Define a contract of Indemnity. What are the essential elements of a contract of Indemnity? What are the rights of Indemnity holder?

Contract of Indemnity:-

In the old English law, Indemnity was defined as a promise to save a person harmless from the consequences of an act. Such a promise can be express or implied from the circumstances of the case. This view was illustrated in the case of Adamson vs Jarvis 1872. In this case, the plaintiff, an auctioneer, sold certain goods upon the instructions of a person. It turned out that the goods did not belong to the person and the true owner held the auctioneer liable for the goods. The auctioneer, in turn, sued the defendant for indemnity for the loss suffered by him by acting on his instructions. It was held that since the auctioneer acted on the instructions of the defendant, he was entitled to assume that if, what he did was wrongful, he would be indemnified by the defendant.

Section 124 - A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person is a "contract of Indemnity".

Illustration - A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of Rs 200. This is a contract of indemnity

Essentials of a contract of indemnity 

A valid contract of indemnity should fulfill the following conditions:

Anticipated loss: A contract of indemnity is a security for an anticipated loss.

Requirements of valid contract: Contract of indemnity being a species of contract must have all essentials of a valid contract like free consent, competence of the parties, consideration, etc.

To save other party: There must be a promise to save the other party from some loss.

Covers only the actual loss: It covers only the actual loss may be due to the promisor himself or any other person and it covers only the loss caused by an event mentioned in the contract. The event mentioned in the contract must happen.

May be express or implied: The contract of indemnity may be express or implied. An express promise is one where a person promises to compensate the other party in express term. Implied promise is one where the conduct of the promisor shows his intention to indemnify the other party from loss.

Depend on good faith: This contract depends on good faith. 

Rights of the indemnity holder :-Section 125, defines the rights of an indemnity holder. These are as follows - 

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor 

Right of recovering Damages :- 

All damages that he is compelled to pay in a suit in respect of any matter to which the promise of indemnity applies.

 Right of recovering Costs :-

All costs that he is compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor and has acted as it would have been prudent for him to act in the absence of the contract of indemnity, or if the promisor authorized him in bringing or defending the suit.

Right of recovering Sums :- 

All sums which he may have paid under the terms of a compromise in any such suite, if the compromise was not contrary to the orders of the promisor and was one which would have been prudent for the promisee to make in the absence of the contract of indemnity, or if

The promisor authorized him to compromise the suit.

As per this section, the rights of the indemnity holder are not absolute or unfettered. He must act within the authority given to him by the promisor and must not contravene the orders of the promisor. Further, he must act with normal intelligence, caution, and care with which he would act if there were no contract of indemnity.

At the same time, if he has followed all the conditions of the contract, he is entitled to the benefits. This was held in the case of United Commercial Bank vs Bank of India AIR 1981. In this case, Supreme Court held that the courts should not grant injunctions restraining the performance of contractual obligations arising out of a letter of credit or bank guarantee if the terms of the conditions have been fulfilled. It held that such LoCs or bank guarantees impose on the banker an absolute obligation to pay.

Commencement of liability:-

In general, as per the definition given in section 124, it looks like an indemnity holder cannot hold the indemnifier liable until he has suffered an actual loss. This is a great disadvantage to the indemnity holder in cases where the loss is imminent and he is not in the position to bear the loss. In the case of Gajanan Moreshwar vs Moreshwar Madan, AIR 1942, Bombay high court observed that the contract of indemnity held very little value if the indemnity holder could not enforce his indemnity until he actually paid the loss. 

If a suit was filed against him, he had to wait till the judgment and pay the damages upfront before suing the indemnifier. He may not be able to pay the judgment and could not sue the indemnifier. Thus, it was held that if his liability has become absolute, he was entitled to get the indemnifier to pay the amount.