The term ‘indemnity’ literally means security against loss. Indemnification refers to the act of being held not liable or being protected from costs by shifting them to another party. If a person is promised by another that he will be protected or compensated in case of loss or damage, he is said to be indemnified.
A contract of indemnity is an express promise to compensate for defined loss or damage used to ensure that a contracting party has an express remedy to correct defects in goods or services delivered under the contract.
Section 124 of the Indian Contract Act, 1872 defines a contract of indemnity as the contract wherein 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 person who promises to protect or compensate is called the indemnifier. The person to whom the promise of indemnity is given is called the indemnity holder.
► Illustration: 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. A is the indemnifier and B is the indemnity holder. When A pays B to cover damages that B had to pay C, and then A has indemnified B.
► Illustration: A may agree to indemnify B for any loss or damage that may occur is if a tree on B’s neighboring property blows over. If the tree then blows over and damages B’s fence, A will be liable for the cost of fixing the fence.
► Illustration: A asks B to enter into a transaction with C and promises to indemnify B. B transact with A and ends up incurring losses of ` 1000. Now A has to take care of the losses.
Indemnity clauses are very common in agreements between tenants and landlords. Tenants agree to indemnify the landlord from costs or damages associated with being harmed on the property while the landlord takes the responsibility to anything that could be potentially dangerous. Thus, a landlord stands indemnified from damages if a tenant tripped and fell down the stairs. But if the stairs were in disrepair, and the landlord had been told to get the same fixed time and again, a mere indemnity clause will not prevent the tenant from suing for damages if such disrepair caused the accident.
The objective of an indemnity clause is to get some work done; indemnity is a mere motivational tool. For example, an agent works for his principal and in case of any loss accruing to the principal, the agent will not be liable.
The definition of contract of indemnity is not exhaustive. The section sets out a case of an express contract of indemnity but there are implied contracts too. After all, Section 9 of the Indian Contract Act, 1872 talks about implied promises. More obviously, the ICA 1872 deals with cases of implied indemnity under Sections 69, 145 and 222. But implied indemnity was recognised for sure by the Privy Council in the case of SECRETARY OF STATE vs. THE BANK OF INDIA LD AIR  PC 191. Sections 10 and 13 of the Indian Partnership Act, 1932 also deal with principles of indemnity.
SECRETARY OF STATE vs. THE BANK OF INDIA LD AIR  PC 191.
FACTS: A Broker endorsed a government promissory note in his possession to a bank with false endorsement. The bank applied in good faith for a renewed promissory note. The bank was given the renewed promissory note from the Public Debt Office. In the meantime, the true owner sued the Secretary of State for conversion. The Secretary of State, in turn, sued the bank on basis of implied indemnity.
HELD: Express indemnity clause is not necessary in face of implied right to indemnity already existing under the Indian laws.
It is a principle of law that when an act if done a person at the behest of another and the act is not itself manifestly tortuous to the knowledge of the person doing the act, the person doing the act has a right to indemnity from the man who requested such an act be done when the act in question turns out to be injurious to the rights of a third party.
A Contract of Indemnity is needed because a party may not be able to control all aspects of the performance of a promise. He can be sued for the actions of another where the conditions of performance were out of his control or supervision. A party can protect himself by providing that the culpable party will bear the costs and expense for damages, including the costs of a verdict, settlement, or defense of the suit in case of loss or damage. A Contract of Indemnity is merely a way to shift risk to another by agreement.
Clauses of indemnity should be studied carefully before being inserted in a contract. They substantially increase exposure in the extent of an unexpected event or breach of the contract.