Contract of indemnity

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. The promisor is the indemnifier and the promisee the indemnity holder. The illustration to the section gives the standard case: A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a sum of money.

The Indian definition is narrower than the English one. It speaks only of loss caused by human conduct, so a promise to make good loss from an accident or natural event, such as fire, falls outside Section 124, though it is enforceable as an ordinary contract. A contract of indemnity has two parties and the liability of the indemnifier is primary and original. A contract of guarantee under Section 126 has three parties, and the surety's liability is secondary, arising only on the default of the principal debtor.

Section 125 sets out the rights of the indemnity holder when sued, provided he acted within the scope of his authority. He may recover all damages he is compelled to pay in any suit on a matter covered by the promise; all costs he is compelled to pay, if in bringing or defending the suit he did not contravene the promisor's orders and acted as a prudent man would without an indemnity, or the promisor authorised the suit; and all sums paid under a compromise, if it was not contrary to the promisor's orders and was prudent, or was authorised.

Section 125 is not exhaustive. Courts in India have held that an indemnity holder whose liability has become absolute may call on the indemnifier to meet it even before he has himself paid. Examiners test the conduct requirement, the conditions for recovering costs under Section 125(2), and the differences from guarantee.