Indemnity Contract: A contract where one party promises to save the other from any loss caused to him by the conduct of promisor himself or any other person is called contract of indemnity, (Section 124) Indian Contract Act, 1872. It is a contract that ‘holds a business or company harmless’ for any burden, loss, or damage.
Indemnity is compensation for damages or loss, and in the legal sense, it may also refer to an exemption from liability for damages. Indemnity contract includes two parties namely; Indemnifier and Indemnity holder. The person who is promising to pay compensation is called Indemnifier and the person who’s a loss is compensated is called Indemnity holder. The term is often used in business contracts and in insurance. A typical example is an insurance company wherein the insurer or indemnitor agrees to compensate the insured or indemnitee for any damages or losses he/she may incur during a period of time.
Example: There is a contract between X and Y according to which X has to Sell a tape recorder (which is selected) to Y after three months. On the next day of their contract Z has come to X and has insisted on selling the same tape recorder to him (Z). Here Z is promising to compensate X for any loss faced by X, due to selling the tape recorder to Z. X has agreed. Now the contract which has got formed between X and Z is called indemnity contract, where Z is indemnifier and X is indemnity holder.