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Contract of Indemnity

 CONTRACT OF INDEMNITY


INTRODUCTION:

It has been derived from the latin word ‘indemnis’ which means unharmed or undamaged. 

Section 124 – A contract by which one party promises to save the order 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 contract of indemnity is a special type of contract, wherein, one party promises to indemnify/save the other party who is promised to be saved against the loss is known as ‘indemnified’ or ‘indemnity-holder’. The section defines a contract of indemnity as one under which the promisee promises to save the other from loss caused to him by the promisor’s conduct, or from the action of a third person. 

The term ‘indemnity’ literally means to make good the loss or compensate for the losses. 

SOME SPECIAL CASES OF IMPLIED INDEMNITY

Section 69: according to this section is a party who is interested in payment of money which another is destined by law to pay and therefore himself pays it, he is designated to be indemnified. 

Section 145: a party is provided with the right of the surety to claim indemnity from the principal defaulter for all sums which he has lawfully paid towards the guarantee. 

Section 222: this section provides for liability of the principal to indemnify the agent in respect of all amounts paid by him during the legitimate exercise of his power. 

RIGHTS OF INDEMNITY – HOLDER WHEN SUED (SECTION 125)

Section 125: rights of indemnity-holder when sued – the promisee is a contract od 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.

As per Section 125 of the Indian Contract Act, 1872 the following rights are available to the promisee/ the indemnified/ indemnity-holder against the promisor/ indemnifier, provided he has acted within the scope of his authority.​

  • RIGHT TO RECOVER DAMAGES PAID IN A SUIT [SECTION 125(1)]: An indemnity-holder has the right to recover from the indemnifier all damages which he may be compelled to pay in any suit in respect of any matter to which the contract of indemnity applies.​


  • RIGHT TO RECOVER COSTS INCURRED IN DEFENDING A SUIT [SECTION 125(2)]: An indemnity-holder has the right to recover from the indemnifier 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.​


  • RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE [SECTION 125(3)]: An indemnity-holder also has the right to recover from the indemnifier 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.​

RIGHTS OF INDEMNIFIER

  • The rights of Indemnifier have not been mentioned expressly anywhere in the Act. These rights have been established purely on the basis of case judgements and court rulings on this matter. In Jaswant Singh v. Section of State (14 BOM 299), it was held that the rights of the indemnifier are similar to the rights of a surety under Sec. 141 of the Indian Contract Act, 1872, where he becomes entitled to all the securities that a creditor has against a principal debtor whether he’s aware of them or not. ​


  • When a person agrees to indemnify, after such indemnification he becomes entitled to all the ways and means by which the original indemnity holder had shielded themselves from any loss or set up a compensation for that loss. Once he has paid for the damages caused, he steps into the shoes of the indemnity holder. This is called the principle of subrogation. ​



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