CONTRACT II- SPECIFIC KINDS OF CONTRACTS

The general principles of Contracts are laid down in Ss. 1 to 75 of the Indian Contract Act , 1872.
The remaining part of the Act deals with 4 particular kinds of contracts , discussed in Sections
124 to 238 of the Indian Contract Act, 1872.

1. Contract of Indemnity (Ss. 124 & 125 )

2. Contract of Guarantee (Ss. 126 to 147)

3. Contract of Bailment and Pledge (Ss. 148 to 181)

4. Contract of Agency ( Ss. 182 to 238)

Earlier, the Indian Contract Act also dealt with the contracts relating to Sale of Goods and
Partnership. However, the law relating to sale of goods is now provided in the Sale of Goods Act,
1930 , while that of Partnership is now found in the Indian Partnership Act, 1932. This is why the
Indian Contract Act ,1872 does not contain any sections between Sec.75 and Sec. 124.

CONTRACT OF INDEMNITY

The term ‘indemnity’ means to make good the loss or to compensate the party who has su ered
some loss.

Sec 124- Meaning of Contract of Indemnity

A “Contract of Indemnity” is a contract by which one party promises to save the other from loss
caused to him by the conduct of the promissory himself or by the conduct of any other person.

Eg. 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. This is a contract of Indemnity.

ESSENTIALS OF A CONTRACT OF INDEMNITY

1. Number of parties

There are Two parties to a contract of Indemnity viz. INDEMNIFIER & INDEMNITY-HOLDER.

Indemni er: The person who promises to make good the loss is called the ‘Indemni er’. ( A is the
indemni er in the above eg.)

Indemnity-Holder: The person whose loss is to be made good is called ‘ indemnity-holder’.

(B is the indemnity-holder in the above eg.)

2. There must be a loss

A contract of indemnity becomes enforceable only when there is a loss. This loss can occur by
the conduct of the promisor himself or by the conduct of a third person.

3. Object must be lawful

The object must be lawful as a contract of Indemnity is also a contract. If the object is unlawful
then the contract shall not be enforceable.

Eg. A instructs B to beat C. A, also promises to indemnify B, if C institutes any action. This
contract between A and B is unenforceable as the object is unlawful.

4.Contract of Indemnity may be express or implied

- A contract of Indemnity is said to be express when a person expressly promises to compensate
the other from loss.

- A contract of indemnity is said to be implied when it is to be inferred from the conduct of the
parties or from the circumstances of the case.

Eg. X , an auctioneer, sold certain goods at the instruction of Y. Later on, it is discovered that the
goods belonged to Z and not Y. Z recovered damages from X for selling his goods.
Here, X is entitled to recover the compensation from Y because there was an implied promise to
compensate the auctioneer for any loss which he may su er on the defective title of the goods
sold by auction. [ Adamson v. Jarvis]
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 5.Essentials of a valid contract
A contract of indemnity is also a contract and hence all the essentials of a valid contract such as
o er, acceptance, intention to create legal relations, lawful consideration, lawful object, free
consent , capacity of the parties to enter into contract, possibility of performance, etc must be
present.

Section 125 : RIGHTS OF INDEMNITY-HOLDER

An indemnity-holder is entitled to recover the following amounts from the Indemni er provided he
acts within the scope of his authority.

1. All damages which he is compelled to pay in any suit in respect of any matter to which the
promise to indemnify applies.

2. All costs which he is compelled to pay, in bringing and defending such suit.

Condition: (a) 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
(b) the promisor authorised him to bring or defend the suit.
3. All sums which he has paid under the terms of any compromise of any such suit

Condition: (a) 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
(b) the promisor authorised him to compromise the suit.

RIGHTS OF INDEMNIFIER
The Indian Contract Act,1872 has specially no provision regarding the indemni er’s rights .

However, the judicial observations in Simpson v. Thomson, (3 AC 279), may be taken into
account:

“It is a well known principle of law that where one person has agreed to indemnify another, he will
on making good the indemnity, be entitled to succeed to all the ways and means by which the
person indemni ed might have protected himself against or reimbursed himself for the loss.”

WHEN DOES THE LIABILITY OF INDEMNIFIER COMMENCE

Although the Indian Contract Act,1872 is silent on the time of commencement of liability of
indemni er but on the basis of judicial pronouncement of courts, it can be said that the liability of
an indemni er commences as soon as the liability of the indemnity-holder becomes absolute
and certain. In other words, if the indemnity-holder has incurred an absolute liability even though
he himself has paid nothing ,he is entitled to ask the indemni er to indemnify him.

Eg. X promises to compensate Y for any loss that he may su er by ling a suit against Z. The court
orders Y to pay Z damages of ₹5000. As the loss has become certain , Y may claim the amount of
loss from X and pass it on to Z.
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