Contract of Indemnity

Introduction

A contract of indemnity is an important special contract under the Indian Contract Act, 1872. It provides protection against loss in legal and business transactions. It ensures that one party is compensated when a loss occurs.

This concept is widely used in commercial dealings and forms the basis of many financial arrangements.

Meaning / Definition

Section 124 of the Indian Contract Act, 1872 defines a contract of indemnity as:
“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.”

• Indemnifier: The person who promises to make good the loss
• Indemnity holder: The person whose loss is to be compensated

The contract creates a right in personam (right enforceable against a specific person only).

Under Indian law, indemnity applies to loss caused by human conduct. It is generally treated as a contingent contract (dependent on happening of an event), enforceable when the loss occurs.

Modes or Types

Express Indemnity

An indemnity is express when the promise to compensate is clearly stated in words, either written or spoken.

Implied Indemnity

An indemnity is implied when it is inferred (understood) from the conduct of the parties or circumstances of the case.

Important Case Law

• Adamson v. Jarvis
  A person acting on the request of another is entitled to indemnity if the act results in loss.

• Dugdale v. Lovering
  Indemnity may arise even without express promise when intention is clear from conduct.

• Sheffield Corporation v. Barclay
  A party acting on another’s request can recover loss through indemnity.

• Secretary of State v. Bank of India
  A person acting in good faith on another’s request can claim indemnity if loss is caused to a third party.

Practical Example

A asks B to sell certain goods. Later, it is found that the goods belong to someone else, and B suffers loss. B can recover the loss from A. This is a contract of indemnity.

Summary

• Defined under Section 124 of the Indian Contract Act, 1872
• One party promises to compensate another for loss
• Parties are indemnifier and indemnity holder
• Creates rights in personam (against specific person)
• Can be express or implied
• Enforceable when the loss occurs