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Contract of Indemnity

The document discusses the differences between a contract of indemnity and a contract of guarantee. A contract of indemnity involves two parties - the promisor who promises to compensate the promisee for any losses. It provides protection for only the promisee. In contrast, a contract of guarantee involves three parties, where the surety guarantees a debt owed by the principal debtor to the creditor, creating both primary and secondary liabilities.

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Adan Hooda
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2K views

Contract of Indemnity

The document discusses the differences between a contract of indemnity and a contract of guarantee. A contract of indemnity involves two parties - the promisor who promises to compensate the promisee for any losses. It provides protection for only the promisee. In contrast, a contract of guarantee involves three parties, where the surety guarantees a debt owed by the principal debtor to the creditor, creating both primary and secondary liabilities.

Uploaded by

Adan Hooda
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Q. What is Contract of Indemnity?

Explain the difference between Indemnity


and Guarantee.
Ans. Contract of indemnity meaning is a special kind of contract. The term ‘indemnity’ literally
means “security or protection against a loss” or compensation. According to 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.”

Example: P contracts to indemnify Q against the consequences of any proceedings which R may
take against Q in respect of a certain sum of money.

OBJECTIVE OF CONTRACT OF INDEMNITY


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

PARTIES TO THE CONTRACT OF INDEMNITY


A contract of indemnity has two parties.
1. The promisor or indemnifier
2. The promisee or the indemnified or indemnity-holder

The promisor or indemnifier: He is the person who promises to bear the loss.
The promisee or the indemnified or indemnity-holder: He is the person whose loss is covered
or who are compensated.

ESSENTIALS OF CONTRACT OF INDEMNITY

1. PARTIES TO A CONTRACT: There must be two parties, namely, promisor or


indemnifier and the promisee or indemnified or indemnity-holder.
2. PROTECTION OF LOSS: A contract of indemnity is entered into for the purpose of
protecting the promisee from the loss. The loss may be caused due to the conduct of the promisor
or any other person.
3. EXPRESS OR IMPLIED: The contract of indemnity may be express (i.e. made by
words spoken or written) or implied (i.e. inferred from the conduct of the parties or
circumstances of the particular case).
4. ESSENTIALS OF A VALID CONTRACT: A contract of indemnity is a special kind
of contract. The principles of the general law of contract contained in Section 1 to 75 of the
Indian Contract Act, 1872 are applicable to them. Therefore, it must possess all the essentials of
a valid contract.

NUMBER OF CONTRACTS: In a contract of Indemnity, there is only one contract that is


between the Indemnifier and the Indemnified.

RIGHTS OF PROMISEE/ THE INDEMNIFIED/ INDEMNITY HOLDER


As per Section 125 of the Indian Contract Act, 1872 the following rights are available to the
promisee/ the indemnified/ indemnity-holder against the promisor/ indemnifier, provided he has
acted within the scope of his authority.
1. RIGHT TO RECOVER DAMAGES PAID IN A SUIT [SECTION 125(1)]:  An
indemnity-holder has the right 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 contract of indemnity applies.
2. RIGHT TO RECOVER COSTS INCURRED IN DEFENDING A SUIT [SECTION
125(2)]: An indemnity-holder has the right to recover from the indemnifier all costs which he
may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene
the orders of the promisor, and acted as it would have been prudent for him to act in the absence
of any contract of indemnity, or if the promisor authorized him to bring or defend the suit.
3. RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE [SECTION
125(3)]: An indemnity-holder also has the right to recover from the indemnifier all sums which
he may have paid under the terms of any compromise of any such suit, if the compromise was
not contrary to the orders of the promisor, and was one which it would have been prudent for the
promisee to make in the absence of any contract of indemnity, or if the promisor authorized him
to compromise the suit.

COMMENCEMENT OF LIABILITY OF PROMISOR/ INDEMNIFIER


Indian Contract Act, 1872 does not provide the time of the commencement of the indemnifier’s
liability under the contract of indemnity. But different High Courts in India have held the
following rules in this regard:

 Indemnifier is not liable until the indemnified has suffered the loss.
 Indemnified can compel the indemnifier to make good his loss although he has not
discharged his liability.

In the leading case of Gajanan Moreshwar vs. Moreshwar Madan(1942), an observation was
made by the judge that “ If the indemnified has incurred a liability and the liability is absolute, he
is entitled to call upon the indemnifier to save him from the liability and pay it off”.

Thus, Contract of Indemnity is a special contract in which one party to a contract (i.e. the
indemnifier) promises to save the other (i.e. the indemnified) from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other person. Section 124 and 125 of
the Indian Contract Act, 1872 are applicable to these types of contracts.
Difference Between Indemnity and Guarantee
BASIS INDEMNITY GUARANTEE
No. of It includes three parties i.e. Principal
It has two parties.
parties Debtor, surety, creditor.
It has two contracts. One is the
No. of
It has only one contract. Principal contract and the other is
Contracts
the guarantee contract.
Its nature is to compensate someone for loss
and is independent of the obligations of the Its nature is to create secondary
Nature
party whose covenants are being reinforced obligations.
by the provision of indemnity.
It has only primary It has only primary It has two liabilities. Primary and
liability. It provides that the liability of the
secondary. Primary is with Principal
Liability
indemnifier is to run with any loss by the Debtor and secondary which lies
person he indemnifies. with the surety.
Under it, obligation of guaranty
Obligation under indemnity arises out of contract is triggered by a demand
Obligations
occurrence of an event. which says the principal debtor is at
fault.
In it liability remains under the transaction When the guarantor pays the sum
Discharge notwithstanding that the debtor is discharged for which he is liable then he
under the main contract. extinguishes his liability.
In guarantee, if surety makes
Under the contract of indemnity the claimant
payment to creditor, surety can
Remedy can recover all the loss if there is a breach of
recover that amount from principal
a contract.
debtor.
     

Proof of loss Under the contract of indemnity, a buyer can Under it, the buyer has to proof the
recover any losses without having to prove loss suffered due to breach of
  that loss. guarantee to be entitle for damages.
The limitation period starts from the date
Limitations –
when loss is suffered.

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