INDIAN LAW ON INDEMNITY

Indemnity in general means “security for losses”. Section 124 of the Indian Contract Act,
1872 defines “Contract of Indemnity” –

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”.

Note: Whether common law principles apply for interpreting indemnity clauses or is the
Contract Act self-sufficient and exhaustive? The Bombay High Court in Gajanan Moreshwar
Parelkar v. Moreshwar Madan Mantri1 while interpreting indemnity provisions clearly held
that the Contract Act is not exhaustive and common law principles are to be relied upon.
Hence, unless there is a conflict with the Contract Act or any judicial decisions rendered by
the Courts in India, the common law principles pertaining to interpreting contracts will
continue to be applicable to indemnity provisions.

A. General Rules of an Indemnity Contract

1. PARTIES TO A CONTRACT: There must be two parties, namely, promisor or
indemnifier and the promisee or indemnified or indemnity-holder.
2. PROTECTION OF LOSS: A contract of indemnity is entered into for the purpose of
protecting the promisee from the loss. The loss may be caused due to the conduct of
the promisor or any other person.
3. EXPRESS OR IMPLIED: The contract of indemnity may be express (i.e., made by words
spoken or written) or implied (i.e., inferred from the conduct of the parties or
circumstances of the particular case).
4. ESSENTIALS OF A VALID CONTRACT: A contract of indemnity is a special kind of
contract. The principles of the general law of contract contained in Section 1 to 75 of
the Indian Contract Act, 1872 are applicable to them. Therefore, it must possess all
the essentials of a valid contract.
5. NUMBER OF CONTRACTS: In a contract of Indemnity, there is only one contract that is
between the Indemnifier and the Indemnified.

B. Rights of the Indemnity Holder

1
Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, A.I.R. 1942 Bom, 302
Section 125 of the Indian Contract Act, 1872 provides the rights available to the indemnified
or indemnity-holder:

“Rights of indemnity-holder when sued. - The promise 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.”

Note: These rights are available provided that the indemnity holder should have acted
prudently and under the directions which were given by the indemnifier. In the judicial
pronouncement of Adamson v Jarvis,2 Adamson was an auctioneer and under the instruction
from Jarvis he auctioned some cattle. It was later known that Jarvis wasn’t the real owner of
the cattle. The real owner of the cattle filed a suit against Adamson. The Court held that
Adamson could recover the cost he incurred from Jarvis because he acted as per the
instructions given by Jarvis.

C. Rights of the Indemnifier

Although the rights of the indemnity-holder have been mentioned under the Indian Contract
Act, the rights of the indemnifier haven’t been mentioned expressly under the Act.

However, in the judicial pronouncement of Jaswant Singh v. Section of State,3 it was opined
by the Court that the rights of the indemnifier are similar to the rights of a surety. Rights of a
surety have been stated under Section 141 of the Act. The indemnifier, upon indemnification,
will be entitled to all the protection which the indemnified person was entitled to. The
principle of subrogation comes into play here. The principle of subrogation follows the
2
Adamson v Jarvis, (1827) 4 Bing 66
3
Jaswant Singh v. Section of State, 14 BOM 299
principle of substitution. Once the promisor pays the amount of compensation, he replaces
the indemnified person.

D. Commencement/Enforceability of Liability under a Contract of Indemnity

In India, no provision expressly states that when a contract of indemnity will become
enforceable or will commence. The judicial decisions are also conflicting with respect to the
issue of enforceability.

In Shankar Nimbaji v. Laxman Sapdu4 and Chand Bibi v. Santosh Kumar Pal,5 the adopted
view was that the liability of indemnifier commences only when the indemnified has actually
suffered loss. But the trend and the Courts have changed a bit.

The case of O.J. and Sons Ltd. v. Gopal Purushottam6 is one of the earliest cases in India
where the right to be indemnified before paying was recognized. The Calcutta High Court
held that indemnity is not necessarily given by repayment after payment. The concept of
indemnity lies on the fact that the indemnity holder shall never be called upon to pay in the
first place. In the cases of Gajanand Moreshwar,7 Shiam Lal v. Abdul Salal,8 and K.
Bhattacharya v. Namo Kumar,9 the Court was of the opinion that the indemnified party can
compel the indemnifier to pay so that he can meet a liability without waiting to actually
discharge the liability. The principle followed is that the indemnified party shall never be
called to pay. The obligation of the indemnifier starts as soon the loss becomes absolute.

E. Exception to Contract of Indemnity

Life insurance and Personal Accident insurance are not contracts of indemnities simply
because life and body parts or limbs cannot be valued in terms of money (it is not
quantifiable). Legally, therefore, it has been kept outside the scope of the principle of
indemnity.

F. Distinctions between Indemnity Claim and Claim for Damages

1. Third Party Claim: As per section 124 of the Contract Act, a claim for indemnity arises
due to “the conduct of the indemnifier or by the conduct of any other person”. Therefore,
third party claims are covered under an indemnity whereas damages can only be claimed
4
Shankar Nimbaji v. Laxman Sapdu, AIR 1940 Bom 161
5
Chand Bibi v. Santosh Kumar Pal,
6
O.J. and Sons Ltd. v. Gopal Purushottam, [1728] ILR 56 CAL 262.
7
Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, A.I.R. 1942 Bom, 302
8
Shiam Lal v. Abdul Salal, 1931 ALL 754
9
K. Bhattacharya v. Namo Kumar, 1899 26 CAL 241.
 against the promisor or the party who has made a promise under the contract. This is a
major benefit of an indemnity over damages. Indemnity clauses shifts the entire risk of
future loss to the indemnifier.

2. Indemnity claims can be made even prior to the party having suffered any actual
loss, unlike a claim for damages: The courts in India have time and again taken the
position that an indemnity holder is entitled to sue the indemnifier even before incurring
any actual damage or loss and that an indemnity is not necessarily given by repayment
after payment. However, a claim for damages can only be made once an actual damage or
loss is incurred.

3. Consequential, indirect and remote losses can all be claimed under an indemnity
clause whereas the same is not sustainable under a damage claim: Under a claim for
damages, the Section 73 of Contract Act only permits seeking compensation for any loss
“which the parties knew, when they made the contract, to be likely to result from the
breach of it” at the time of entering into the contract which is commonly termed as the
principle of contemplation of damages between the parties. Reasonable foreseeability is
construed as the serious possibility of occurrence of loss and is often the test used for
damages. Further, the damages claimed must be reasonable and hence damages may not
be sustainable for loss of profit or opportunity costs ordinarily. 10 Section 73 specifically
states that, “Compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach.” Hence, it specifically excludes any claim for remote or
indirect losses.

No such restriction applies for an indemnity claim. 11 Section 124 of the Contract Act
defines a contract of indemnity as “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.” A claim for damages is subject to the ordinary rules of remoteness
discussed whereas a claim for indemnity is not subject to the same rules. Thus,
consequential, remote, indirect, and third-party losses can all be claimed by the
indemnified party unless specifically excluded in the indemnity clause.

4. Nexus between Breach and Damage: Indemnity can be claimed for losses without
demonstrating that the loss has arisen on account of breach of contract event whereas for
10
Ruxley Electronics and Construction Limited v. Forsyth, [1996] AC 344.
11
Total Transport Corporation v. Arcadia Petroleum Limited, [1998] 1 Lloyd's Rep. 351.
damages, a clear connection and sufficient nexus between the breach of contract event and
damage suffered has to be demonstrated.