What is Contract of Indemnity?

(This article explains the meaning of contract of Indemnity; features of Indemnity Contract, rights and duties of indemnity holder.)

Definition of contract of indemnity:

Section 124 of contract Acts defines contract of indemnity as “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”.

From the above definition of indemnity we comprehend that the indemnity holder is entitled to recover from the indemnifier only when the following condition is necessarily to be fulfilled.

• There must be a loss and (ii) indemnifier is liable only for the loss caused to him either by the indemnifier (promisor) or by any other person.

Rights of indemnity holder:

Section 125 of contract act defines the right of indemnity holder when sued as under.

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;

(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit;

(3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.

From the above definition we may conclude that

1. The indemnity holder has the right to recover the damages to which the promise to indemnify applies,
2. The indemnity holder also has the right of recovering cost of the suit in bringing or defending it.
3. The indemnity holder has the right of recovering sums paid under the terms of any compromise of any such suit, if the compromise is not contrary to the orders of the promisor.

The precaution to be taken by the indemnity holder:

The duties of the indemnity holder is not mentioned anywhere in the law but his rights are not absolute or unrestricted. The indemnity holder has some implied duties and he has to take precautions such as he must act within the terms and conditions of the contract of indemnity and he should not contravene the orders of the promisor. Any alteration of conditions of the contract can facilitate the indemnifier to reject the claim of indemnification.

Indemnity bonds obtained by the banks:

Whenever a depositor of the bank who lost the term deposit issued by the bank or purchaser of demand draft who lost the draft purchased by him would request the bank to issue duplicate deposit receipt/ duplicate demand draft in lieu of the original. In such occasions banks obtain indemnity bond from the applicant to indemnify the bank against any losses/damages incurred by the bank on account of issuing such duplicate deposit/ DD.