CONTRACT OF

INDEMNITY

SUBMITTED BY:
SUBMITTED TO: ANUVRATA SEHGAL-
A3221520122
MS. VAISHALI ARORA
DHRUV DEWAN- A3221520066
AMITY LAW SCHOOL, NOIDA
 CONTRACT OF INDEMNITY
INTRODUCTION
The meaning of the term Indemnity literally entails “Security against loss”. In a contract of
indemnity one party promises to compensate referred to as the indemnifier, the other party
i.e. the indemnified against the loss suffered by the other. In English law, indemnity refers to
a promise to save a person harmless from the consequences of an act. This promise can be
express or implied. The meaning and effect of a contract of indemnity were laid down in
Adamson V. Jarvis.
In Sheffield Corporation V. Barclay, a corporation having registered a transfer of stock on the
request of a banker, was held entitled to recover indemnity from the banker, was held entitled
to recover indemnity from the banker when the transfers were discovered to be forged.

SCOPE OF INDEMNITY CONTRACT

Indemnity under English law includes a promise against loss arising from any cause
whatsoever including loss caused by fire or by some other accident, every contract of
insurance except life assurance is a contract of indemnity. However, in India the contract of
indemnity has a narrow scope. Indemnity under Indian law is defined under Section 124 of
Indian Contract Act, 1872. According to section 124, 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
promisor himself, or by the conduct of other person.
Illustration- 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 rupees. This is a contract of
indemnity.
Thus, in India the scope of indemnity is restricted to cases where there is a promise to
indemnify against loss caused by:
 The promisor himself, or
 Any other person
Excluding from its purview cases of loss arising from accidents like fire or perils of the sea.
In India, for a contract of indemnity to be valid loss must be caused by human agency.
Section 124 of Indian Contract Act, 1872 does not specify anything about implied contract of
indemnity.
A broker in possession of a government promissory note endorsed it to a bank with forged
endorsement. The bank acting in good faith applied for and got a renewed promissory note
from the Public Debt Office. Meanwhile the true owner sued the Secretary of State for
conversion who in turn sued the bank on an implied indemnity. It was held that – it is general
principle of law when an act is done by one person at the request of another which act is not
in itself manifestly tortious to the knowledge of the person doing it, and such act turns to be
injurious to the rights of a third person, the person doing it is entitled to an indemnity from
him who requested that it should be done. [Secretary of State v Bank of India].
SECTIONS IN ICA,1872 DEALING WITH INDEMNITY
Other sections that lay down various provisions under the contract of indemnity in The Indian
Contract Act, 1872 are listed as follows:
 Section 223- The cases involving loss arising from an act done under at the request of
the promisor are covered under this section which provides for indemnity between
principal and agent.
 Section 69- If a person who is interested in payment of money which another is
bound by law to pay and therefore pays it, he is entitled to be indemnified. For
instance – if a tenant pays certain electricity bill to be paid by the owner, he is entitled
to be indemnified by the owner.
 Section 145- It provides for right of a surety to claim indemnity from the principal
debtor for all sums which he has rightfully paid towards the guarantee.
 Section 222- It provides for liability of the principal to indemnify the agent in respect
of all amounts paid by him during the lawful exercise of his authority.

ESSENTIALS OF AN INDEMNITY CONTRACT

A contract of indemnity can be treated as a species under the genus of contracts. The
essentials of a contract as specified under Section 10 of ICA, 1872 are also applicable to
indemnity contracts in general so much so that the rules such as free consent, legality of
object, etc., are equally applicable.

Where the consent to an agreement is caused by coercion, fraud, misrepresentation, the

agreement is voidable at the option of the party whose consent was so caused. As per the
requirement of the Contract Act, the object of the agreement must be lawful. An agreement,
the object of which is opposed to the law or against the public policy, is either unlawful or
void depending upon the provision of the law to which it is subject.

COMMENCEMENT OF LIABILITY
The question that arises in the enforceability of a contract of indemnity is whether the
liability of indemnifier commences only when the indemnified has actually suffered loss or
when there is an apprehension that the indemnified by all chances is likely to suffer it. The
original English rule was that indemnity was payable only after the indemnity-holder had
suffered actual loss by paying off the claim. The maxim of law was: ‘ you must be damnified
before you can claim to be indemnified.’ But this has changed over the year. In India, this
change was established in Gajanan Parelkar v. Moreshwar Madan Mantri. The court of equity
held that if his liability had become absolute then he was entitled either to get the indemnifier
to pay off the claim or to pay into court sufficient money which would constitute a fund for
paying off the claim whenever it was made.

In India, this was laid down in the case law Shankar Nimbaji v Laxman Sapdu / Chand Bibi v
Santosh Kumar Pal.

In this case, the plaintiff filed a suit to recover Rs. 5,000/- and interest from defendant by the
sale of a mortgaged property and, in case of deficit, for a decree against the estate of
defendant 2 which was in the hands of his sons, the defendant 2 died during the pendency of
the suit. It was held that plaintiff cannot sue the defendant in anticipation that the proceeds
realized by the sale of the mortgaged property would be insufficient and there would be some
deficit. [Shankar Nimbaji v Laxman Sapdu]

The defendant’s father while purchasing certain property covenanted to pay off mortgage
debt incurred by the plaintiff and also promised to indemnify him if they were made liable for
the mortgage debt. The defendant’s father failed to pay off the mortgage debt and plaintiff
filed an action to enforce the covenant. It was held as the plaintiff had not yet suffered any
damage, the suit was premature so far as the cause of action on indemnity was concerned.
[Chand Bibi v Santosh Kumar Pal]

INSURANCE INDEMNITY
All insurances other than life and personal accident insurance are contracts of indemnity. The
insurer’s promise to indemnify is an absolute one. A suit can be filed immediately upon
failure of performance, irrespective of actual loss. If the indemnity holder incurred liability
and the liability was absolute, he would be entitled to call upon the indemnifier to save him
from that liability of paying it off.

EXTENT OF LIABILITY
Section 125 of Indian Contract Act, 1872 highlights the rights of the indemnified but does not
particularly mentions the rights of the indemnifier.

Rights of the indemnified

An indemnity holder (i.e. indemnified) acting within the scope of his authority is entitled to
the following rights –
 Right to recover damages – He is entitled to recover all damages which he might have
been compelled to pay in any suit in respect of any matter covered by the contract.

 Right to recover costs – He is entitled to recover all costs incidental to the institution
and defending of the suit.

 Right to recover sums paid under compromise – He is entitled to recover all amounts
which he had paid under the terms of the compromise of such suit. However, the
compensation must not be against the directions of the indemnifier. It must be prudent
and authorized by the indemnifier.

 Right to sue for specific performance – He 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-

(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

It is important to note here that the right to indemnity cannot be claimed of dishonesty, lack
of good faith and contravention of the promisor’s request. However, the right cannot be
negatived in case of oversight. [Yeung v HSBC]

Rights of Indemnifier
Section 125 is particularly mute about the rights of the indemnifier. Section 141 which deals
with the rights of surety can however be applied to lay down the rights of the indemnifier.

Where one person has agreed to indemnify the other, he will, on making good the indemnity,
be entitled to succeed to all the ways and means by which the person indemnified might have
protected himself against or reimbursed himself for the loss. [Simpson v Thomson]

Principle of Subrogation is applicable because it is an essential part of law of indemnity and

is based on equity and the Contract Act contains no provision in contravention with
[Maharaja Shri Jarvat Singhji v Secretary of State for India]

DIFFERENCE BETWEEN CONTRACT OF

INDEMNITY AND CONTRACT OF GUARANTEE
1. In the contract of indemnity, one party makes a promise to the other that he will
compensate for any loss occurred to the other party because of the act of the promisor
or any other person. In the contract of guarantee, one party makes a promise to the
other party that he will perform the obligation or pay for the liability, in the case of
default by a third party.
2. Indemnity is defined in Section 124 of Indian Contract Act, 1872, while in Section
126, Guarantee is defined.
3. In indemnity, there are two parties, indemnifier and indemnified but in the contract of
guarantee, there are three parties i.e. debtor, creditor, and surety.
4. The liability of the indemnifier in the contract of indemnity is primary whereas if we
talk about guarantee the liability of the surety is secondary because the primary
liability is of the debtor.
5. The purpose of the contract of indemnity is to save the other party from suffering loss.
However, in the case of a contract of guarantee, the aim is to assure the creditor that
either the contract will be performed, or liability will be discharged.
6. In the contract of indemnity, the liability arises when the contingency occurs while in
the contract of guarantee, the liability already exists.
7. If Mr. Joe is a shareholder of Alpha Ltd. And he lost his share certificate. Joe applies
for a duplicate one. The company agrees, but on the condition that Joe compensates
for the loss or damage to the company if a third person brings the original certificate
is an example of indemnity whereas if Mr. Harry takes a loan from the bank for which
Mr. Joesph has given the guarantee that if Harry default in the payment of the said
 amount he will discharge the liability. Here Joseph plays the role of surety, Harry is
the principal debtor and Bank is the creditor.

SPECIFIED TIME FOR NOTICE

The indemnified party must bring the loss in knowledge of the indemnifier in a reasonable
amount of time if similar condition is not explicitly stated in the contract. An insured motor
vehicle was lost by theft. The insurance policy required the assured to send notice to the
insurer immediately after theft or any other criminal act. The assured made police report of
the theft immediately after the incident, but informed the insurer after one month. The
question was whether this could be regarded as a notice given immediately. The court said
that the expression immediately implies notice to be given with promptitude avoiding
unnecessary delay. Immediate police report showed the bona fides of the assured in the
matter. Report to the insurer after one month could not be regarded as unreasonable.
Indemnification could not be denied.

CASE LAWS
1. The New India Assurance Company vs The State Trading
Corporation Of India

BASIC FACTS

1.1 The State Trading Corporation of India Ltd. (Government of India undertaking, plaintiff
No. 1 and Adani Exports Ltd., plaintiff No. 2 (hereinafter referred to as the plaintiffs) had
filed a suit under Order 37 of Code of Civil Procedure (for short C.P.C.) for the liquidated
demand of total amount of Rs. 4,48,32,365/- interest on the same from date of the suit over
the same. All these amounts have been claimed for loss of goods at Porbandar, Kandla and
Mundra Ports being principal amount Rs. 3,59,07,604.00 and interest on the said amounts
from 5.6.2003 to 20.10.2004 - from the date of notice till filing of the suit and further interest
on the said amount till realisation in favour of the plaintiff i.e. Rs. 3,59,07,604.00 (principal
amount) + Rs. 89,24,761.00 (interest amount) = Rs. 4,48,32,365/-.

1.2 Plaintiff No. 1 is a Government Undertaking Company registered under the provisions
of Companies Act, 1956. Plaintiff No. 1 is carrying on business inter alia trading business and
more particularly business of exporting and importing of various commodities including food
grains. The majority of the shares of plaintiff No. 1 Company are owned by Government of
India.

1.2A Plaintiff No. 2 is a Company registered under the Companies Act, 1956 and is carrying
on business of export and import in India.

1.3 It is case of the plaintiffs that plaintiff No. 1 entered into a contract on 05.02.2001 with
plaintiff No. 2 under which plaintiff No. 2 was responsible for execution of the contract
entered into between plaintiff No. 1 and M/s. Al Hadha Trading Co. (L.L.C.) of Dubai for
export of 90,000 MTs. of Indian wheat in bulk under which plaintiff No. 1 had agreed to
supply wheat to the said Page 0010 foreign buyer. As an associate supplier, plaintiff No. 2
was required to arrange for the movement of the cargo from upcountry centers to various
ports from which the said goods were to be shipped to the foreign buyer at destination.

1.4 Plaintiff No. 1 by its letter dated 28.5.2001 appointed plaintiff No. 2 as its authorized
agent and to do all necessary acts and deed for the recovery of the amount of their claim
arising out of marine insurance policy issued by the New India Assurance Company Ltd.
(petitioner herein and original defendant in Summary Suit). Plaintiff No. 2 was authorized to
make claim, negotiate, compromise, settle and receive the payment in respect thereof from
the defendant. Plaintiff No. 1 also gave sufficient instructions to the defendant to deal with
plaintiff No. 2 as agent of plaintiff No. 1 in respect of all the matters relating to the marine
insurance policy issued by the defendant in this behalf.

1.5 Defendant is an insurance company having its Registered Office and Head Office at
Mumbai and a Regional Office and Divisional Office at Ahmedabad. Defendant has issued in
favour of the plaintiff No. 1, the Marine Insurance Policy initially for Rs. 25,65,00,000/- for
50,000 MTs of wheat at the rate of Rs. 5130/- per MT, which was subsequently increased to
an insured value of Rs. 38.475 crores being the value for 75,000 MTs at the rate of Rs. 5130/-
per MT by further endorsement. A total premium of Rs. 4,78,389/- was paid for said sum
insured, which was the agreed value of the subject matter. The period of the said policy was
from 16.4.2001 to 15.4.2002. The said Open Marine Policy was issued to protect the assured
against losses on the land incidental to the intended sea voyage. The said open Marine Policy
was for the consignment of wheat in jute bags and/or bulk to be dispatched from the godowns
of Food Corporation of India Ltd. anywhere in India by Rail or Road to any port in Gujarat.

1.6 A cyclone formed near Goa in Arabian Sea during mid May, 2001 travelled towards
coastal area of Gujarat including Porbandar, Kandla and Mundra. All the coastal areas of
Saurashtra and more particularly the three ports referred to above experienced cyclonic winds
accompanied by rain in the last week of the month of May and 1st half of June, 2001. Due to
cyclonic winds and rain, wheat stored on the aforesaid ports either in godown or in open plots
or in jetty areas was severely damaged by heavy rains, risk of which was covered under the
aforesaid policy. Thereafter the correspondence was made between the parties.

1.7 Immediately plaintiff No. 2 informed the Insurance Company about the damage caused
by the cyclone and requested the defendant to depute its surveyors for assessing the loss. The
defendant appointed M/s. Indian Surveyors Private Ltd. Rajkot, on 3.6.2001 to survey and
assess the loss and the representative of the said surveyor visited Porbandar on 4.6.2001.
Defendant also appointed another surveyor M/s. Mehta and Padamsey Pvt. Ltd. Ahmedabad
as joint surveyor for the very work on 14.8.2001 and both the aforesaid surveyors appointed
by defendant visited Porbandar several times i.e. 14.8.2001, 20.8.2001 and 21.8.2002 and
conducted the detailed survey on 7.12.2001. Thus, both the said joint surveyors jointly and
severally Page 0011 visited Porbandar site several times. Based on the said report, plaintiffs
submitted a detailed claim statement dated 3.1.2002 and accordingly plaintiffs claim in
respect of the policy was Rs. 1,29,18,586/- in respect of the loss suffered at Porbandar port,
similarly for Kandla Port Rs. 1,29,05319/- and for Mundra Port Rs. 92,65,085/- in all Rs.
1,29,18,586/- + Rs. 1,29,05,319/- + Rs. 92,65,085/-= Rs. 3,50,88,990/-. (Rupees Three Crores
Fifty Lacs Eighty Eight Thousand Nine Hundred Ninety only).

1.8 The plaintiffs have also stated that in view of the decision of ONGC v. Collector of
Central Excise reported in (1995) Supreme Court (4) SCC 541, in which it is held that in
every case where a dispute is between Government Departments and/or between a
Government Department and Public Sector Undertaking, the matter should be referred to the
High Power committee established by the Government pursuant to the order of the Hon'ble
Supreme Court. As the dispute between State Trading Corporation which is Government
undertaking and the New India Assurance Co. Ltd., which is also Government of India
undertaking. The meeting of the committee held on 2.9.2004, the committee have finally
decided to refer this matter for adjudication to the jurisdictional Court of law.

2. Gajanan Moreshwar Parelkar vs. Moreshwar Madan Mantri

Plaintiff: Gajanan Moreshwar Parelkar

Defendant: Moreshwar Madan Mantri

FACTS

In this case the plaintiff had procured and brought possession of a plot from Bombay
Municipal Corporation on lease of 999 years in 1934 but, since he didn’t make use of it,
defendant entered into play and on defendant’s request the possession was handed over to
him. He erected building over the land thus rendering the plaintiff to mortgage the land twice
for rupees 5 thousand anytime to the artefact supplier. Finally, on the request of defendant
and agreeing of plaintiff the lease of the plot was also transferred in his name. The defendant
never paid to material supplier except a number of the interest over principle amount and
some lease instalments to the municipal corporations. After passage of over one and half year
previous the deadline the plaintiff was embarrassed and demanded the discharge deed against
the mortgage from artefact supplier or /else deposit of mortgage amount with the court to
make sure the repayment. Regarding the provision of Section 124, it has been stated that, it
defines the contract of indemnity as the contract by which one party promises to safeguard
the other from loss caused to him by the conduct of the promisor himself or by the conduct of
any other person.

ISSUES

1. Whether the plaint discloses any cause of action? (since plaintiff has neither paid off the
dues nor has been compelled to do so by some legal movement, suit or decision).

2. Whether the suit was premature?

JUDGEMENT

These facts therein led to the judgement that the plaintiffs couldn’t sue the defendants in
anticipation that the proceeds realized by the sale of the mortgaged property would be
insufficient and there would be some deficit left. The court construed the note as an
indemnity. The court also provided the plaintiffs to choose repudiation of the mortgage
wholly and recover the full amount from defendant no. 2 but the plaintiffs opted for the
recovery from the mortgaged property. Thus, there being no actual clue to the apprehension
that the recovery from the sale of mortgaged property shall be insufficient the said decree
couldn’t be awarded. The council didn’t accept M Madan’s stance that G Moreshwar had
suffered no loss and thus couldn’t claim anything under Sections 124 and 125. The Council
held that an indemnity holder has rights apart from those mentioned within the Sections
above. If the indemnity holder has incurred a liability and therefore the liability is absolute,
he can address the indemnifier to require care of the liability and pay it off. Thus, G
Moreshwar was entitled to be indemnified by M Madan against all liability under the
mortgage and deed of charge.