What is a Contract of Indemnity ?

The word indemnity simply means “to make good the loss”. In law terms, a contract of indemnity is defined as a legal contract between two parties whereby one party agrees to compensate the loss incurred to the other party , either caused by his conduct or by the conduct of some third party.

However, this contract does not covers the loss caused by – Conduct of promise, accident or by the act of God , for e.g- earthquakes, floods etc.

The objective of entering into a contract of indemnity is to protect the promisee against unanticipated losses.

PARTIES INVOLVED IN CONTRACT OF INDEMNITY

There are two parties to the contract of Indemnity i.e

  • Indemnifier or the promisor :- The person who promises to protect another from the loss
  • Indemnity holder or the promisee :- The person who is so protected or whose loss is to be compensated.

FEATURES OF A CONTRACT OF INDEMNITY :-

  1. A Contract of indemnity is just like any other contract and must fulfill all the essentials of a valid contract ,e.g consideration , free consent , competency of parties , lawful object etc.
  2. The mode of the contract of indemnity can be either express or implied.
  3. The contracts of insurance, i.e. Fire and Marine Insurance will be covered under the contract of indemnity, but life insurance is not covered in it.

RIGHTS OF INDEMNITY HOLDER

The indemnity holder can exercise the following rights in this contract if he acts within the scope of his authority-

  • The indemnifier is liable to pay all the damages claimed by the indemnity holder in a suit.
  • The indemnity holder has the right to claim the costs incurred in litigating the suit.
  • If the parties agree to legally compromise the suit, the indemnifier has to pay the compromise amount.

RIGHTS OF INDEMNIFIER

  • Once the indemnity holder is compensated for the loss caused, the indemnifier possesses all the rights to all the methods and resources that can save the indemnifier from loss.
  • If the indemnity holder is compensated for the losses , the indemnifier gets the right to sue the third parties on behalf of the indemnity holder.
  • He can sue the third parties only to the extent of damages he has paid to the indemnity holder.

 

Thus, in simple words the contract of indemnity is a special contract which involves one party promising the other party to make good its losses either caused by himself or by some third party and is defined u/s 124 of the Indian Contract Act, 1872.

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