Indemnity refers to an obligation by a person to provide compensation for a particular loss or damage suffered by another person. In a literal sense, indemnity refers to security against loss. The person who is obligated to pay a compensation is called an indemnitor and the person receiving becomes an indemnitee.
Let us understand indemnity better with this example: Ajay resides at Mr. Sharma’s property on rent. As a tenant, during the time of making rent agreement, Ajay would have agreed to indemnify the landlord from costs or damages associated with his stay. At the same time, the landlord takes responsibilities to anything that could be potentially dangerous. When the contract is over and Ajay decides to relocate to another city. During his stay in Mr. Sharma’s property, two of the ceiling fans and three switchboards were damaged. Also, the paint of the house was damaged. So in this case, Ajay, while vacating the house, has to pay a compensation towards the ceiling fans, switchboards and paint cost to the landlord.
Contract of Indemnity is governed by Chapter VIII of the Indian Contract Act of 1872. Contract of Indemnity refers to when one party promises to save the other from loss caused by him by the contract promisor himself, or by the conduct of any other person. For a contract of indemnity, there are two parties, and both the parties should agree that the promisor should save the promisee from any kind of loss.
This said, the indemnity holder has certain rights that he can exercise, according to Section 125. They are:
- The right to recover any amount compelled to pay is held by the indemnity holder.
- The indemnity holder also is entitled to recover any cost which he might have to pay any third party
- If the indemnity holder has paid any sum under any suit or compromise (provided it was not a contrary to the instruction of the indemnifier), he holds the right to recover that said amount