Essentials of Contract of Indemnity

 Contract of Indemnity

“Contract of Indemnity” defined (Section 124) :

 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.”

There are two parties in this form of contract.

The party who promises to indemnify/ save the other party from loss is known as ‘indemnifier’,

whereas the party who is promised to be saved against the loss is known as ‘indemnified’ or indemnity holder.

What does Indemnify mean?

To indemnify means to compensate or make good the loss.

Thus, under a contract of indemnity the “existence of loss” is essential.  Unless the promisee has suffered a loss, he cannot hold the promisor liable on the contract of indemnity.

Example 1 : A may contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a sum of ` 5000/- advanced by C to B.

In consequence, when B who is called upon to pay the sum of money to C fails to do so, C would be able to recover the amount from A as provided in Section 124.

Example 2 : X, a shareholder of a company lost his share certificate. He applied for the duplicate. The company agreed to issue the same on the term that X will compensate the company against the loss where any holder produces the original certificate. Here, there is contract of indemnity between X and the company.

However, the above definition of indemnity restricts the scope of contracts of indemnity in as much as it covers only the loss caused :

(i) By the conduct of the promisor himself, or

(ii) By the conduct of any other person.

Thus, loss occasioned by the conduct of the promise, or accident, or an act of God is not covered.

A contract of indemnity like any other contract may be express or implied.

A contract of indemnity is like any other contract and must fulfill all the essentials of a valid contract like consideration, free consent, competency of contract, lawful object etc.

Example : A asks B to beat C promising to indemnify him against the consequences. The promise of A cannot be enforced. Suppose, B beats C and is fined Rs. 1000, B cannot claim this amount from A because the object of the agreement is unlawful.

A contract of Fire Insurance or Marine Insurance is always a contract of indemnity. But there is no contract of indemnity in case of a contract of Life Insurance.

 Objective of Contract of Indemnity

To protect the Promisee from unanticipated loss.

The principle of indemnity asserts that on the happening of a loss the insured shall be put back into the same financial position as he used to occupy immediately before the loss.

In other words, the insured shall get neither more nor less than the actual amount of loss sustained.

This, of course, is always subject to the limit of the sum insured and also subject to certain terms and conditions of the policy.

Essentials of Contract of Indemnity

•     Parties to Contract
•     Express or Implied
•     Protection of Loss
•     Essentials of a Valid Contract 

1. Parties to Contract of Indemnity

2. Mode of Contract-Express/Implied

The mode of the contract of indemnity can be express or implied, i.e. if a person explicitly promises to save the other from losses, the mode of the contract will be express, whereas if the contract is signified from the conditions of the case, then the mode of the contract will be implied. 

Suppose Mohan sold a house to Piyush on the instruction of Pawan. Afterward, it is disclosed that Amit is the registered owner of the house.

Amit recovered the amount from Mohan for selling his house. Now, Mohan can recover compensation from Pawan. This is an implied form of a contract of indemnity. 

3. Protection of Loss

Making the Good     (Loss of Another)

A contract of indemnity is entered into for the purpose of protecting the promisee from the loss.

The loss may be caused due to the conduct of the promisor or any other person.

4. Essentials of a Valid Contract

It is characterized by all the essential elements of a valid contract, i.e. lawful object, consideration, free consent of the parties, the capacity of the parties to contract, etc.

Rights of Indemnity—holder when sued (Section 125) :

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor/indemnifier—

(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.

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

Commencement of Liability

Indemnifier is not liable until the indemnified has suffered the loss.

Indemnified can compel the indemnifier to make good his loss although he has not discharged his liability.

Difference between Contract of Indemnity and Contract of Guarantee