A Contract of Indemnity comes under the category of Special Contract and is covered under Section 124 of the Indian Contract Act, 1872.
“Contract of indemnity” defined– 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, is called a “contract of indemnity.”Indian Contract Act, 1872.
The word indemnity is derived from the Latin word which means without loss or unharmed. Indemnity simply means to make good the loss or compensate for the losses.
In simple terms, a contract of indemnity is defined as wherein one party saves the other party or indemnifies the other party from any loss that occurred from his action or the action of a 3rd person.
The person who promises to save the other party is known as Indemnifier and the person for whom the promise is made is known as the Indemnity holder.
- Let’s suppose there is an Insurance company named XYZ that provides car and bike insurance to the customer. The customer who is the insurance policyholder can ask for the claim from the company if his/her gets damaged in an accident due to the negligent act of the 3rd party or can claim losses from the company if they on their own part does any act which in turn causes damage to the insurance policyholder.
Note– Here Insurance company is the Indemnifier and the insurance policyholder is the Indemnity holder.
2. Let’s suppose Mr A issued a bill of exchange to Mr B for his debt, but Mr B lost the bill of exchange. Here in this situation, Mr B can ask for a duplicate bill of exchange but here Mr A can make a contract of indemnity from Mr B where it will be mentioned that if anybody else other than you come with the bill of exchange to claim the amount which is already paid then Mr B will be liable for all the losses which Mr A will suffer.
3. A principal and agent also come in the category of the contract of indemnity. An agent acts on behalf of the principal for his work, if he acts within the scope of the authority and during that period if he does any act which causes loss to the principal, then the principal is liable to pay the losses because he is under the contract of indemnity.
Note- The indemnity clause does not apply to illegal matters. For.eg- If Mr A indemnifies Mr B as a drug supplier and Mr B suffers losses then Mr B cannot make Mr A liable to compensate for Mr.B.
The primary liability to pay for the losses is of the Indemnifier, whereas in guarantee the primary liability to pay for the debt is of the Principal debtor and then of the surety if the principal debtor fails to pay the debt.
What are the essentials of a valid Contract of Indemnity?
- Two Party Contract
The Contract of indemnity is made between 2 parties, Indemnifier and indemnity holder.
Indemnifier is the person who promises to save the other person and an indemnity holder is a person for whom the promise is made.
2. To Compensate for the losses
The most important element for a contract of indemnity is to compensate for the losses from which the indemnity holder is suffering.
3. The Contract can be Implied as well as Express
A contract of indemnity can be made via both ways expressly (in written form) and impliedly (by the act of the person). for.eg- Indemnity bond is an express indemnity and agency & partnership is an implied contract.
Some special cases of Implied Indemnity
The special cases of implied indemnity are covered under sections 69, 145, and 222 of the Indian Contract Act, 1872.
Section- 69 Reimbursement of person paying money due by another, in payment of which he is interested- A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.
If Mr A is a tenant on Mr B’s land, and there is pending electricity of Mr B which Mr A has to pay to start the electricity of the property.
Here in this case Mr B is liable to indemnify Mr A for the bill which he has paid on Mr B’s behalf.
Section- 145 Implied promise to indemnify surety- In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully.
In a contract of guarantee, there is a tri-parted contract between the Principal debtor, surety, and creditor. If the Principal debtor is liable to pay Rs, 5lakh to the creditor and he fails to do the same, then surety is liable to pay the amount on his behalf.
After surety has made the payment surety steps into the shoes of the creditor and now the Principal debtor is liable to pay back the amount to the surety, under the implied contract of indemnity.
Section- 222 Agent to be indemnified against consequences of lawful acts- The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.
If in Principal and agent relationship agent does any act which is within the scope of authority and due the same some losses occurred to the principal, then the Principal is liable to indemnify the agent.
for eg- if we appoint a driver to drive our car, and if he hits a pedestrian even after following all the rules and regulations by RTO and by the principal, then in that case principal the owner of the vehicle is liable to compensate for the losses from which the driver suffered.
What are the Rights of Indemnity holder?
The rights of indemnity-holder are covered under Section 125 of the Indian Contract Act, 1872.
Rights of indemnity-holder when sued- The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor-
(1) 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) 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 it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit;
(3) all sums 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 authorized him to compromise the suit.
An indemnity contract thus implies that a person if does any kind of damage in terms of the contract conditions is liable to pay them by himself or by a third person who becomes the indemnifier and pays off the liability in case of any default made by the promisee. The contract provides with the same rights and duties as a normal contract does, and is a way of saving the promisor from any kind of losses that may occur. Thus, it is seen to be prevalent in the industries indulging in big shipments and amounts.