A contract of indemnity is a unique type of contract. The phrase “indemnity” signifies “security or protection against loss” or “compensation.” “A contract by which one party promises to safeguard the other from loss caused to him by the promisor’s behavior, or by the action of any other person, is called a contract of indemnity,” according to Section 124 of the Indian Contract Act, 1872. An insurance firm is a good illustration of this, because the insurer or indemnitor commits to compensate the insured or indemnitee for any damages or losses incurred over a period of time. The insured must pay premiums to bind the agreement so that the insurer can repay or compensate for the damages or losses. The person who gives the indemnity is called ‘indemnifier’. The person for whose protection it is given is called ‘indemnity holder’. [1]
The purpose of entering into an indemnity contract is to safeguard the promisee against unanticipated damages. Only the scope of its definition limits the reach of Indemnity. It covers: a) Losses incurred by the promisor; and b) Losses incurred by any other person. It is vital to highlight that the definition excludes damages resulting from incidents that are not caused by some human agency, such as fire or maritime risks. Except for life insurances, all insurance contracts are indemnity contracts since actual loss is estimated in indemnity, whereas actual loss is not estimated in life insurance.
The definition provides of the elements which are important for the contract of Indemnity-
There must be a loss.
The loss must be caused either by the promisor or by other person (in Indian context the loss is to be caused by some human agency).
Indemnifier is responsible only for the loss.
The promisee/ indemnified/ indemnity-holder has the following rights against the promisor/ indemnifier under Section 125 of the Indian Contract Act, 1872, providing he behaved within the scope of his authority. [2]
SECTION 125(1): RIGHT TO RECOVER DAMAGES PAID IN A SUIT: In any dispute in respect of any matter to which the indemnity contract applies, an indemnity-holder has the right to recover from the indemnifier whatever damages that he may be required to pay.
RIGHT TO RECOVER COSTS OF DEFENDING A CASE [SECTION 125(2)]- If, in bringing or defending the suit, he did not contravene the promisor’s orders and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit, an indemnity-holder has the right to recover from the indemnifier all costs which he may be compelled to pay in any such suit.
RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE [SECTION 125(3)]:– An indemnity-holder has the right to recover from the indemnifier all sums paid under the terms of any compromise of any such suit, if the compromise was not against the promisor’s orders, and was one that the promisee would have made if there had been no contract of indemnity, or if the promisor authorised him to compromise the suit.
In other words, indemnification requires one party to compensate the other if certain expenditures specified in the indemnity contract are incurred by a third party. There are various circumstances or situations in which the continuation of an indemnity makes a significant difference for some people, while it makes little or no difference for others. Liability issues can never be solved with a simple indemnity clause. Those who attempt to avoid culpability or seek relief from liability for their activities will find the law to be unfavourable to them. The primary reason for this is that a negligent party should not be allowed to totally shift all claims and damages against him to another, non-negligent party.
References- [1] https://legodesk.com/legopedia/contract-of-indemnity/
[2] https://allindialegalforum.in/2020/08/11/contract-of-indemnity/
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