1.1.1 Concept
A contract of indemnity is a promise by one party (the indemnifier) to save the other (the indemnity-holder / indemnified) from loss caused by the conduct of the promisor himself, or by the conduct of any other person. It is a loss-shifting device: one party's risk is contractually loaded onto another who agrees to bear it. The English common law shaped the doctrine (the Dobie era of marine and fire insurance); the Indian Contract Act 1872 codified the classical definition (a contract "to save a party from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person" — quoted for the concept). Nepal's Muluki Civil Code 2074 (Part5, Chapter 7) houses the indemnity-and-guarantee rules in one chapter (the Code's structure verified from its official table of contents).
Everyday forms: a contractor indemnifying an employer against third-party claims; a director indemnifying a lender; an insurance policy (the regulated indemnity — see 1.1.2); a tenant indemnifying a landlord against the premises' liabilities.
1.1.2 Types
1. Express vs. implied: written hold-harmless clauses vs. indemnity implied by conduct or by law (the insurer's subrogation duty is statutory).
2. Contractual vs. statutory: private loss-shifting vs. state-created indemnity (acquisition-and- compensation schemes; statutory compensation funds — describe by statute name and effect only).
3. Limited vs. unlimited: capped at a sum or tied to specific heads of loss vs. all loss flowing from the event.
4. Insurance as the regulated species: fire, marine and motor policies are indemnity contracts in their core (the principle of indemnity — the insured is restored, not enriched); the Insurance Act 2079 is the governing statute (by name and year; the earlier frame was the Insurance Act 2049 — see Law of Contract-I, Semester 4, Unit 2).
5. Indemnity vs. guarantee: see the comparison table at 1.2.1 below — indemnity is two-party and primary; guarantee is three-party and secondary.
1.1.3 Features
• Two parties (indemnifier–indemnity holder) at the core; a third party's conduct is only the occasion of loss, not a contracting party.
• Loss-contingent liability: the indemnifier's duty crystallises when the loss occurs within the promise's scope.
• Primary liability toward the indemnity-holder (contrast the surety's secondary liability, 1.2.2).
• The general contract law's essentials apply: capacity, free consent, lawful object, certainty (Law of Contract-I, LAW5305, Units 2–5).
• Not necessarily supported by the indemnified's own benefit: protection of the indemnified against a defined risk is the consideration's essence.
1.1.4 Rights and Duties of the Indemnity-Holder (the indemnified)
• Rights: to recover the loss within the promise's scope; to recover damages, interest andthe costs of defended suits (the Indian Act's celebrated section 125 formula — the codified trilogy; cite as the Indian position by name); to sue the indemnifier without first paying the third party where liability to pay has accrued.
• Duties: to act within the indemnified authority's limits; to give notice of claims; to mitigate the loss; to cooperate in the defence; to disclose material facts (the insurance context's utmost good faith).
1.1.5 Rights and Duties of the Indemnifier
• Duties: to make good the loss within the promised scope; to take over the defence of claims when entitled; to conduct the defence prudently.
• Rights: to resist claims outside the indemnity's scope; to the indemnified's cooperation; onpaying, to step into the indemnity-holder's shoes against the wrongdoer — the subrogation consequence (1.1.6); to the benefit of the indemnity-holder's securities against the third party.
• Defences: the indemnifier may raise the underlying transaction's defences (the indemnity is not a hostage to the third party's frauds on the indemnifier — the Adamson line by name only).
1.1.6 Contract of Subrogation
(i) Meaning and legal basis. Subrogation = "stepping into another's shoes" after the indemnifier (insurer or surety) has paid, the law substitutes him into the rights, remedies and securities of the party he paid, to the extent of his payment. Its home is equity and marine insurance; it now runs through two streams: insurance subrogation (the insurer paying the insured acquires the insured's rights against the wrongdoer — the Insurance Act 2079's discipline) and suretyship subrogation (the surety paying the creditor acquires the creditor's rights against the principal debtor — the classic rule that the surety, on payment, is subrogated to the creditor's rights; this is the surety's first right, 1.2.5).
(ii) Rights and liabilities of the parties. | Party | Rights | Liabilities/limits | |---|---|---| | Subrogee (insurer/surety) | The paid party's rights, remedies, securities to the extent of payment; may sue in the paid party's name | Cannot recover more than he paid; no profit from subrogation; the insured's/surety's own excess loss has priority | | Paid party (insured/creditor) | Keeps his excess loss rights ahead of the subrogee | Must not prejudice the subrogee (must not release the wrongdoer; must preserve securities) | | Third party (wrongdoer/principal debtor) | Protected against double payment; may use against the subrogee the defences he had against the paid party | Cannot be made to pay twice |
Memory hook: subrogation is a substitution, not a bounty — it prevents the wrongdoer's escape and the payee's double recovery, without converting the indemnifier's protection into profit.
1.1.7 Provisions of Nepalese Contract Law
• Muluki Civil Code 2074, Part 5, Chapter 7 — the Code's chapter on contracts of guarantee houses the indemnity-and-guarantee family; the Code's Part 5 (ss. 493 onward — the sections verified in Law of Contract-I) carries the general contract law that frames every indemnity.
• The repealed ladder: the Law of Contract Act 2023 and the Contract Act 2056 (both repealed by the 2074 adjustment legislation) — the Code enlarged the earlier statutes' short specific- contract chapters into dedicated ones.
• Insurance Act 2079 — the regulated indemnity (fire, marine, motor, liability covers); the insurer's subrogation and contribution disciplines.
• Public Procurement Act 2063 — state contracts routinely demand contractor indemnities (performance security, the employer's claim protection).
• Judicial practice: the Supreme Court treats an indemnity as enforceable like any contract, reading its scope strictly against the indemnifier's promise (decided cases below under 1.2.8).