Contract of Indemnity- Indian Contract Law Notes

INTRODUCTION TO CONTRACT OF INDEMNITY

Indemnity Meaning –

• To make good the loss incurred by another person
• To compensate the party who has suffered some loss
• To protect a party from incurring a loss

Contract of indemnity Definition

A contract is called as a ‘contract of indemnity’ if –

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.

Modes of contract of indemnity

Expressed:

When a person expressly promises to compensate the other from loss.

Implied :

When the contract is to be inferred from the conduct of the parties or from the circumstances of the case.

Essential elements of a contract of indemnity

Contract : All the essentials of a valid contract must also be present in the contract of indemnity. Example:- X asks Y to beat Z and promises to indemnify Y against the consequences. Y beats Z and is fined Rs.1,000. Y cannot claim this amount from X because the object of the agreement was unlawful.

Loss to one party

A person can indemnify another person only if such other person incurs some loss or it has become certain that he will incur some loss.

Indemnity by the promisor

The purpose of contract of indemnity is to protect the indemnity holder from any loss that may be caused to the indemnity holder.

Reason for loss

The contract of indemnity must specify that indemnity holder shall be protected from the

loss caused due to –

• Action of the promisor himself; or
  • Action of any other person; or
  • Any act, event or accident which is not in the control of the parties.

RIGHTS OF INDEMNITY HOLDER (Sec. 125)

• 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.

• Right to recover costs
  The indemnity holder has the right to recover all the costs which he is compelled to pay in bringing or defending such suit.
  Condition:
  • The indemnifier authorised him to bring or defend the suit; or
  • 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.

• Right to recover sums paid
  The indemnity holder has the right to recover all the sums which he has paid under the terms of a compromise of such suit.
  • The indemnifier authorised him to compromise the suit; or
  • The indemnifier 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.

DISTINCTION BETWEEN INDEMNITY AND GUARANTEE

Basis	Contract of indemnity	Contract of guarantee
Meaning     Parties     Nature of liability Number of contract       Nature of contract	A contract by which one party promises to save the other from  loss caused to him is called as a contract of indemnity. There are only two parties, viz, the indemnifier and the indemnity holder. The liability of the indemnifier is primary and independent. In a contract of indemnity there is only one contract.       The contract of indemnity is for the reimbursement of the loss.	A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of his default. There are three parties, viz., the principal debtor, creditor and the surety. The liability of the surety is secondary and conditional. In the contract of guarantee, there are three contracts; first between principal debtors and creditor, second between creditor and surety, and third between surety and principal debtor. The contract of guarantee is  for the security of the creditor.

---

Recommended Books For Law of Contract

• Law of CONTRACT & Specific Relief by Dr. Avtar Singh
• Law of Contract I & II by Dr. S.S. Srivastava
• Law of Contract by Dr. Ashok K. Jain

---

Read more Article

• 16 Best Academics Books for Law Students
• 20 Books Every Law Student Should Read

---