The word “indemnity” means “protection against loss.” One party is the indemnifier in a contract of indemnity, and the other party promises to indemnify the indemnifier, i.e., claim indemnity for the damage caused to the other party. Indemnity refers to a promise to protect a person blameless from the consequences of an act. 

An indemnity contract also covers damages caused by other than humans, such as fire accidents and other natural disasters. Section 124 of the Indian Contract Act, 1872, defines a contract of indemnity as:

“A contract by which one party promises to protect the other from damage caused by the promisor’s conduct or the conduct of any other person.”

Historical Decision Related to Contract of Indemnity, Guarantee and Insurance

The meaning is further elaborated under the Indian Contract Act’s definition of indemnity, which states that the indemnifier’s liability is limited to the damage caused by the promisor’s or any other person’s actions. The key citation is Punjab National Bank vs. Vikram Cotton Mills. It is stated that under an indemnity contract, the promisor’s liability originates from the loss caused to them by their action or action in the conduct of another person.

This was further explained in the Gajanan Moreshwar vs. Moreshwar Madan case, which stated that every insurance contract, excluding life insurance, contains a contract of indemnity in the event of a loss caused by a human agency. Furthermore, in the case of Moreshwar vs. Moreshwar, it was held that the damage caused by the indemnifier’s or any other person’s action originates from a promise made by the indemnified person but is unrelated to them. 

Section 124 deals with a unique type of compensation in circumstances when compensation is derived from loss caused by occurrences or incidents that may not be reliant on the indemnifier but has been agreed by the indemnifier to  compensate.

In the Secretary of State vs. Bank of India case, a broker in command of a government promissory note forged an endorsement and gave it to a bank. In good faith, the bank applied for and received a fresh promissory note from the Public Debt Office. Meanwhile, the genuine owner filed a conversion lawsuit against the Secretary of State, who then sued the bank based on an implicit indemnification. It was held that it is a general principle of law that when one person performs an act at the request of another, that act is not inherently tortious to the person performing it. Such an act injures the rights of a third person; the person performing it is entitled to an indemnity from him.

Nature of Contract of Indemnity

Depending on the circumstances, an indemnification contract may be explicit or implied. Special circumstances of implied indemnity are also addressed in the Indian Contract Act –

• Under Section 69, indemnification is when a person pays the money that another is legally obligated to pay.
•  Section 145 gives a surety of the right to seek indemnification from the principal debtor for all sums he has legally paid towards the guarantee.
• Section 222 imposes on the principle the obligation to indemnify the agent for all amounts paid by him in the proper exercise of his authority.
• Section 125 of the Act simply states the rights of the indemnified and says nothing about the indemnifier’s rights, as if the indemnifier has no rights and only a duty to the indemnified.
• In the current logical condition of affairs, we may easily deduce that the indemnifier’s right is the same as that of the surety if we read Section 141, which deals with surety rights.

Right of indemnity holder as per section 125

The following rights are available to an indemnity holder acting within the scope of his authority:

• Damages recovery: He is entitled to all damages he may have been forced to pay in any suit relating to any topic covered by the contract.

• Costs recovery: He is entitled to all costs incurred in the institution and defence of the lawsuit.

• Right to recoup funds paid under compromise: He is entitled to recoup all sums paid under the provisions of the compromise agreement. The compensation must not, however, go against the indemnifier’s wishes. It must be prudent, and the indemnifier must approve it.

• Right to claim for specific performance: If he has incurred absolute liability and the contract includes such liability, he has the right to sue for specific performance. In a contract of indemnification, the promisee has the right to recover from the promisor if he acts within the scope of his authority.

Example

The indemnity holder is entitled to reclaim any charge imposed in any case or suit to which the indemnifier’s promise applies. Amit and Sumit may, for example, agree that if Rajesh sues Sumit on a specific matter, Amit will defend Sumit. Sumit is compelled to settle because Rajesh has filed a lawsuit against him. Amit shall be accountable for all payments made by Sumit to Rajesh in that case, according to the contract.

Difference between indemnity and guarantee

A contract of indemnity has two parties: the indemnifier and the indemnified. Aside from that, the contract of guarantee involves three parties: creditors, primary debtors, and sureties, among others. In most cases, indemnity is used to compensate for a loss, whereas the guarantee protects the creditor. The indemnifier’s liability is primary in a contract of indemnity, and it comes primarily from an accidental event. The indemnifier has no claim against the third party after completing his share of the contract and can only sue the third party if there is an assignment in his favour.

Conclusion

An indemnification agreement holds one party liable for any harm or loss suffered by the other party due to the promisor’s or other party’s acts. Because the law prohibits people from transferring their obligations onto others or attempting to avoid liability, a simple indemnification provision in a contract does not always resolve liability issues.