Contract of Indemnity

Definition: In common parlance, the word ‘indemnity’ implies reimbursement against financial loss or protect someone from incurring a loss.

In law, Contract of indemnity can be defined as a legal contract between two persons whereby one party commits to indemnify, i.e. to compensate or reimburse, the loss incurred to the other party, by the conduct of the party, who is making the promise or by the conduct of the third party.

Therefore, it does not cover the loss caused by – Conduct of promisee, Accident and An act of God, i.e. any kind of natural calamity such as earthquake, floods etc. Nevertheless, the contracts of insurance, i.e. Fire and Marine Insurance will be covered under the contract of indemnity, but life insurance is not covered in it.

The contract of indemnity is a form of contingent contract, as the liability of the indemnifier, is based on an event whose occurrence is contingent. Further, the liability of the indemnifier is primary and independent.

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

Parties to Contract of Indemnity

There are only two parties in a contract of indemnity, explained as under:Parties to contract of indemnity

  • Indemnifier: The promisor, who promises to make good the loss caused to the other party, is called as Indemnifier.
  • Indemnified: The person who is assured to be compensated for the loss caused (if any) is called as indemnified or indemnity holder.

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.

Examples

The examples of the contract of indemnity are given hereunder:

  1. Suppose John sold a house to Paul on the instruction of Peter. Afterwards, it is disclosed that Alex is the registered owner of the house. Alex recovered the amount from John for selling his house. Now, John can recover the compensation from Peter. This is an implied form of a contract of indemnity.
  2. Beta Insurance Company entered into a contract with Alpha Ltd., to compensate for loss caused by accidental fire to the company’s stock of goods up to Rs. 50,00,000 for a premium of Rs. 1,00,000. This is an express form of a contract of indemnity.

Rights of Indemnity Holder

The indemnity holder who is acting within the periphery of his authority can compensate for the loss caused to him/her from the indemnifier. So, the upcoming points will discuss the rights of the indemnity holder on being sued:

  • Any kind of damages which the indemnity holder is bound to pay in any suit concerned with any issue to which the contract of indemnity applies.
  • Any expenses which the indemnity holder is bound to pay, so as to bring or defend the suit.
  • All the amount which the indemnity holder has paid, in connection to the settlement of the suit.

Rights of Indemnifier

  • Once the indemnity holder is compensated for the loss caused, the indemnifier possesses all the rights to all the methods and resources that can save the indemnifier from loss.

The essence of the contract of indemnity is the loss to the party, i.e. Indemnification can be done only if the loss is incurred to the other party, or if it is sure that the loss will incur.

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