According to Longman’s Dictionary of Contemporary English meaning, indemnity is protection against loss, esp. in the form of a promise to pay, or payment for loss of money, goods, etc. According to Chambers New English Dictionary, “Indemnity is a security against, or compensation for loss, etc.” For instance, 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 a contract of indemnity, the person who promises to indemnify is known as “indemnifier”, and the person in whose favour such a promise is made is known as “indemnified” or “indemnity holder”.
According to Section 124 of the Indian Contract Act, 1872, a contract of indemnity means “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 conduct of any other person.” This provision incorporates a contract where one party promises to save the other from loss which may be caused, either
(i) by the conduct of the promisor himself; or
(ii) by the conduct of any other person.
This definition covers indemnity for loss caused by human agency only. It does not deal with those classes of cases where the indemnity arises from 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(GajananMoreshwar v. Moreshwar Madan, A.I.R. 1942 Bom. 302, at p. 303.).
We can say that A contract of indemnity is an original and direct engagement between two parties. It is really a kind of ‘contingent’ contract. The promise under a contract of indemnity must have suffered loss before he can hold the promisor liable; the happening of the loss is the contingency on which the liability of the indemnifier springs into existence.
The general principles of the law of contract are also applicable to a contract of indemnity. Thus, the consideration or object of an indemnity contract must be lawful. For example, an agreement to indemnify the printer/publisher of a libel by the writer of the same cannot be enforced. Likewise, an agreement by an accused or any other person to indemnify the person who has given bail is illegal.
Rights of the indemnity holder
In a suit against the indemnity holder, he may have been compelled to pay damages, and incurred costs, etc. In his own turn, he can bring an action against the promisor (indemnifier) to recover damages and costs, etc. paid by him, if the indemnifier has promised an indemnity in such a case. The provision in this regard is contained in Section 125, which reads as under:
“125. Rights of indemnity holder when sued. 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 indemnity 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.”
We can say that indemnity holder is entitled to recover from the promisor all damages, all costs and all sums which he may has paid under the terms of any compromise not contrary to orders of the promisor of any such suit.