Indemnity means enact to compensate or protect someone from the loss, it happens when one person promises another person that if he/she suffers from loss, the first person will compensate the loss. In a contract there are two parties to contract the promiser and promisee. In contract of indemnity the parties are called as indemnifier and indemnity holder.
Under Section 124 of Indian Contract Act Contract of indemnity means that one party promises to save the other from loss caused to him by conduct of the promiser or any other person. But the indemnifier will not compensate if the loss to indemnity holder is caused by his own act then. To understand this concept better we can take the example of fire insurance who play as indemnifier.
Essentials of contract of indemnity are:
- There must be a loss
- loss should have happened either by promisor or anyother person;
- indemnifier is liable for the loss
The contract is contingent in nature and will be enforceable only if there is any loss to the indemnity holder. Rights of indemnity holder are explained under Section 125 of the Act. First and foremost right is right to recover damages, then right to recover cost that indemnity holder has to pay in a suit. Right of recovering sums under the terms of compromise. But these rights are not absolute right of indemnity holder. Courts have held that the indemnifier has to pay the full amount of the value of the vehicle lost to theft. In State Bank of India vs Moti Thawardas Dadlani and Ors on (18 December, 2006) court took into consideration that Section 124 does not deal with those classes of cases where indemnity arises from the loss caused by events which do not depend on conduct of indemnifier.
Indemnifier’s duties will become the rights of the indemnity holder. A contract of guarantee is one where there are 3 parties to contract, one is Principal Debtor another party is Creditor and third party is Surety. This is defined under Section 126 of the Indian Contract Act where it says, that a contract of guarantee is a contract to perform the promise of the third person in case of default. Here surety promises to the creditor that in case of debtor defaults in payment on due date then surety will make the payment to the creditor. In such type of contracts also should have all essentials of valid contract parties should be competent to contract, contract should have some consideration too, and there should not be any misrepresentation in the contract and no concealment of fact should be made and last essential is that the contract of guarantee should be written.
by Sushma Javare.