Contract of Indemnity

A contract of indemnity is a legally binding agreement where one party (the indemnifier) promises to compensate another party (the indemnity-holder or indemnified) for any loss or damage they may suffer due to a specific event or cause. It’s essentially a form of protection against potential financial loss.

Characteristics of a Contract of Indemnity:

• Two Parties: There are two parties involved:
  • Indemnifier: The party who promises to compensate for the loss.
  • Indemnity-holder: The party who is protected against the loss.
• Promise to Save from Loss: The core of the contract is the indemnifier’s promise to protect the indemnity-holder from loss. This loss can be caused by:
  • The conduct of the indemnifier themselves.
  • The conduct of any other person.
• Contingent Contract: A contract of indemnity is a type of contingent contract, meaning its performance depends on the occurrence of a specific event (the loss). The indemnifier’s liability arises only when the indemnity-holder actually suffers a loss.
• Express or Implied: An indemnity contract can be express (written or oral) or implied from the conduct of the parties and the circumstances of the case.
• Essential Elements of a Valid Contract: Like any other contract, a contract of indemnity must have all the essential elements of a valid contract, such as offer, acceptance, consideration, capacity to contract, free consent, lawful object, etc.

Rights of the Indemnity-Holder:

Section 125 of the Indian Contract Act, 1872, outlines the rights of the indemnity-holder:

1. Right to Recover Damages: The indemnity-holder is entitled to recover from the indemnifier all damages that they may be compelled to pay in any suit in respect of any matter to which the indemnity applies. This includes:

   • Damages awarded against the indemnity-holder in a lawsuit.
   • Costs incurred in defending the suit, provided they acted reasonably and under the indemnifier’s authority (or if no contrary instructions were given).

2. Right to Recover Costs: The indemnity-holder can recover from the indemnifier all costs that they may be compelled to pay in bringing or defending such suit, provided they acted as a prudent person would have acted in the absence of any contract of indemnity, or if the indemnifier authorized them to bring or defend the suit.

3. Right to Recover Sums Paid Under Compromise: If the indemnity-holder compromises any suit relating to the indemnity, they are entitled to recover the amount paid under the compromise from the indemnifier, provided the compromise was made in good faith and was reasonable, and either under the indemnifier’s authority or when a prudent person would have made such a compromise.

Key Points to Remember:

• The indemnity-holder’s right to be indemnified arises only when they have actually suffered a loss. However, they can compel the indemnifier to make good the loss even before they have actually discharged their liability, if the contract expressly provides for it.
• The indemnity-holder must act reasonably and in good faith when dealing with the matter that gives rise to the indemnity.
• Contracts of insurance are a common form of indemnity, where the insurer promises to indemnify the insured against certain types of losses.

In essence, a contract of indemnity provides a crucial safeguard against potential financial risks, ensuring that one party is protected from losses caused by a specific event or the actions of another party.