Nature and Meaning of Contract of Indemnity.

Contract of indemnity: 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. The person who promises to compensate the loss is called the indemnifier and the person who is so promised is called the indemnity holder. 

According to the definition of indemnity, the loss to be made good must be caused either by the conduct of the promisor himself or by the conduct of any other person, and, so if the loss is caused by accident or by the conduct of the promisee (indemnity holder), there would be no indemnity. However, the Indian Courts have taken the view that this interpretation is not correct and that indemnity cannot exclude insurance.

A contract of indemnity being basically a contract, it has to possess all the essential elements of a valid contract such as free consent, lawful consideration and competence of parties to enter into contract etc. Further, a contract of indemnity can be either express or implied. An implied contract of indemnity can be inferred from the conduct of the parties or the circumstances of the case.

Since the Contract Act has not stated the time of the commencement of the indemnifiers liability to indemnify and the word ‘loss’ has been used in Section 124, doubt arises as to the commencement of the promisors liability. However, it is the settled position of law that the indemnified (promisee) does not have to wait till the time he has to actually sustain the loss. He can compel the indemnifier to place him in a position to meet the liability that may be cast upon him without waiting until the promisee has actually discharged it.

Rights of indemnity holder : As we have already seen, contract of indemnity is a contract where the indemnifier promises the indemnity holder to save the latter from any loss that may be caused to him under the contract. From this, the rights of the indemnity holder can be stated as follows:

1. If the indemnity holder has to pay any compensation to any party in any suit in respect of any matter pertaining to which the indemnity applies, he can recover the same from the indemnifier;

2. He can recover from the indemnifier all costs of suit which he has to pay to such third party (provided he has acted in good faith, under the authority of the indemnifier and as per his instructions);

3. If any amount has been paid by the indemnity holder to any third party in any such suit by way of compromise, he can recover the same from the indemnifier, provided such compromise was not contrary to the orders of the indemnifier. 

Rights of indemnifier: The Act is silent as to the rights of the indemnifier. However, his rights are similar to the rights of Surety under contract of guarantee. 

For example, he becomes entitled to all securities which the creditor has against the principal debtor. (Students are advised to refer to “rights of Surety” under the contract of guarantee.)

 Nature and Meaning of Contract of Indemnity.

 Nature and characteristics of contract of guarantee and its various types

 Contracts of Indemnity and Contracts of Guarantee

 Essential features of a wagering agreement

 What are mistake of fact and mistake of law?

 What is Quasi Contracts?

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