The court laid down the
conditions for the claim by the promisee to be valid if the indemnity holder genuinely wants
the amount to be recovered certain conditions with respect to the compromise so affected
would have to be fulfilled
 the compromise should have been put to effect in a Bonafide manner
 it had been resolved without any sort of collusion
 it has not been impeached as an immoral bargain.