A contract of indemnity is a legal agreement where one person promises to protect another from any loss or damage that may happen due to specific reasons. As per English law, it means a promise to save someone from the consequences of an act, which can include losses caused by other people or even natural events like fire or accidents. In simple terms, indemnity means "to make up for a loss" or "to compensate someone who has suffered a loss."
Although contracts of indemnity and guarantee may seem similar because both deal with compensation and are based on good faith, they are quite different in their structure and application. A guarantee involves three parties, while an indemnity involves only two. This article discusses the meaning, features, and legal aspects of a contract of indemnity under Indian law.
What is the Purpose of an Indemnity Contract?
The main goal of such a contract is to protect the person who might suffer a loss (called the indemnified or promisee). It ensures that if a loss occurs because of someone’s actions or any agreed reason, the person making the promise (called the indemnifier or promisor) will cover that loss.
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Who are the Parties in a Contract of Indemnity?
A contract of indemnity always involves two parties:
- The Promisor or Indemnifier – the one who promises to cover the loss
- The Promisee or Indemnity-holder – the one who is protected under the contract
Important Features of a Contract of Indemnity
- It should be a valid contract under the Indian Contract Act.
- It must include all necessary elements like free consent, lawful object, etc.
- It is a contingent contract, which means it becomes active only if a particular event (like a loss) happens.
- The loss should be caused due to someone's action (human conduct).
Section 124 of the Indian Contract Act defines a contract of indemnity as an agreement where one party promises to save the other from a loss caused by their actions or by the actions of another person.
- Adamson vs. Jarvis (1872): An auctioneer acted on someone’s instructions and later faced legal trouble because the goods didn’t belong to that person. The court held that the person who gave the instructions had to indemnify the auctioneer.
- Gajanan Moreshwar vs. Moreshwar Madan: The court said that if someone has already become liable to pay, they can ask the indemnifier to step in and pay the liability.
Rights of the Indemnity-holder (Section 125)
If the promisee faces a legal case, he has certain rights against the promisor, such as:
- To recover damages, he is forced to pay
- To recover legal costs, he had to bear while defending or filing a case
- To recover any amount paid in settlement of the case, if it was a reasonable or authorized decision
How Much is the Indemnifier Liable For?
There is no fixed rule about how much an indemnifier has to pay. The amount depends on what both parties agreed upon in the contract. Courts look at the specific terms and conditions of the contract in each case to decide the compensation. In United Commercial Bank vs. Bank of India (1981), the Supreme Court held that if all conditions of a bank guarantee are met, courts should not stop the payment promised in the guarantee. This showed that the indemnity through bank guarantees creates a strong obligation to pay.
Conclusion
Contracts of indemnity play an important role in protecting people from unexpected losses. Whether it's business, banking, or personal matters, indemnity ensures that one party does not suffer unfairly due to the actions of another. Though simple in purpose compensating for a loss the legal structure requires clear agreements and understanding between the parties. With proper execution, indemnity contracts serve as an essential tool in ensuring fairness and accountability in legal and commercial relationships.
