Section 124 of Indian Contract Act

By Rachit Garg - June 24, 2022

This article is written by Ms. Sushree Surekha Choudhury from KIIT School of Law. The article gives a detailed overview of
the laws relating to indemnity under Section 124 of the Indian Contract Act (1872).

It has been published by Rachit Garg.

Table of Contents
 1. Introduction
2. Indemnity under English Law
2.1. Essentials of an indemnity contract under English Law
2.1.1. Facts of the case
2.1.2. Judgement of the Court
2.2. Expressed or implied contract of indemnity
2.2.1. Facts of the case
2.2.2. Judgement of the Court
3. What does indemnity mean under Section 124 of Indian Contract Act
4. When is an indemnity contract made
5. Parties to an indemnity contract
6. Essentials of an indemnity contract
7. Enforcement of a contract of indemnity
8. Rights of an indemnity-holder (Section 125 of Indian Contract Act)
8.1. Recover damages
8.1.1. Facts of the case
8.1.2. Judgement of the Court
8.2. Recover costs
8.2.1. Facts of the case
8.2.2. Judgement of the Court
8.3. Recover sums paid under compromise
9. Duties of an indemnity-holder
10. Rights of an indemnifier
11. Duties of an indemnifier
12. Difference between a contract of indemnity and a contract of guarantee
13. Landmark case laws under Section 124 of Indian Contract Act
13.1. Osman Jamal & Sons Ltd. v. Gopal Purshotam (1928)
13.1.1. Facts of the case
13.1.2. Judgement of the Court
13.2. Secretary of State v. Bank of India (1938)
13.2.1. Facts of the case
13.2.2. Judgement of the Court
13.3. Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942)
13.3.1. Facts of the case
13.3.2. Judgement of the Court
13.4. Mohit Kumar Saha v. New India Assurance Co. (1996)
13.4.1. Facts of the case
13.4.2. Judgement of the Court
13.5. Lala Shanti Swarup v. Munshi Singh (1967)
13.5.1. Facts of the case
13.5.2. Judgement of the Court
14. Conclusion
15. Frequently Asked Questions (FAQs)
15.1. What is the difference between an indemnity and a guarantee?
15.2. Does indemnity cover insurance?
15.3. What are the rights of indemnity holders?
15.4. How many parties are involved in a contract of indemnity?
15.5. How many parties are involved in a contract of guarantee?
16. References

Introduction
Indemnity, in its basic understanding, means to ‘compensate for loss or damage caused.’ It is a security against losses or
damages that might occur by one party to another. Indemnity contracts or indemnity clauses in any contract denote an
agreement between two parties – insurer and the insured where the insurer promises to pay compensation or make good
the losses incurred by the insured, if any, in case of default, damage, or any other consequential loss. A contract made on
this behalf is known as an ‘indemnity contract.’ A contract of indemnity is defined under Section 124 of the Indian Contract
Act (1872).

Let us understand this with the help of an example. A and B are friends. C is B’s landowner, whose house B has rented. A
and C entered into an agreement. A promises to C to pay a certain sum of Rs. 25,000/- which is B’s monthly rent payable to
C, in case B makes a default in payment. Here, A became an insurer, and B his insured and the agreement entered into is a
contract of indemnity. Now, C can recover from A the due amount in case B defaults. In other words, A shall indemnify B
against C. A here becomes an indemnifier, and B is the indemnity holder.

Indemnity under English Law

Indemnity under English law has a wider ambit than under Indian laws. While Indian laws only cover acts or conduct of
individuals, English law also gives recognition to unforeseeable events like accidents, fires or an act of God. English law of
indemnity is governed primarily by one rule which states that you must be damnified before you claim to be indemnified.
This means that, as per English law, there must be proof of injury or loss in order to be eligible to claim compensation as
indemnity.
Essentials of an indemnity contract under English Law
The following conditions must be fulfilled before a person can claim for damages under an indemnity contract under English
law:

There must be injury/loss/damage.

The indemnity holder must have adhered to all the necessary conditions and instructions given by the indemnifier.

An indemnity contract will also compensate for costs incurred in any legal proceedings arising out of the indemnity
contract.

There were certain instances where justice was denied due to this precondition of proving injury. Thus, later on, the English
court went on to relax these rules and also made room for cases where loss has not actually occurred, as per the facts and
circumstances of the case. The concept of indemnity originated under English law in a landmark judgement of Adamson v.
Jarvis (1827).

Facts of the case

In the instant case, Adamson was the plaintiff and Jarvis, the defendant. Adamson was an auctioneer who purchased
livestock from Jarvis. He then sold the livestock after complying with all the instructions that he received from Jarvis. It was
later found that Jarvis was not the real owner of the livestock that he sold. The real owner sued Adamson for damages.
Adamson had to pay damages. Later, Adamson sued Jarvis, the defendant, to indemnify him for the losses he incurred.

Judgement of the Court

The Court held that, since Adamson followed all the instructions given by Jarvis, anything that went wrong due to following
those instructions must be compensated by the one giving such instructions. Thus, Jarvis could be held liable and was
bound to indemnify Adamson for the losses he incurred.

Expressed or implied contract of indemnity

In the landmark case of Dugdale v. Lovering (1875), the concept of an implied contract of indemnity was discussed.

Facts of the case

The plaintiff was in possession of some trucks that the defendant wanted to be delivered. Plaintiff and defendant had a
telephonic conversation about the same in which the plaintiff expressed their want for indemnity. The plaintiff in clear words
stated that they shall send the trucks only if the defendant agrees to indemnify in case of any losses incurred. The
defendant, though, gave no direct answer to this but asked the plaintiff to send the trucks. The plaintiff presumed that the
defendant agreed to indemnify as they asked for the trucks to be sent. It was later found that one K. P. Co. was the one
who was entitled to those truck deliveries and not the defendants. K. P. Co. sued the plaintiff for damages and they had to
pay. Now, the plaintiff sued the defendants to indemnify against losses incurred by him.
Judgement of the Court
It was held by the court that the defendants are liable to indemnify the plaintiff as the plaintiff clearly stated their
precondition of sending the trucks as the promise to indemnify. Since this was communicated to the defendants and after
which they asked to send the trucks, it is presumed that they also agreed with every precondition stated by the plaintiff.
Thus, there was an implied promise to indemnify. This judgement was significant since it gave recognition to implied
contracts of indemnity.

What does indemnity mean under Section 124 of Indian Contract Act
Section 124 of the Indian Contract Act (1872) defines a ‘contract of indemnity.’ It states that when one party promises to
compensate another against the losses incurred by them due to anything done or omitted to be done by the promisor, a
contract of indemnity is said to be made between the parties. The promisor comes to be known as the indemnifier, and the
person to whom a promise is made is called the indemnity holder.

Since a contract of indemnity is a form of contract, it must satisfy all the conditions of a valid contract as specified under
Section 10 of the Indian Contract Act. As per Section 10, a contract is said to be valid if it fulfils the following conditions:

It must be made with free consent.

There must be an offer and acceptance of that offer.

This must become a promise to do or not to do something.

This promise must be made on a lawful object.

This promise must be made under lawful consideration.

It must fulfil a legal obligation.

The contracting parties must be competent to contract (Section 11) –

Must be 18 years of age or above.

Must be of sound mind.

Must not be an undischarged insolvent.

Must not be disqualified by any law in force.

It must be made with good faith.

It must not be disqualified by law of the territory.

When is an indemnity contract made

An indemnity contract is made when one party promises to compensate another party for losses incurred by them. This loss
may be due to the act of the promisor himself or any other person. If the person insured by a contract of indemnity has
fulfilled all the necessary conditions for enforceability of the contract and that followed all the instructions, laws and rules
governing the contract, he/she becomes eligible to be compensated.

An indemnity contract is usually made as a contingent contract. It is like an insurance which one party avails from another
for the future probability of events, as security.

Parties to an indemnity contract

There are usually two parties to an indemnity contract. The one who promises to indemnify is known as the indemnifier. The
person who is promised to be indemnified is called the indemnity holder. There is also a third party, the creditor or the
owner. This is usually the person who has the legal right against the object in consideration of the contract and can also sue
for damages incurred by him/her. Only then does a case of enforcing an indemnity contract come into the picture.

Essentials of an indemnity contract

Firstly, since the indemnity contract is a form of contract, as a result, it must fulfil all the ingredients of a valid contract as
has been mentioned under Section 10 of the Act. It has been discussed above. Other essentials can be listed as follows:
 Apart from Section 10 of the Indian Contract Act, other general provisions of the law of contract are also applicable to an
indemnity contract.

There must be two parties to form a contract of indemnity. Those parties are called the indemnifier and the indemnified
(or indemnity holder).

As a contract of indemnity is to compensate for “losses” incurred, such loss must have been caused. It is essential to
prove the occurrence of loss or damage.

Such loss/damage must be that one that has been promised to be indemnified and not any other.

Such loss/damage must be caused due to the act/omission of the promisor or any other person.

The act under promise must be contracted as done by individuals. It does not include uncertain future events or events
occurring without any human intervention, like an Act of God.

It can be a contract of insurance, except for life insurance. Insurance contracts are a kind of contract of indemnity.

The contract of indemnity must be absolute in nature. It must not be collateral to the happening or non-happening of
certain events. An indemnity contract must be independent of all hindrances to its absoluteness.

It may be either an express or implied contract.

The conditions, promise, object, and every other prerequisite must be in a clear and concise manner.

Enforcement of a contract of indemnity

Enforcement of an indemnity contract can be made through the following steps:

1. The validity of an indemnity contract is established.

2. Proof of claim by the indemnity holder and good faith established.

3. After this, the contract can be enforced as per the terms and conditions mentioned and agreed upon by both parties.

4. It includes not only the amount of compensation as promised in the contract of indemnity but shall also include the extra
costs incurred in maintaining a legal claim, adjudication, and any other extra amount that must be paid to the indemnity
holder in regards to the terms of the contract.

The laws of enforceability have been shaped through a series of judicial pronouncements. It began with the case of Osmal
Jamal & sons ltd. v. Gopal Purushottam (1728) where the right of indemnity was discussed for the first time. Currently, the
courts have come a long way and there is a common consensus regarding indemnity laws in India. Through cases like
Secretary of State v. Bank of India (1939) and Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942) [cases
discussed below], the rights of indemnity holders have widened and the ambit increased. It places into consideration several
other factors than only a loss or damage, it also sets absolute liability on indemnifiers as per the facts and circumstances of
the case.

Rights of an indemnity-holder (Section 125 of Indian Contract Act)

As the contract of indemnity is made, the indemnity holder is vested with a set of rights with a prerequisite notion that the
indemnity holder shall act diligently, in good faith, and with a bona fide intention. He/she must not be defrauding or
attempting to defraud the indemnifier. Those rights are described under Section 125 of the Indian Contract Act. He has the
right to recover from the indemnifier the following:

Recover damages
The indemnity holder can recover in the form of damages, all the sum that he has paid in compensation to any party
against which he is entitled to be indemnified under the promise made under the indemnity contract.

It was upheld in Nallappa Reddi v. Vridhachala Reddi and Anr. (1914) where the rights of an indemnity holder were given
validation.

Facts of the case

The plaintiff was a minor and the defendant had agreed to manage property in his name on his behalf till he attained the
age of majority. Such an agreement also involved a promise by the defendant to pay the interest of debts to another person
who was the creditor. He was the indemnifier in this case to indemnify the debts taken by the minor. However, he failed to
pay the amount promised. The plaintiff paid the sum due to the creditor when the creditor filed a lawsuit to recover it
against the minor and his indemnifier as co-defendants. Now, the plaintiff (indemnity holder) sued the co-defendant
(indemnifier) to recover damages.

Judgement of the Court

The Madras High Court observed that the defendant failed to fulfil his obligation to indemnify the plaintiff even though he
had plenty of opportunities to do so. The plaintiff had to incur losses because of such a failure. He had to make payment to
the creditor and also bear legal costs in defending his case. Hence, the court decided that the defendant is liable to pay the
amount to the plaintiff for which he promised to indemnify. The plaintiff has a right to recover damages from his
indemnifier.

Recover costs
The indemnity holder can recover the sums of money that he has spent in maintaining or defending a lawsuit against the
claim of damages by a competent third party. An indemnity holder can recover this money if he/she has complied with all
the instructions of the indemnifier, has acted in good faith, and has taken reasonable care as an ordinarily prudent man
would have done.

It was upheld in Pepin v. Chunder Seekur Mookerjee and Anr. (1880) that the indemnity holder has a right to recover costs
incurred by him.

Facts of the case

In the instant case, a suit was filed by an assignor of a lease against the assignee. The defendant had promised to pay
covenants on the lease but failed to do so. As a result of such failure and default, a suit was brought against the plaintiff by
the administrator general, and also bore costs in defending the lawsuit which arose due to non-payment on the part of the
indemnifier. Hence, the plaintiff brought a lawsuit against the defendant to recover damages and recover costs incurred by
him.

Judgement of the Court

The Calcutta High Court observes that there is an implied obligation on the defendant to pay covenants on the lease in the
instant case. Failure to do so has given rise to a good and valid cause of action from the plaintiff. The costs incurred by the
plaintiff in paying to the administrator general and in defending the lawsuit have arisen properly and reasonably and due to
the reasons of failure on part of the defendant. Hence, the plaintiff is entitled to recover costs and damages from the
defendant and the defendant (indemnifier) is liable to pay.

Recover sums paid under compromise

If and when the indemnity holder pays a certain sum of money to compromise and end the litigation, such a sum can be
recovered from the indemnifier. Preconditions for being eligible to recover such sums are:

The indemnity holder must have acted in good faith.

He should have deceived the indemnifier.

The indemnity holder must not have recovered or attempted to recover sums fraudulently.

He must have followed all instructions and directions as given by the indemnifier.

The claim under-recovery must be fair and reasonable.

In Anwar Khan v. Gulam Kasam (1919), the Court held that the sum of money demanded under damages to recover sums
under the compromise, by the indemnity holder, must be fair and proportionate. The indemnifier is liable to indemnify only
to the extent he has promised to indemnify and no further. If the amount asked for recovery is beyond what has been
promised, the indemnifier can refuse to pay.

In Alla Venkataramana v. Palacherla Manqamma (1944), the Madras High Court stated the conditions under which the
claims of the indemnity holder shall be validated. The conditions discussed by the Court were that:

The compromise must have been made in a bona fide manner.

The compromise must have been resolved amicably.

The bargain must not be deemed immoral.

Duties of an indemnity-holder
As the indemnity holder has been vested with enormous rights in the contract of indemnity, he has also been given certain
duties that he is expected to perform and adhere to. These are implied and sometimes expressed in the contract so made.
Some of the core duties can be stated as follows:
1. The most basic yet crucial duty of the indemnity holder is to comply with the terms and conditions of the contract of
indemnity so made. If there is any contravention of the terms and conditions laid down in the contract by the indemnity
holder, the indemnifier cannot be made liable to indemnify.

2. It is the duty of the indemnity holder to act prudently. He is expected to act diligently like a reasonable man with
ordinary prudence would do. In case the indemnity holder does not act reasonably and with ordinary prudence, the
indemnifier cannot be made liable to indemnify.

3. It is the duty of the indemnity holder to act with good faith. The indemnity holder must act with a bona fide intention and
any malice would be considered a contravention. The intent is given importance here. If the indemnity holder malafidely
tries to make the indemnifier pay for his losses while the losses are self-inflicted, the indemnifier will not be made liable
to indemnity on grounds of mala fide intention by the indemnity holder.

4. It is a core duty of the indemnity holder to not cause loss or damage. The indemnity holder must act responsibly and
must not incur the losses himself due to negligence. If the loss or damage occurs due to negligence of the indemnity
holder or due to any other reason which would have ordinarily been avoided to save from loss or damage, the indemnifier
would not be made liable to indemnify for such loss.

5. It is the prime duty of the indemnity holder to comply with the instructions of the promisor. If the indemnity holder,
knowingly or unknowingly, fails to comply with instructions and follow the directions given to him by the promisor, then
any loss or damage arising due to such non-compliance will be the burden of the indemnity holder. The indemnifier would
no longer be liable to indemnify.

Thus, the duties of an indemnity holder can be essentially categorised as

Duty to act with prudence,

Duty to comply with instructions,

Duty to act in good faith, and

Duty to adhere to terms and conditions of the contract of indemnity.

Interestingly, the duties of the indemnity holder automatically become the rights of the indemnifier. His liability or non-
liability is determined by the same. Though the rights of the indemnifier have not been codified under the laws of indemnity,
they can be interpreted from the intention of the legislature and through judicial pronouncements.

Rights of an indemnifier
Although the Indian Contract Act is silent on the rights of an indemnifier, it can be understood through various judicial
pronouncements. It was in Jaswant Singh v. The State (1965), that the rights of an indemnifier were discussed for the first
time. It was held that the rights of an indemnifier under a contract of indemnity are the same as the rights of a surety
under a contract of guarantee. Thus, an indemnifier is vested with the following rights:

1. When an indemnifier indemnifies for an indemnity holder, he steps into the shoes of the indemnity holder and gets access
and rights over the property of the indemnity holder under the indemnity.

2. He is liable to indemnify the promisee only to the limit and for the amount of loss as has been set under the terms and
clauses of the indemnity contract. After these claims are settled, he assumes the role of a creditor.

3. The indemnifier is eligible to sue third parties regarding the property that he has gained rights to, after fulfilling his
obligations under the contract of indemnity. The indemnifier acquires absolute rights over the property. However, he
attains such a right only after he has fulfilled his obligation against the contract made between him and the indemnified.
He can therefore sue third parties over the property only after gaining absolute rights to do so, i.e., after fulfilling his
obligations and settling the claim.

4. The indemnifier can be made liable to compensate for losses in such amounts and to such extent as have been agreed to
in the contract. This right was upheld in V. M Rv. Ramaswami Chettiar v. R. Muthukrishna Iyer and Ors. (1966) where
the Supreme Court decided that the indemnifier is liable to make good only up to the amount of Rs. 1236/-as has been
mentioned in the contract of indemnity and no further. The same was upheld by the Supreme Court and the defendant’s
appeal to recover more money was dismissed.

5. In certain cases, the indemnifier can exercise subrogation rights. It is the right that has been enjoyed by a surety in the
case of a contract of guarantee. In a contract of guarantee, after the surety makes the payments and settles the claims
of the creditor, he steps into the shoes of the creditor and can now recover such amounts from the principal debtor.
Similarly, the indemnifier can exercise subrogation rights and act as a creditor to recover the monies he has paid as
indemnity, in the form of money, or by assuming rights over property or in any other manner.

Duties of an indemnifier
The duties of an indemnifier are not particularly codified under Indian Contract Act but it is understood to be the same as
the rights of the indemnity holder as is mentioned in Section 125 of the Indian Contract Act. Thus, the duties of an
indemnifier can be stated as:
1. It is the primary duty of the indemnifier to abide by the rules and clauses of the indemnity contract.

2. The indemnifier must act in good faith with due care and diligence.

3. The indemnifier must act prudently and reasonably. He must act as a reasonable man of ordinary prudence would do and
be vigilant to the terms of the contract so made.

4. The indemnifier must perform his part of the contract when needed to do so.

5. It is the duty of the indemnifier to pay the indemnity holder for all the damages that he might have suffered due to the
non-payment of indemnity.

6. It is the duty of the indemnifier to pay all costs incurred by the indemnity holder due to a breach of contract by the
indemnifier. If the indemnity holder has acted in good faith and has followed all directions given by the indemnifier, it
becomes the duty of the indemnifier to compensate for his losses.

7. When the indemnity holder pays a certain sum of money for a compromise against a suit, it is the duty of the indemnifier
to compensate the indemnity holder for all such sum of money spent by him under such compromise or arrangement.

8. Thus, it comes under the duty of the indemnifier to first adhere to the terms and conditions of the contract. If and when
he fails to do so and the indemnity holder suffers a loss, it becomes the duty of the indemnifier to compensate for such
damages and costs incurred by the indemnity holder and the sums payable under the amicable compromise, if any.

In Kali Charan v. Durga Kunwar and Ors. (1931), the Allahabad High Court held that it is a right of the indemnity holder to
recover damages and costs from the indemnifier. Thus, it is also the duty of the indemnifier to pay for such damages and
costs.

In Venkatarangaiya Appa Rao v. Varaprasada Rao Naidu (1921), the Madras High Court held that it is the duty of the
indemnifier to indemnify or otherwise pay for damages, costs, and sums under compromise if all the prerequisites are met
bonafide transaction, amicable settlement, and fair bargain.

In Bishal Chand Jain v. Chattur Sen (1966), the Allahabad High Court held that the duty of the indemnifier to indemnify
applies only to the extent of agreed clauses of the contract of indemnity. In this case, when the indemnifier was asked to
make subsequent payments which he had not contracted upon, the Court held that he could not be made liable to do so and
was eligible to refuse to make such payments.

Difference between a contract of indemnity and a contract of

guarantee
A contract of indemnity and a contract of guarantee look strikingly similar, but there is a conceptual difference, making the
two distinct. Defined under Section 126 of the Indian Contract Act, when a person promises to another, to pay on behalf of
another, in case of default, a contract of guarantee is said to be made between the promisor and promisee. The person who
promises to pay and fulfil the promise or discharge the liability on behalf of another is called a ‘surety.’ The person on whose
behalf the surety is given is known as the ‘principal debtor.’ The person for whom the guarantee is given is called the
‘creditor.’ The liability of the surety is secondary.

For instance, A promises to B that he will pay a sum of Rs. 20,000/- for goods that C has purchased from B in credit if C
does not make the payment by the end of the month. Here, A is the surety, B is the creditor, and C is the principal debtor.
Here, A’s obligation is secondary, which shall arise only if C makes a default.

In P. J. Rajjapan v. Associated Industries (1983), the guarantor (surety) had agreed to the contract of guarantee which he
said he would sign later but never signed. When the situation came for him to fulfil his obligation as a surety, he tried to
escape the obligation by saying that he never signed the contract thus, there is no contract made between the parties. The
Kerala High Court stated that a contract of guarantee involves three types of agreements between the principal debtor and
creditor, the surety and principal debtor, and the surety and creditor.

In an instance, where there is evidence proving the intention and involvement of the surety in this contract, the mere failure
to put a signature on the contract does not render the agreement void. His promise to act as a surety and to later sign the
contract all indicated that he agreed to the terms of the contract and to be bound by it. This is sufficient to ask for due
performance. The presence of intention, knowledge, and an expressed promise is good enough to establish the existence of
a contract. It is further pertinent to mention that both oral and written forms of a contract of the guarantee are legally
recognised in India.
Mentioned below are the defining differences that distinguish a contract of indemnity from a contract of guarantee:

Criteria Contract of Indemnity Contract of Guarantee

There are two parties to a

Parties to contract of indemnity – There are three parties to a contract of guarantee – creditor, principal
contract indemnifier and indemnity debtor, and the surety.
holder.

The indemnity holder

claims the compensation
Nature of
directly from the The creditor recovers the amount defaulted by the principal debtor from the
performance
indemnifier in case of loss surety. The relationship is secondary and arises only in an event of default.
of contract
or damage. There is a
direct relationship.

There are three contracts. One contract is between the surety and the
principal debtor in which one party agrees to become the surety for another
There is only one in a certain event or transaction. The second contract is between a creditor
Number of contract- a contract of and principal debtor where the principal debtor promises to make payment
contracts indemnity between the to the creditor and also guarantees him that in case of default a surety
involved indemnifier and indemnity would make good or discharge his liabilities. Finally, a third contract is
holder. made between the surety and the creditor where the surety promises to the
creditor that he would discharge the liability in case the principal debtor
makes a default.

Liability It is primary in nature. It is secondary in nature.

A contract of indemnity is
Basis of
performed in case of loss A contract of guarantee is performed in case of default in payment.
performance
or damage.

The recovery of money in case of a contract of guarantee is twofold. First,

The indemnity holder
Manner of the creditor recovers the defaulted amount from the surety. Then, the
recovers the sum payable
recovery surety acts as a creditor and is eligible to recover the amount from the
from the indemnifier.
principal debtor that he has paid on his behalf.

Landmark case laws under Section 124 of Indian Contract Act

Several judicial pronouncements have shaped the laws of indemnity over the years. Since the implementation of Section
124 of the Indian Contract Act, the cases mentioned below have helped in the growth of indemnity laws in India:

Osman Jamal & Sons Ltd. v. Gopal Purshotam (1928)

Facts of the case

In this case, the plaintiff is a company that acts as a commission agent for the defendant’s firm. The defendant’s firm sold
certain hessian and gunnies with the help of the plaintiff and had promised the plaintiff to indemnify in case of occurrence of
any loss or damage. The plaintiff brought the goods from one Maliram Ramjidas to supply them to the defendant’s firm. This
time, the defendant’s firm was unable to make the deliveries and make payment. Due to this, Ramjidas had to sell those
products at a price lower than the contracted price and sued the plaintiff to pay the balance amount. So, the plaintiff then
asked the defendant firm to indemnify for this loss and also pay the commission amount as the plaintiff would have received
under normal circumstances.

Judgement of the Court

The Calcutta High Court held that this is a case of expressed indemnity as the defendant had agreed to indemnify the
plaintiff in case of loss or damage. Thus, the defendant’s firm must fulfil what was promised and indemnify the plaintiff.

Secretary of State v. Bank of India (1938)

Facts of the case

In this case, a woman named Gangabai was the indorser and holder of a promissory note worth Rs. 5000/- Her agent,
Acharya, forged documents and endorsed them for value to the respondents. The respondents, in good faith, applied to the
Public Debt Office to issue them a fresh note in exchange for the note indorsed by Acharya. When Gangabai came to know
about this fraud, she sued the appellant (Secretary of State) for conversion and damages. The appellants brought an action
against the respondent (Bank of India) for damages incurred by them due to following the respondent’s instructions. The
Secretary of State sued to be indemnified.
Judgement of the Court
The Bombay High Court held that there was an implied indemnity arising between the parties. The court said that when a
person does any act on the instructions of a third person and incurs losses due to that, the person who does the act under
instructions is entitled to be indemnified by the one giving such instructions.

Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942)

Facts of the case

In this case, the plaintiff leased his piece of land to BMC for 999 years. The defendant wanted to build on that piece of land,
to which the plaintiff agreed. The defendant was in possession of the land while ownership was with the plaintiff. One
Keshavdas Mohandas supplied construction materials. There became a due of Rs. 5000/- which the defendant could not pay.
The defendant mortgaged the property with the principal amount and an interest rate of 10%, but he made a second
default, and now the property was transferred to Mohandas. When the plaintiff came to know about this, he demanded the
property back from the defendant, but the title deed was with Mohandas. The plaintiff now sued the defendant to indemnify
and also for transfer of title deeds. The defendant contended that there has not been any loss or damage as specified under
Section 124 therefore, the plaintiff cannot invoke Section 125.

Judgement of the Court

The Bombay High Court held that the rights of indemnity holders and laws of indemnity go beyond what is mentioned
under Sections 124 and 125. In case the indemnity holder has incurred an absolute liability, the indemnifier becomes liable
to pay it off. Thus, the plaintiff must be indemnified against the mortgage of his land and other charges.

Mohit Kumar Saha v. New India Assurance Co. (1996)

Facts of the case

In this case, the petitioner was a truck owner who had taken an insurance policy for his truck from the respondent’s
company. The driver of the truck with goods loaded in it stole the truck after assaulting the petitioner’s father, who was
present during the incident. The petitioner filed a complaint about the loss of the truck and injuries sustained by his father.

Judgement of the Court

The Calcutta High Court held that the insurance claim shall cover this loss. The insurance company must indemnify the
plaintiff for the loss in full and no less. Insurance as a form of indemnity contract was recognized and laws under Section
124 and Section 125 were applied.

Lala Shanti Swarup v. Munshi Singh (1967)

Facts of the case

In this case, the respondent had mortgaged land to one Bansidhar and another Khub Chand for an amount of Rs. 12000/-
The real owner of the land, later, sold this land to one Shanti Saran for Rs. 16000/- Shanti Saran agreed to pay whatever
the due amount to Bansidhar and Khub Chand. Later, Shanti Saran failed to do so, due to which Bansidhar and Khub Chand
brought a lawsuit for indemnity.

Judgement of the Court

The Supreme Court held that Shanti Saran promised to pay the amount, which he failed to do, and this brought losses to
the vendor. Thus, he is liable to indemnify as per Section 124 of the Indian Contract Act.
Conclusion
A contract of indemnity, as defined under Section 124 of the Indian Contract Act gives rise to a legal relationship between
two parties, namely, the indemnifier and the indemnity holder. While the rights of an indemnifier are not defined anywhere
in the Indian Contract Act, the rights of an indemnity holder are wide as has been described under Section 125 of Indian
Contract Act. The rights of an indemnifier become like those of a surety under a contract of guarantee. These indicate high
similarities between a contract of indemnity and a contract of guarantee but the two are quite different from one another in
terms of application and nature. Several judicial pronouncements have helped in shaping the laws relating to indemnity as it
is today, so much so that the courts grant rights beyond which is mentioned under Section 125. Indemnity laws have been
prevalent in India and across the world for over years now and have helped in preventing several fraudulent occurrences
and provided justice to the injured. In this article, we have also tried to understand, in brief, about the contract of
guarantee through relevant sections of the Indian Contract Act and judicial pronouncements.

Frequently Asked Questions (FAQs)

What is the difference between an indemnity and a guarantee?

Mentioned under Section 124 of the Indian Contract Act is a contract of indemnity which lets one party recover from another
the losses incurred by him if the other party has promised to do so. It is different from a contract of guarantee as has been
mentioned under Section 126 of the Indian Contract Act in a manner such that a contract of guarantee grants rights to a
creditor to recover money from a surety in case his principal debtor makes a default in payment if there is a contract of
guarantee made governing the same.

Does indemnity cover insurance?

Yes. A contract of indemnity covers all kinds of insurance except life insurance.

What are the rights of indemnity holders?

The rights of an indemnity holder are described under Section 125 of the Indian Contract Act. It grants rights such as the
right to recover damages, and the right to recover money incurred in maintaining a lawsuit or compromise settlement for
the object under an indemnity.

How many parties are involved in a contract of indemnity?

In a contract of indemnity, two parties are involved primarily. They are known as an indemnity holder and indemnifier.

How many parties are involved in a contract of guarantee?

A contract of guarantee is a contract between three parties, namely, the creditor, principal debtor, and surety. There are also
three forms of contracts involving two of these parties in each, that together form the contract of guarantee.

References
https://blog.ipleaders.in/contract-of-guarantee/

https://thefactfactor.com/tag/dugdale-v-lovering/

https://lawtimesjournal.in/contract-of-indeminity/#_ftnref1

https://www.thelegalwatch.in/forum/contract-awareness-forum/7-top-30-contract-law-cases-on-contracts-of-indemnity-
and-guarantee-s-124-147-of-ica

Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their
coursework and develop themselves in real-life practical skills.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click
on this link and join:

https://t.me/lawyerscommunity

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.