INDEMNITY
Meaning
Under section 124 of Indian Contract Act, 1872 ,”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.”
In this type of contract, one party promises to indemnify or compensate the other party for any losses or damages arising from a specified event. The event could be anything, such as the loss of property, injury, or legal action.
The person who promises to make good the losses is called the ‘indemnifier’ and the person whose loss is to be made good is the ‘indemnified or indemnity-holder’.
For example, if a person enters into a contract of indemnity with an insurance company, the insurance company agrees to compensate the person for any loss or damage that may occur to the insured property, subject to the terms and conditions of the policy.
Essential elements of contract of Indemnity
1. Contractual Relationship: There must be a contractual relationship between the indemnifier and the indemnified party. It means that there must be an agreement between the two parties, where one party agrees to compensate the other party for any loss or damage.
2. Loss or Liability: There must be a loss or liability suffered by the indemnified party, either actual or potential. This loss must be caused by the action of the indemnifier or any other person, for whom the indemnifier is responsible.
3. Promise to Indemnify: There must be a promise by the indemnifier to compensate the indemnified party for any loss or damage suffered by the latter. The promise can be express or implied.
4. Lawful Act: The act for which indemnity is sought must be lawful. If the act is illegal, the contract of indemnity will be void.
5. Consent: The contract of indemnity must be entered into with the free consent of both the parties. The consent must not be obtained by coercion, undue influence, fraud, misrepresentation, or mistake.
Rights of indemnified or indemnity-holder
Under section 125, the promisee in the contract is entitled to some rights which are:
i. Right to Claim Indemnity: The indemnity holder has the right to claim indemnity from the indemnifier for any loss or damage suffered by him/her as a result of the specified event covered by the contract of indemnity.
ii. Right to Defend Legal Proceedings: If the indemnified party is involved in any legal proceedings related to the event covered by the contract of indemnity, the indemnity holder has the right to defend such proceedings on behalf of the indemnifier.
iii. Right to Terminate the Contract: If the indemnifier breaches any of the terms of the contract of indemnity, the indemnity holder has the right to terminate the contract and claim compensation for any loss or damage suffered as a result of the breach.
iv. Right to Inspect Relevant Documents: The indemnity holder has the right to inspect all relevant documents related to the event covered by the contract of indemnity, in order to ascertain the extent of the loss or damage suffered.
Rights of indemnifier
The rights of an indemnifier under the Indian Contract Act, 1872 are as follows:
i. Right to be Informed: The indemnifier has the right to be informed by the indemnified party about any loss or damage suffered by him/her as a result of the specified event covered by the contract of indemnity.
ii. Right of Subrogation: The indemnifier has the right of subrogation, which means that he/she can take legal action against any third party responsible for the loss or damage suffered by the indemnified party, in order to recover the amount of indemnity paid by him/her.
iii. Right to Receive Information: The indemnifier has the right to receive all relevant information related to the event covered by the contract of indemnity, in order to ascertain the extent of the loss or damage suffered by the indemnified party.
