A Contract of Indemnity is a specialized commercial tool designed to protect one party from financial risk or loss arising from a transaction or the conduct of others.
1. Statutory Definition: Section 124
Under Section 124 of the Indian Contract Act, 1872:
"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 called a contract of indemnity."
- Indemnifier: The promisor who promises to make good the loss.
- Indemnity Holder / Indemnified: The promisee who is protected from loss.
Note: The Indian definition is narrower than the English definition, as it only covers losses caused by human conduct (the promisor or third parties) and does not explicitly cover losses arising from natural accidents or fire (which are governed as Contingent Contracts in India).
2. Rights of an Indemnity Holder: Section 125
Under Section 125, the indemnity holder, when sued, is entitled 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 promise to indemnify applies.
- All costs which he may be compelled to pay in such suit (provided he acted prudently or with the indemnifier's authorization).
- All sums paid under the terms of any compromise of any such suit.
3. Commencement of Liability
When does the indemnifier's duty to pay begin?
- English Common Law: Historically, the indemnity holder had to suffer actual out-of-pocket loss first ("you must be damnified before you can claim to be indemnified").
- Indian Law: The landmark case Gajanan Moreshwar v. Moreshwar Madan (1942) settled that the indemnity holder can compel the indemnifier to pay as soon as the liability becomes absolute and clear, even before suffering any actual out-of-pocket loss.