Definition
Contract to protect another from loss.
Promise by one person to save another from loss caused by the promisor or any other person.
Statutory Definition
Indian Contract Act, 1872, Sections 124-125.
Etymology & Origin
From Latin 'indemnis' (uninjured, without loss — 'in', not, and 'damnum', loss, damage). 'Indemnity' is the condition of being 'without loss' — and a contract of indemnity is the undertaking to keep another party in that condition. The indemnifier undertakes to make good any loss that the indemnified party might suffer, keeping them free from financial damage.
Full Legal Analysis
A contract of indemnity is defined in Section 124 of the Indian Contract Act, 1872 as a contract by which one party promises to save the other from loss caused to them by the conduct of the promisor themselves or by the conduct of any other person. The essential features are: (1) there must be a loss; (2) the promisor undertakes to compensate the promisee for that loss; and (3) the loss may be caused by the promisor's own conduct or by the conduct of any third party (unlike suretyship/guarantee, where the loss always arises from the principal debtor's default). Insurance contracts are the most common form of indemnity contract — the insurer indemnifies the insured against the loss caused by the insured event.
Section 125 ICA specifies the rights of the indemnified party (indemnity holder) when sued: (1) the indemnity holder can recover all damages that they may be compelled to pay in any suit in respect of any matter to which the indemnity applies; (2) all costs that the indemnity holder incurs in bringing or defending any suit, if they acted as a prudent person would have acted; and (3) all sums paid under any compromise, if the compromise was prudent and not contrary to the indemnifier's instructions. These rights arise when the indemnity holder suffers the loss — not before.
A critical question in Indian indemnity law — one not expressly resolved by the ICA — is whether the indemnity holder can compel the indemnifier to pay before they have actually suffered a loss (i.e., whether they can require the indemnifier to 'stand behind' them before judgment is given against them). The strict reading of Section 125 suggests the right arises only after the indemnified party has paid — 'when compelled to pay.' However, courts of equity (and increasingly Indian courts following the Gajanan Moreshwar line of reasoning) have held that the indemnity holder may compel the indemnifier to provide security or to put the holder in funds before they are actually required to pay, where it is clear the liability will arise.
The Bombay High Court (Chagla J.) held that the contract of indemnity in Section 124 ICA does not require the promisee to await actual loss before the indemnifier's obligation arises. Where the promisee has incurred a clear and ascertained liability (even though not yet paid), they are entitled in equity to call upon the indemnifier to relieve them of that liability by discharging it directly. The Court held that if A (indemnifier) compels B (indemnified) to incur a liability to C, and B has a clear liability to pay C, B need not wait until C actually sues and obtains a judgment — B can compel A to pay C directly or to provide B with the funds to discharge the liability.
Indemnity in banking practice is significant: (1) Indemnity bonds are required by banks when paying against lost instruments (lost fixed deposit receipts, lost share certificates); the indemnifier promises to protect the bank from any future claim by anyone who may turn up with the original instrument; (2) Letters of indemnity are used in shipping to persuade shipowners to release goods without production of the bill of lading — the shipper indemnifies the shipowner against any loss from release without the bill of lading; and (3) Indemnities in loan agreements protect lenders from increased costs arising from changes in law, taxes, or regulatory requirements.
For advocates, the distinction between indemnity and guarantee is practically important: (1) Indemnity — the indemnifier's obligation is primary and original (not dependent on default of another party); (2) Guarantee — the guarantor's obligation is collateral and secondary (dependent on the principal debtor's default). If the principal debtor's obligation is void or unenforceable, the guarantor is discharged; but the indemnifier remains liable on their primary obligation. This distinction affects the security available to the creditor and the remedies available on default.
This Term in Indian Statutes
Indian Contract Act, 1872, 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.'"
Primary obligation (unlike guarantee which is secondary); Gajanan Moreshwar: can compel payment before actual loss if liability is clear; insurance is indemnity; indemnity vs guarantee distinction
