Define ” Indeminty” and explain its essential element. What are the rights of an Indemnity holder, when sued ?

Ans. Definition of Indemnity–According to S.124-A contract of indemnity is a contract whereby 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. For Example —A. contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity. Indemnity and Contingent Contracts–it will be observed that a contract of indemnity is really a part of the general class of contingent contracts, It is an original and direct engagement between two parties whereby one promises to save another harmless from the result of the conduct of the promisor himselfor of any other person called indemnifier and the person to whom the loss is caused is called indemnity holder.

Essentials of Contract of Indemnity-

1. Loss to promisee essential —It will be seen from the wordings of S.124 that the promisee under a contract of indemnity must have suffered loss before he can hold the promisor liable on the contract of indemnity. The happening of the loss is the contingency on which the liability of the indemnifier springs into existence. For Example—A agreed to act as a commission agent for B in certain transactions. B covenanted to indemnify A against any loss arising under the transactions. As a result of the transactions, A became liable to C and D to the extent of Rs. 10,000. A sued B to recover the said sum of Rs. 10,000 although he had not in fact paid to C or D. A is not, on the above ground, entitled to recover the sum of Rs. 10,000 from B.

2. Consideration must be lawful– It must be noted that the consideration or object of the contract of indemnity must be lawful. For Example – An agreement to indemnify the printer or publisher of a libel by the writer of the same cannot be legally enforced. Similarly, an agreement by an accused person or any other person to indemnify the person who has given bail is illegal and cannot be enforced.

3. Indemnity may be express or Implied–Although S. 124 section applies only to an express promise, yet a duty to indemnify may arise by operation of law in several circumstances. S.69 which deals with the “Quasi Contract” is one such example. Similarly, in the case of a sale of a Company’s shares, the transferor is bound to indemnify the transferee against future calls on the shares transferred.