Section 124: A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a ‘contract of indemnity’.
Illustration: A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
In common parlance, the word ‘indemnity’ implies reimbursement against financial loss or to protect someone from incurring a loss. The word ‘indemnity’ means security or protection against a financial liability. It usually occurs in the form of a contractual agreement made between parties in which one party agrees to pay for losses or damages suffered by the other party. In law, the contract of indemnity is 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. Thus, indemnity is based on a mutual contract between two parties (one insured and the other insurer) where one promises the other to compensate for the loss against payment of premiums.
“The concept of indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for potential losses or damages caused by the other party. A typical example is an insurance contract, whereby one party (the insurer or the indemnitor) agrees to compensate the other (the insured, or the indemnitee) for any damages or losses, in return for premiums paid by the insured to the insurer.” Investopedia
“An indemnity is a contract, express or implied to keep a person, who has entered into or who is about to enter into, a contract or incur any other liability, indemnified against loss, independently of the question whether a third person makes a default.” Halsbury
“The term indemnity is used in law in different senses. In its widest sense, it means recompense for any loss or liability which one person has incurred, whether the duty to indemnify comes from an agreement or not.” Chitty
There are two parties in a contract of indemnity as under—
Section 124 deals only with one particular kind of indemnity which arises from a promise made by the indemnifier to save the indemnified from the loss caused to him by the conduct of the indemnified himself or by the conduct of any other person. It does not deal with those classes of cases where the indemnity arises from the loss caused by events or accidents which do not or may not depend upon the conduct of the indemnifier or any other person, or by reason of liability incurred by something done by the indemnified at the request of the indemnifier. State Bank of India vs Moti Thawardas Dadlani 1)
Under section 125 of the Indian Contract Act, 1872, the promisee, acting within the scope of his authority, is entitled to recover from the promisor all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies.United India Insurance Co. Ltd. vs Pratibha Rathi 2)
An indemnity clause plays a vital role in the managing the risks which are associated with the commercial transactions which protects against the effects of the contractual default or negligence by the other party. Basically, the general approach is to seek an indemnity which will protect a party to the maximum possible extent against the liabilities which arise from the actions of the other party. While drafting the contract, the indemnity clause must be carefully examined by the parties.
Indemnity clauses place legal responsibility for risk onto a particular company or party, and in some cases increase the actual degree of risk a company shoulders when compared to common law practices. By using an indemnity clause, the indemnifying company may potentially assume more than its fair share of risk from a legal standpoint.
For example, a supplier may assume all liability associated with a particular product, even if the product becomes damaged due to an accident caused by the retailer. Other types of indemnity clauses may only take on a limited degree of risk that accounts for unforeseen accidents or mistakes, while still others only protect against accidents or mistakes caused by the indemnifying company or the party shouldering the risk.
Generally, the indemnity clauses are drafted too widely seeking to cover third parties and circumstances beyond the ordinary circumstances actionable under the common law. In some circumstances, the indemnity clauses also seek to apply even when there is no breach of contract by the party. A very god example of indemnity is the guarantee in which one party indemnifies another party for the act, default or breach of a third party. Indemnities in these circumstances can therefore extend into unintended onerous obligations which the common law would not otherwise impose.
A contract of insurance is a contract by which the insurer promises to save the insured from the loss caused to him by the conduct of any other person. Indemnities form the basis of many insurance contracts; for example, a car owner may purchase different kinds of insurance as an indemnity for various kinds of loss arising from operation of the car, such as damage to the car itself, or medical expenses following an accident. In an agency context, a principal may be obligated to indemnify his agent for liabilities incurred while carrying out responsibilities under the relationship. While the events giving rise to an indemnity may be specified by contract, the actions that may be taken to compensate the injured party are largely unpredictable, and the maximum compensation is often expressly limited.
Insurance is a contract of indemnity only; consequently, an insurer of property, upon payment of the amount due under the contract, is subrogated to the assured, that is, is considered in equity as standing order in the place, and may pursue his remedies against a person primarily liable for the loss. Leake on Contracts
A contract of motor insurance, like marine or accident insurance, is, in essence, one of indemnity and that the insurer, when he has indemnified the assured, is subrogated to his rights and remedies against the third party who has occasioned the loss. This right of the insurer to subrogation is to get into the shoes of the assured as it were, need not necessarily flow from the terms of the motor insurance policy, but inherent in and springs from the principles of indemnity.Vasudeva vs Caledonian Insurance Company3)
Adv. Sunil Sharma is a writer for about 25 years and has authored more than 40 books on Law.