What is Indemnity?

Indemnity, in general, has a lot of meanings. One being – that ‘Indemnity’ is the protection against any financial liability or burden. The other being – that ‘Indemnity’ is the sum of money which is generally paid as a compensation by a country which has been defeated to the other country as a peace offering. Yet another meaning being – that providing of legal exemption from the responsibilities and acts of a person.

What is ‘Contract of Indemnity?’

A ‘Contract of Indemnity’ can be defined as a contract between two parties where one party makes a promise to save the other party from all the losses, be it monetary or otherwise, which has been caused to him because of the Contract of the Promisor.[1]

Illustration 1: A makes a Contract of Indemnity with B. A makes contracts to indemnify B against all the consequences of any legal proceeding which can be undertaken by C against B with regard to a sum of Rs. 200. This is an example of ‘Contract of Indemnity.’

 What are the Rights of an Indemnity – Holder?

In a Contract of Indemnity, the Promisee, whilst within his authority’s scope, has the right to recover from the Promisor the following things:

  1. In case of a suit pertaining to the ambit of the promise arises, then the Promisee is entitled to claim the damages from the Promisor;
  2. The costs that the Promisee may be forced to pay whilst fighting or defending a suit which is within the ambit of the Promisor’s promises;
  3. Sum total of all the money which has been spent in lieu of the compromising terms of any suit which was filed or fought will be payable by the Promisor to the Promisee.[2]

Illustration 1: X signs a Contract of Indemnity with Y. X promises to indemnify Y against all the suits undertaken by Z which may be with regard to the consequences arising out of a certain act of Y’s. Here, this certain act of Y, the consequences arising out of this act are all indemnifiable by X. Y has all the rights to claim the indemnification from X in case Z files a suit on any issue pertaining to this particular act by Y and its consequences.

Indemnification by the Bailor

In the procedure of Bailment, if a good is bailed by the Bailor to the Bailee, then is the Bailor’s duty to indemnify Bailee against any suit arising out of the ambit of the Bailment. For example, if there arises a dispute regarding the ownership of the good bailed and a suit is filed against the Bailee by a third party, then it is the Bailee’s right to claim indemnification from the Bailor. And also, it is the Bailor’s right to claim the indemnity. It is not of Bailor’s interest as to who is the real owner of the bailed good. For the Bailee, the Bailor is the real owner as he is the party to the Bailment and he is the owner who bailed the good to the Bailee. Any of the dispute regarding the owner is a matter between the Bailor and the claiming party, and not the Bailee as he is in mere possession of the bailed good.

Illustration 1: A found an antique piece of jewellery and bailed it to B for safe-keeping. C, the real owner, found out that B has the jewellery and filed a suit against B for recovery and compensation. Here, it is the duty of A, the Bailor to indemnify B, the Bailee.

Illustration 2: A has a collection of unique coins of the Mughal Era. He bailed it to B for safekeeping. C, a common friend of both A and B, visits B and sees the coins. C claims that these coins were stolen from his home and are his. C sues B for various reasons. B has the right to claim the indemnification from A as the dispute of ownership was mainly between A and C; and B was a mere intervening media in the form of possessor of the bailed good.

Illustration 3: M has a bullock cart. M leaves the bullock cart with N for safekeeping. O claims the bullocks to be his and sues N for their ownership. M has to indemnify N against all the dues of the suits filed by O against N


[1]Indian Contracts Act, 1872. Section 124.

[2]Indian Contracts Act, 1872. Section 125.