Contract of indemnity

Contract of indemnity: An indemnity contract is a legal arrangement between two parties in which one party agrees to pay another party for a loss or harm that meets certain requirements and conditions unless other circumstances are specified. It is a form of contingent contract which is characterized by all the essential elements of a valid contract.

In an indemnity contract, there are only two parties, as stated in:

• The indemnifier:
  The promisor, who agrees to make up the damage caused to the other group, is called the Indemnifier.
• The Indemnified:
  the person who is assured of compensation for the damage incurred (if any) is referred to as the indemnity holder or the indemnified.

The mode of the compensation contract can be express or implied, i.e. if a person expressly agrees to save the other from damages, the mode of the contract will be stated, while if the contract is signified by the terms of the case, the mode of the contract will be implied.

Examples of the Contract of indemnity are given below:

1. Suppose John had sold Paul a house at Peter’s direction. Afterwards it is revealed that Alex is the house’s registered owner. Alex got back John’s sum for selling his house. John will now recoup Peter’s fee. This is an implicit form of an indemnity contract.
2. Beta Insurance Company entered into a deal with Alpha Ltd. to reimburse the company’s stock of products up to Rs. 50,00,000 for a premium of Rs.1,00,000 for damages incurred by accidental fire. That is an explicit type of an indemnity contract.

Rights of indemnity holder

Section 125 of the Indian contracts act states:
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 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.

Rights of the Indemnifier

• After the indemnity holder is paid for the damage incurred, the compensator shall have all the rights to all the methods and services which can save the compensator from the damage.

The essence of the indemnity contract is the loss to the party, i.e. Indemnification can only be done if the loss to the other party is incurred, or if it is certain that the loss will incur.
The Indian Contract Act of 1872 does not provide for the time to commence the liability of the indemnifier under the contract.

• Right to sue the third party.

As soon as the indemnifier has indemnified the indemnity-holder against the damages and amount of the property, he is entitled to have full rights over the property and has the right to sue the third party for that property too. Before paying damages to the indemnity holder, he cannot sue the third party.

For example- A has promised B to indemnify him in case he suffers damage to his car because of C. Afterwards when B suffers the damage because of C and asks for money from A, A indemnifies him and gets the right over the car. Now A has a right to sue C and claim damage.

• Compensate losses which are covered in the deed.

The indemnifier has a right to pay for only those losses which are covered in the contract of indemnity. In Ramaswami Vs Muthukrishna High Court ordered the indemnifier to pay the plaintiffs only for a sum of Rs. 1236/- which was the actual loss suffered by him. The further appeal filed in Supreme Court to recover more amount from the defendant was dismissed.

• Right under Doctrine of Subrogation.

According to surety’s subrogation rights, after settling the claims of the former creditor, the surety steps into the shoes of the creditor and in certain cases is entitled to receive the whole amount from the debtor. Similarly, indemnifier also has rights in some cases to recover the money or possession.