1

RESEARCH PROJECT
ON
‘RIGHTS OF INDEMNITY HOLDER: JUDICIAL
INTERPRETATION’

Submitted to: Submitted by:

Prof. Nishtha Agrawal Rishabh Manawat
Law of Contract-II 20200401076
UWSL, Gandhinagar. B.B.A(Hons.) L.LB.(Hons.)
Semester-3 Year: 2021-22
Section- ‘A’
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DECLARATION

The text reported in the project is the outcome of my efforts and no part of this project
assignment has been copied in any unauthorized manner and no part of it has been incorporated
without due acknowledgment.

(Rishabh Manawat)
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TABLE OF CONTENTS

PAGE NO.

1. DECLARATION 2
2. TABLE OF CONTENTS 3
3. TABLE OF CASES 4
4. TABLE OF STATUTES 5
5. INTRODUCTION 6
6. RESEARCH METHODOLOGY 6
7. CONTRACT OF INDEMNITY 6
7.1 ESSENTIALS OF CONTRACT OF INDEMNITY 7
7.2 NATURE OF INDEMNITY 7
8. RIGHTS OF INDEMNITY HOLDER 7
8.1 RIGHT TO RECOVER DAMAGES PAID IN A SUIT 8
8.2 RIGHT TO RECOVER COSTS INCURRED IN DEFENDING OR 9
BRINGING SUCH SUIT

8.3 RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE 9

9. DUTIES OF INDEMNITY HOLDER 10
10.WHEN DOES THE COMMENCEMENT OF LIABILITY ARISE? 10
11.CONCLUSION 11
12.BIBLIOGRAPHY 11
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TABLE OF CASES

PAGE NO.

1. Adamson vs. Jarvis [1827] 4 Bing 66 7

2. Mohit Kumar Saha vs New India Assurance Co. [1997] ACJ 1170 8
3. Pepin vs. Chunder Seekur Mookerjee [1880] ILR 5 Cal 811 9
4. Gopal Singh vs. Bhawani Prasad [1888] ILR 10 All 531 9
5. United Commercial Bank vs Bank of India [1981] SCR (3) 300 10
6. Gajanan Moreshwar vs Moreshwar Madan [1942] 44 BOMLR 703 10
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TABLE OF STATUTES

1. INDIAN CONTRACT ACT,1872.

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INTRODUCTION

The focus of this research paper is the Rights of Indemnity Holder or Indemnified when sued
which comes under Section 125 of the Indian Contract Act, 1872. Before looking into the rights
of the indemnity holder understanding the meaning of the contract of indemnity is more
important. Rights of Indemnity Holder is the main topic of this research paper which comes in
the extent of liability and there are three points under this and a case will be explained to
illustrate the same i.e. Right to recover damages, right to recover all costs when he brings up
the suits when he is being sued Right to recover all sums paid by him in a compromise. Some
cases such as Adamson vs. Jarvis and other case laws will also be discussed in brief.

RESEARCH METHODOLOGY

➢ OBJECTIVE: Research conducted to study the contract of indemnity, parties involved,

and the different rights of indemnity holders.
➢ HYPOTHESIS: ‘Rights available to the indemnity holder under Section 125 makes the
indemnifier liable to pay for the losses caused to the indemnity holder.’
➢ RESEARCH QUESTION: What are the rights of an indemnity holder when sued under
Indian Contract Act,1872?

CONTRACT OF INDEMNITY

The term ‘indemnity’ simply means to make good the loss or to compensate the party who has
suffered some loss. The term ‘contract of indemnity is defined in Section 124 of the Indian
Contract Act as follows, ‘A contract by which 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, is
called a contract of indemnity.’ Contract of Indemnity can be expressed or implied. It must
fulfill all the essentials of a valid contract. For example, Fire Insurance.

There are two parties in this type of contract, the person who promises to compensate for the
loss is called the ‘indemnifier’ and the person to whom this promise is made or whose loss is
to be made good is known as ‘indemnity holder’ or ‘indemnified’.

For example, A contracts to indemnify B against the consequences of any proceedings which
C may take against B in respect of a certain sum of money. This is a contract of indemnity,
where A is the indemnifier and B is the indemnity holder.
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ESSENTIALS OF CONTRACT OF INDEMNITY

The definition of Contract of Indemnity provides the essential elements of this contract:

1. There must be a loss.

2. The loss must be caused either by the promisor or by any other person.
3. Indemnifier is liable only for the loss.

NATURE OF INDEMNITY

Contract of Indemnity is contingent and it mainly provides a safeguard provision for future
uncertainties. A contract of indemnity is just like any other contract and it shall necessarily
follow all the requirements of a valid contract.

The concept of indemnity originated from the case of Adamson vs. Jarvis1. In this case, Jarvis,
the principal, represented to Adamson, an auctioneer, that he was the owner of cattle and other
goods, and allowed the auctioneer to sell them. The auctioneer was ignorant about the fact that
Jarvis did not have rights over the goods and cattle. Adamson merely followed the instructions
and sold it. However, he was sued for conversion. Adamson was ordered to recover damages
and other expenses from Jarvis and compensate them to the true owner.

RIGHTS OF INDEMNITY HOLDER

According to Section 125 of the Indian Contract Act, 1872: 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:

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;

1
[1827] 4 Bing 66.
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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.

i.e.

1. Right to recover damages.

2. Right to recover all costs in bringing up or defending the suit.

3. Right to recover all the sums which he may have paid under the terms of a compromise.

Some of the important conditions which he ought to follow here are viz; that as per this
section, the rights of the indemnity holder are not absolute or unfettered. He must act within
the authority given to him by the promisor and must not contravene the orders of the
promisor. Further, he must act with normal intelligence, caution, and care with which he
would act if there were no contract of indemnity. Therefore, at the same time, if he has
followed all the conditions of the contract, he is entitled to the benefits.

In the case of Mohit Kumar Saha vs New India Assurance Co.2, Calcutta HC held that the
indemnifier must pay the full amount of the value of the vehicle lost to theft as given by the
surveyor. Any settlement at lesser value is arbitrary and unfair and violates art 14 of the
constitution.

RIGHT TO RECOVER DAMAGES PAID IN A SUIT [SECTION 125(1)]:

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 in the first place. The damages would be the
result of the total liability that the indemnity holder had to carry.

The 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 damages which he may
be compelled to pay in any suit in respect of any matter covered in the contract of indemnity.

For example, if A contracts to indemnify B against the consequences of any proceedings which
C may take against B in respect of a particular transaction. If C does institute legal proceeding

2
[1997] ACJ 1170.
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against B in that matter and B pay damages to C, A will be liable to make good all the damages
B had to pay in the case.

RIGHT TO RECOVER COSTS INCURRED IN DEFENDING OR BRINGING SUCH SUIT

[SECTION 125(2)]:

When 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 as the
damages from the indemnifier provided, they are reasonable.

An indemnity holder has the right to recover from the indemnifier all accidental 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 the case of Adamson vs. Jarvis3, Adamson was entitled to recover the money he had to pay
to the true owner of cattle as well as any expenses incurred by him to get a legal counsel, etc.
Jarvis was ordered to pay damages to Adamson.

In Pepin vs. Chunder Seekur Mookerjee4, the court held that the expenses do arise while
reducing or ascertaining, or resisting the claim. Hence, the costs of such nature can be
recovered.

In Gopal Singh vs. Bhawani Prasad5, the court held that only those costs would be recoverable
that are supposed to be incurred by a prudent man.

RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE [SECTION 125(3)]:

This is similar to the 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 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.

3
[1827] 4 Bing 66.
4
[1880] ILR 5 Cal 811.
5
[1888] ILR 10 All 531.
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In the case of United Commercial Bank vs Bank of India6. In this case, Supreme Court held
that the courts should not grant injunctions restraining the performance of contractual
obligations arising out of a letter of credit or bank guarantee if the terms of the conditions have
been fulfilled. It held that such LoCs or bank guarantees impose on the banker an absolute
obligation to pay.

DUTIES OF INDEMNITY HOLDER:

Even though the duties of the indemnity holder are not mentioned in any section, we can say
that the indemnity holder has some implied duties.

1. Duty to act prudently- The indemnity-holder must act reasonably. If the indemnity-
holder acts negligently, the indemnifier shall not be liable to indemnify.
2. Duty not to act to cause harm or loss- The indemnity-holder must not intend to deceive
or cause harm to the indemnifier, and thus, must act in good faith.
3. Duty to comply with the orders of the Promisor- If the indemnity-holder acts in
contravention of the orders of the Promisor, the indemnifier will not be responsible for
such losses which arise due to non-compliance of instructions.

WHEN DOES THE COMMENCEMENT OF LIABILITY ARISE?

In general, as per the definition given in Section 124, it looks like an indemnity holder cannot
hold the indemnifier liable until he has suffered an actual loss. This is a great disadvantage to
the indemnity holder in cases where the loss is imminent and he is not in the position to bear
the loss.

In the celebrated case of Gajanan Moreshwar vs Moreshwar Madan7, the Bombay High court
observed that the contract of indemnity held very little value if the indemnity holder could not
enforce his indemnity until he paid the loss. If a suit was filed against him, he had to wait till
the judgment and pay the damages upfront before suing the indemnifier. He may not be able to
pay the judgment fees and could not sue the indemnifier. Thus, it was held that if his liability
has become absolute, he was entitled to get the indemnifier to pay the amount.

6
[1981] SCR (3) 300.
7
[1942] 44 BOMLR 703.
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CONCLUSION

To sum up, the contract of indemnity is an effective tool to protect and secure a party from
losses. The indemnified party is given an advantage to the extent that they need not prove the
causation of the event, or its proximity to the default of the promisor or any third-party, but
simply its occurrence is enough to claim damages. The party is also entitled to claim damages
suffered as a result of a breach of contract. All this has ensured that the indemnified party
comes out unaffected from the consequences of any event bringing harm. The claim of
indemnity can be claimed even before the occurrence of actual loss to enforce the provision in
its true spirit. In today’s time, it becomes very important to use these types of indemnity
insurance for safety.

BIBLIOGRAPHY

➢ BOOKS:

1. AVATAR SINGH, CONTRACT & SPECIFIC RELIEF, TENTH EDITION,

EASTERN BOOK COMPANY.
2. POLLOCK & MULLA, INDIAN CONTRACT AND SPECIFIC RELIEF ACTS,
THIRTEENTH EDITION, VOLUME II.
➢ WEBSITES:
▪ www.law.uok.edu.in
▪ www.lawcorner.in
▪ www.indiancaselaw.in
▪ www.blog.ipleaders.in
▪ www.indiankanoon.org