Indemnity – Meaning and Definition
The term indemnity means to make good the loss of another person. Under Section 124 of the Indian Contract Act, 1872, a contract of indemnity is defined as an agreement in which one party promises to save the other from loss caused by the promisor’s actions or by the actions of a third party. This provision ensures that the indemnity holder is protected from financial harm arising from risks covered under the agreement. The primary objective is to provide security and confidence in business or contractual dealings where losses may arise unexpectedly.
Nature of Indemnity Contract
A contract of indemnity is based on the principle of compensation. It creates a legal obligation on the indemnifier to reimburse the indemnity holder for the losses suffered, provided they fall within the terms of the agreement. Indemnity contracts may arise expressly through written agreements, or in some cases, they may be implied through the conduct of parties. This ensures fairness in transactions and prevents one party from being unjustly burdened with losses caused by another. The law essentially balances the risk by transferring the liability back to the promisor.
Rights of the Indemnity Holder
The rights of an indemnity holder are provided under Section 125 of the Indian Contract Act, 1872. These rights include the ability to recover all damages paid in any suit, all costs incurred in defending such suits, and all sums paid under a compromise—provided the indemnifier authorized it. This legal protection gives indemnity holders the confidence to act without fearing unpredictable financial loss. Courts have also interpreted indemnity broadly, ensuring that justice is not denied merely because the loss occurred before the indemnifier’s liability was enforced.
Real-Life Example
Suppose A hires B to act as his agent in purchasing goods. To protect B from potential legal action, A promises to indemnify B against any claims that may arise from the transactions. If later, a third party sues B for breach of contract due to defects in the goods supplied, and B has to pay damages and legal costs, B can recover those amounts from A under Section 125. This real-world example shows how indemnity protects agents, employees, and parties to contracts from unfair liability caused by another’s actions.
Mnemonic to Remember – “DCC Rule”
To easily remember the rights of an indemnity holder, use the mnemonic DCC:
- D = Right to recover Damages.
- C = Right to recover Costs of legal proceedings.
- C = Right to recover sums paid in Compromise with the indemnifier’s consent.
Think of it like: “Indemnity = DCC: Damages, Costs, Compromise.” This short formula helps in quick recall of Section 125 during exams or while applying the law in practice.
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