RAJIV GANDHI NATIONAL UNIVERSITY OF LAW

TOPIC – NATURE AND EXTENT OF LIABILITY UNDER THE CONTRACT OF

INDEMNITY

NAME – HARKIRAT KAUR ROLL NO. – 19002 (group – 1)

SUBMITTED TO – MRS JASWINDER KAUR

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ACKNOWLEDGEMENT

I would like to take this opportunity to express my heartfelt gratitude and deep regard to Mrs
Jaswinder kaur for her guidance and valuable feedback and constant support throughout the
duration of project. Her suggestions were of monumental help in the rough work of my
project.

I would also like to express my gratitude to Rajiv Gandhi National University of Law, Patiala
for giving me the topic that enriched my knowledge. I would also like to thank the library
staff for constant support.

Lastly, I am thankful to my parents and friends for their constant support and coordination in
the completion of research work.

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Table of Contents
1. INTRODUCTION – INDEMNITY AS BORROWED FROM ENGLISH LAW ....................... 4

2. WHAT IS INDEMNITY – CLAUSE AND INTERPRETATION .............................................. 5

2.1 Indemnity as under Section 124 .........................................................................................................

2.2 Interpretation ......................................................................................................................................

3. NATURE OF INDEMNITY ........................................................................................................... 6

4. EXTENT OF LIABILITY CAUSED (section – 125) .................................................................... 7

4.1 INTERPRETATION – CLAUSE (1) RIGHT TO RECOVER DAMAG ESPAID IN A SUIT .............

4.2 INTERPRETATION – CLAUSE (2) RIGHT TO ECOVER COSTS INCURRED IN DEFENDING

4.3 INTERPRETATION – CLAUSE (3) RIGHT TO RECOVER SUMS PAID UNDER

COMPROMISE ........................................................................................................................................

5. COMMENCEMENT OF LIABILITY ......................................................................................... 10

6. SCOPE OF INDEMNITY RELATION WITH INSURANCE (analytical approach) ……….10

6.1 Position in India ..................................................................................................................................

6.2 Position in England .............................................................................................................................

7. CONCLUSION .............................................................................................................................. 12

REFERENCES ...................................................................................................................................... 13

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1. INTRODUCTION – INDEMNITY AS BORROWED FROM ENGLISH LAW

The concept of contract of Indemnity has originally been borrowed from English Law or the
Common Law. The case of Adamson v. Jarvis1 explains efficiently the Contract of Indemnity.
Facts of the case are as follows – The plaintiff was an auctioneer. He sold certain cattle on the
command of the defendant. It later turned out that the livestock did not belong to the
defendant but to someone else. The real owner sued the auctioneer who in turn sued the
defendant to recover the loss he suffered due to his decisions. The court, in its verdict, laid
out that the plaintiff having acted on defendant’s commands was qualified to recover the loss
from the defendant in case of any harm incurred.

The case in itself explains Indemnity as a promise to save a person harmless from the
consequences of the act. The promise as such can be expressed or implied as according to the
circumstances of the case.

Similarly, in the case of Dugdale v. Lovering2, the plaintiff was in possession of certain
trucks. The trucks were claimed both by the defendant as well as a company named K.P. Co.
as the defendants demanded delivery of the trucks, the plaintiffs asked for the Indemnity
bond. The plaintiffs received no reply but delivered the trucks on time. Later, the plaintiffs
were sued by the K.P. Co. The plaintiffs sued the defendant to recover the loss incurred. The
defendants claimed that they had not promised any Indemnity bond and therefore were not
liable to pay. But the court declared that the promise of Indemnity bond was implied through
the contract as the plaintiff expressed the intention of creating one.

Many jurists have claimed that the English Law of Indemnity has the widest possible
interpretations. It incorporates all kinds of losses occurring from any reason whatsoever. This
implies that all kinds of insurances except from life insurances are included under the ambit
of the contract of Indemnity.

2. WHAT IS INDEMNITY – CLAUSE AND INTERPRETATION

Literally, Indemnity means Insurance or Security or Protection.

1
Adamson v. Jarvis, [1875] LR 10 CP 196
2
Dugdale v. Lovering, 10 CP 196: 44 LJ (CP) 157:32 LT 155.

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Indemnity is a special type of contract giving protection to the one indemnified against the
future course of events that may happen. This shows the existence of two parties clearly,
namely-

I. Indemnifier
II. Indemnified

2.1 Indemnity as under Section 124

The Indian Contract Act, 1872 under Section 124 defines Indemnity as -

A contract by which one party promises to save the other from loss caused to him by the
contract of the promisor himself, or by the conduct of any other person, is called a “contract
of indemnity”.3

2.2 Interpretation

For better understanding of the contract of Indemnity, it is better to understand its essentials
first.

ESSENTIALS

I. There must be a loss.

II. The loss must be caused either by the promisor or by any other person (in Indian
context loss is to be caused by only by a human agency.)
III. Indemnifier is liable only for the loss.

The essentials very much clear the meaning of the clause. One party has to promise to the
other party in terms of protecting that other party from a loss that would arise in future. When
consent in terms of offer and acceptance would be deductible from both the sides, then the
contract can be termed to have been fructified.4

The obligation to pay for the damages that may arise in the future would emanate from the
assured alone for the contract of indemnity that exists between the parties. Hence, the right of

3
Section 124, Indian Contract Act, 1872
4
State of Orissa v. United India Insurance Co. Ltd., (1997) 5 SCC 512

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the indemnified is not only dependent upon the privity of contract but the nature of the
indemnity clause that exists between the parties5

3. NATURE OF INDEMNITY

Indemnity can be treated as a sub-species of compensation and a Contract of Indemnity is a

species of contracts. The obligation to indemnify is a voluntary obligation taken by the
indemnifier.

Mere possibility of loss occurring will not make the indemnifier liable. Loss to the indemnity
holder is essential, otherwise, the indemnifier cannot be held liable. Plus, the loss must arise
due to the conduct of the indemnifier or any other person related. Strictly speaking this does
not cover the acts of God; otherwise various insurance transactions will be rendered
untenable. Under Indian law, the definition of contract of indemnity is restricted to cases
wherein the loss is caused by human agency. Losses from other causes are covered in other
chapters of the Indian Contract Act, 1872.

A contract of Indemnity may arise by:

I. Express Promise. There can be an agreement between parties to indemnify one party.
II. Operation of Law. Under Section 145 of the ICA, 1872 if the surety pays the creditor,
the principal debtor in lieu of whom the surety had to pay has to indemnify the surety.

In Gajanan Moreshwar v. Moreshwar Madan6, it was decided that law relating to indemnity
is by no means exhaustive and thus, the Courts in India shall follow the English Law. In the
same case, English equity law was discussed; whether requiring an indemnity holder to
actually pay and clear the damages before claiming them from the indemnifier places an
undue burden on the indemnity holder. Thus, if the liability of an indemnity holder became
absolute, he was held entitled to get the indemnifier to pay off the claim or to pay the court
sufficient amount of money for making a fund to pay the claim as and when it was made.

The contract of indemnity is an actionable claim. Of course, it must not be against public
policy or unlawful to valid. If a contract of indemnity for indemnifying bail in a criminal case
is invalid. For example, if A publishes a libel at the request of B and suffers damage due to
such publication, A cannot sue B to indemnify him.

5
Union of India v. Sri Sarada Mills, 1972, SCC 877
6
Gajanan Moreshwar v. Moreshwar Madan, (1942) 44 BOMLR 703

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A right of indemnity exists where one party is obliged to make good certain losses suffered
by the other party. The losses which the indemnifying party must make good will depend on
the wording of the indemnity.

No third person or a stranger to the contract of indemnity cannot sue the indemnifier due to
the principle of privity of contract as decided in the case of National Petroleum Company v.
Popal Lal7 by the Bombay High Court.

4. EXTENT OF LIABILITY CAUSED (section – 125)

The Extent of liability under the contract of Indemnity is explained in Sectio-125 of the
Indian Contract Act, 1872 in the form of Rights of the Indemnity holder.

“Rights of indemnity-holder when sued.—The promisee in a contract of indemnity, acting

within the scope of his authority, is entitled to recover from the promisor— —The promisee
in a contract of indemnity, acting within the scope of his authority, is entitled to recover from
the promisor—"

(1) all damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies;

(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it,
he did not contravene the orders of the promisor, and acted as it would have been prudent for
him to act in the absence of any contract of indemnity, or if the promisor authorized him to
bring or defend the suit;

(3) all sums which he may have paid under the terms of any compromise of any such suit, if
the compromise was not contrary to the orders of the promisor, and was one which it would
have been prudent for the promisee to make in the absence of any contract of indemnity, or if
the promisor authorized him to compromise the suit.”8

4.1 INTERPRETATION – CLAUSE (1) RIGHT TO RECOVER DAMAG ESPAID IN A

SUIT

7
National Petroleum Company v. Popal Lal, (1936) 38 BOMLR 610, 165 Ind Cas 338
8
Section 125, Indian Contract Act, 1872

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When a third party lays down a claim against the indemnity holder, it is well established the
duty to pay the latter arises for the indemnifier at the first place. The damages would
definitely be the end result of the total liability that the indemnity holder had to carry.

The logical principle is that a person who had acted on the faith of another party should be
indemnified. An indemnity-holder has the right to recover from the indemnifier, all the
damages which he may be compelled to pay in any suit.

In Parker v. Lewis,9 case, the logical principle of providing the indemnity to a person who
had acted on the faith of another party is upheld. The Court laid down that it would be
obvious for the person indemnified, who has altered his position and faced action for that
action, to be indemnified and be protected by the third party. Once a suit is decided against
the indemnified and he, being the judgment debtor, pays the money to the judgment creditor,
or, when in a compromise, he prudently settles the dispute by paying the damages:
indemnifier becomes absolutely liable to indemnify him (i.e the decree becomes conclusive
for the purpose of invoking indemnity). Notwithstanding that the suit could have been
brought or could have been appealed against. Also, if the indemnifier trusts indemnified to
further appeal against the judgment he will still be liable to pay under the indemnity contract
to the indemnified, if the latter had paid the decreed amount under the previous suit. It is only
if indemnified finally wins the case, shall the judgment debtor will pay the decreed amount to
the indemnifier.

In Alla Venkataramanna v. Palacherla Mangamma10, the Court held that the suit. in which
the indemnified is roped in, has a binding effect on the indemnifier in terms of its final result,
even though he was not a party to the contract. This is not an exception to the rule of res
judicata rather; it is so because the claim against which the indemnification had been
promised has been conclusively established.

4.2 INTERPRETATION – CLAUSE (2) RIGHT TO ECOVER COSTS INCURRED IN

DEFENDING

Where pursuing a suit in which the purpose or the action of the indemnity is being involved,
the indemnity holder is being provided with the statutory right to claim costs as well with the
damages from the indemnifier provided they are reasonable.

9
Parker v. Lewis, (1873) 8 Ch App 1035
10
Alla Venkataramanna v. Palacherla Mangamma, AIR 1944 Mad 457

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An indemnity-holder has the right to recover from the indemnifier all incidental costs which
he may be compelled to pay in any such suit if in bringing or defending it, he did not
contravene the orders of the promisor, and acted as it would have been prudent for him to act
in the absence of any contract of indemnity, or if the promisor authorized him to bring or
defend the suit.

In Pepin v. Chunder Seekur Mookerjee, (1880) case, the Court held that the expenses do arise
while reducing or ascertaining or resisting the claim. Hence the cost of such a nature can be
recovered.

In Gopal Singh v. Bhawani Prasad. (1888) case the Court held that only those costs would be
recoverable that are supposed to be incurred by a prudent man.

4.3 INTERPRETATION – CLAUSE (3) RIGHT TO RECOVER SUMS PAID UNDER

COMPROMISE

This is similar to previous right, but it arises in the case of compromise. An indemnity-holder
also has the right to recover all amounts from the indemnifier which he may have paid under
the terms of any compromise of any such suit if the compromise was not contrary to the order
of the promisor, and was one which it would have been prudent for the promisee to make in
the absence of any contract of indemnity, or if the promisor authorized him to compromise
the suit.

In Alla Venkataramanna v. Palacherla Mangamma11, the court laid down the conditions for
the claim by the promisee, to be valid. If the indemnity holder genuinely wants the amount to
be recovered, certain conditions with respect to the compromise so affected would have to
fulfil:

I. The compromise should have been put to effect in a bona fide manner.
II. It has been resolved without any sort of collusion.
III. It has not been impeached as an immoral bargain

Right to sue for specific performance:

11
Alla Venkataramanna v. Palacherla Mangamma, AIR 1944 Mad 457

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An indemnity-holder is entitled to sue for specific performance if he has incurred absolute
liability and the contract covers such liability. The promisee in a contract of indemnity, acting
within the scope of his authority, is entitled to recover from the promisor

Rights of Indemnifier:

The rights of the indemnifier have not been mentioned expressly anywhere in the Act in
Jaswant Singh v. Section of State12, it was decided that the rights of the indemnifier are
similar to the rights of a surety under Section 141 where he becomes entitled to the benefit of
all securities that the creditor has against the principal debtor whether he was aware of them
or not. Where a person agrees to indemnify, he will upon such indemnification be entitled to
succeed to all the ways and means by which the person originally indemnified might have
protected him against loss or set up his compensation for the loss.

5. COMMENCEMENT OF LIABILITY

Indian Contract Act, 1872 does not provide the time of the commencement of the
indemnifier’s liability under the contract of indemnity. But different High Courts in India
have held the following rules in this regard:

I. Indemnifier is not liable until the indemnified has suffered the loss.
II. Indemnified can compel the indemnifier to make good his loss although he has not
discharged his liability.

In the leading case of Gajanan Moreshwar v. Moreshwar Madan13 an observation was made
by the judge that “If the indemnified has incurred a liability and the liability is absolute, he is
entitled to call upon the indemnifier to save him from the liability and pay it off.”14

Thus, Contract of Indemnity is a special contract in which one party to a contract (i.e. the
indemnifier) promises to save the other (i.e. the indemnified) from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other person. Section 124 and 125
of the Indian Contract Act, 1872 are applicable to these types of contracts.

6. SCOPE OF INDEMNITY - RELATION WITH INSURANCE (analytical approach)

12
Jaswant Singh v. Section of State, 1966 CriLJ 451
13
Gajanan Moreshwar v. Moreshwar Madan, (1942) 44 BOMLR 703
14
Ibid.

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This section will deal with critical analysis of the contract of Indemnity and its relation with
the concept of Insurance. Do we really need indemnity in insurance in India? Section 125
provides that an indemnity holder may ask for damages from the indemnifier only to the
extent of indemnity contract as decided between them. This means that the liability for the
indemnifier will be only to the extent he has agreed to undertake as per the contract (whether
implied or express). This means that in a contract of indemnity, there is a substance of prior
knowledge as to the possible repercussions and losses that a promisee may suffer in a
particular contract of indemnity.

However, in cases of insurance, the policy-holder or the insurer is unaware of what possible
damage can occur to his insured property. There is a wide array of possibilities and the
absence of any well-defined, limited conditions for only which the insuring company should
pay. There is no prior assent to only a few particular kinds of accidents to the insured
property for which liability will be that of the company. Any loss that occurs to the insured
property will make the insurer liable.

6.1 Position in India

It has been noted above that section-124 recognizes only such contract as a contract of
indemnity where there is a promise to save another person from loss which may be caused by
the conduct of the promisor himself or by conduct of any other person. It does not cover a
promise to compensate for loss not arising due to human agency. Therefore, a contract of
insurance is not covered by the definition of section-124. Thus, if under a contract of
insurance, an insurer promises to pay compensation in the event of loss by fire, such a
contract does not come within the purview of section-124. Such contracts are valid contracts,
as being contingent contracts as defined in section-31.

In United India Insurance Co. v. M/s. Aman Singh Munshilal15. The cover note stipulated
delivery to the consigner. Moreover, on its way to the destination the goods were to be stored
in a godown and thereafter to be carried to the destination. While the goods were in the
godown, the goods were destroyed by fire. It was held that the goods were destroyed during
transit, and the insurer was liable as per the insurance contract.

15
United India Insurance Co. v. M/s. Aman Singh Munshilal, A.I.R. 1994 P. & H. 206.

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6.2 Position in England

Under English law, the word “indemnity” carries a much wider meaning than given to it
under the Indian Contract Act. It includes a contract to save the promise from a loss, whether
it be caused by human agency or any other event like an accident and fire. Under English
law, a contract of insurance (other than life insurance) is a contract of indemnity. Life
Insurance contract is, however, not a contract of indemnity, because in such a contract
different considerations apply. A contract of life insurance, for instance, may provide the
payment of a certain sum of money either on the death of a person, or on the expiry of a
stipulated period of time (even if the assured is still alive). In such a case, the question of
amount of loss suffered by the assured, or indemnity for the same does not arise. Moreover,
even if a certain sum is payable in the event of death, since, unlike property, the life of a
person cannot be valued, the whole of the amount assured becomes payable. For that reason
also, it is not a contract of indemnity.

Indian Contract Act does not specifically provide that there can be an implied contract of
indemnity. The Privy Council has, however, recognized an implied contract of indemnity also
(Secretary of State vs. The Bank of India Ltd.16). The Law Commission of India in its Report
(13th Report, 1958, on Indian Contract Act, 1872) has recommended the amendment of
section 124. According to its recommendation, “the definition of the ‘Contract of Indemnity’
in section 124 is expanded to include cases of loss caused by events which may or may not
depend upon the conduct of any person. It should also provide clearly that the promise may
also be implied.”

7. CONCLUSION

Simply put, indemnity requires that one party indemnify the other if certain expenses spoken
of in the contract of indemnity are incurred by him. For example, car rental companies
stipulate that the person hiring will be responsible for damage to the rental car caused by his
reckless driving and will have to indemnify the rental company.

Most attention of late has been given to development of indemnity contracts in the IT
industry. There are some circumstances in which the existence of an indemnity would make a
significant difference while in others; a contract of indemnity will have little or no role to
play. Another new concept called ‘Indemnity Lottery’ can be found in the law of contract that

16
Secretary of State vs. The Bank of India Ltd , A.I.R. 1938 P.C. 191

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implies that in civil cases of indemnity results can never be predicted. Brazilian jurist
Leonardo Castro is credited for coining the term.

A simple indemnity clause is not the answer to liability issues. The law leans disfavouably
towards for those who try to avoid liability or seek exemption from liability of their actions.
The underlying reasoning is that a negligent party should not be able to completely shift all
claims and damages made against it to another, non-negligent party.

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REFERENCES

I. https://kanwarn.wordpress.com/2010/11/25/indemnity-under-indian-contract-
act-1872-part-2/
II. http://www.legalservicesindia.com/article/1768/Damages-Under-Indemnity.html
III. https://legodesk.com/legopedia/contract-of-indemnity/
IV. www.scconline.com
V. www.indiankanoon.com

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