UNIVERSITY INSTITUTE OF LEGAL

STUDIES,
PANJAB UNIVERSITY, CHANDIGARH.

TOPIC-ESSENTIALS OF CONTRACT OF
INDEMNITY
SUBMITTTED TO- DR.GURPREET KAUR
SUBMITTED BY- SAKSHAM SHARMA,
ROLL NUMBER- 123/20
BALLB (HONS.) 2ND SEMESTER
SECTION- C
 ACKNOWLEDGEMENT
I take this opportunity to express a deep sense
of gratitude to Prof. Gurpreet Kaur for her
cordial support, valuable information and
guidance, which helped me in completing this
task through various stages. Without her able
guidance, it was not possible to complete this
project within the stipulated time. The project
helped me learn how to do proper research and
I learned about many new things while doing
the project.
Lastly, I would like to thank each and every
person who directly or indirectly helped me in
the completion of the project especially my
Parents and Peers who supported me
throughout my project.
CONTENTS

1. INTRODUCTION 1

2. DEFINITION UNDER ICA, 1872 2

3. ESSENTIALS OF CONTRACT OF INDEMNITY 3-4

4. RIGHTS OF INDEMNITY HOLDER 5-7

5. CONCLUSION 8

6. BIBLIOGRAPHY 9
 INTRODUCTION
The distinctive feature of Contract Law, as compared to other
branches of law, is that in the former the parties make law for
themselves within the broad framework of the Contract Law. The
importance of the contract in regulating business and other social and
economic relations is so great that not only private enterprise, but
public enterprise units and the Government have resorted to contract
as an instrument of participating in their country’s market economy.
Since the topic at hand is the Contract of Indemnity, it is one of the
forms of commercial contract. Certain industries like a partnership,
insurance companies, principal-agent relationship, etc rely on such a
contract.
In common parlance, the word ‘indemnity’ implies reimbursement
against financial loss or protect someone from incurring a loss.
Indemnity is an obligation by a person to provide compensation for a
particular loss suffered by another person. The first Indain case where
the right to be indemnified was identified was of Osmal Jamal &
Sons Limited v. Gopal Purshotam1. In Birkmya v. Darnell2, the
court held that “A contract between two parties where one party
promises to compensate or reparation from the loss caused to him
either by its conduct or by the conduct of any third person called
Contract of Indemnity”. It plays a crucial role in small and large
businesses. In Gajanan Moreshwar Parelkar v. Moreshar Madan
Mantri3, it was held that the Contract of Indemnity is not exhaustive
and hence the same principle is equitably followed in a court of
England. For example, in an agency context, a principal may be
obliged to indemnify their agent for liabilities incurred while carrying
responsibilities under the relationship.
Thus, Contract of Indemnity means “to save against loss” or in other
words, it is a special type of contract wherein security or protection
against the loss is reserved so as to indemnify or compensate.1

1
1 ILR 1929 56 Cal 262
DEFINITION UNDER THE INDIAN CONTRACT
ACT, 1872
Section 124 of the Indian Contract Act’1872 defines Contract of Indemnity as
a “contract by which one party promises to save the other person from loss
caused to him by the conduct of the promisor himself, or by the conduct of any
other person”. The Section starts with the word ‘contract’, hence the contract of
indemnity should have all the ingredients of a valid contract4. The person who
gives the indemnity is called an ‘indemnifier’ and the person to whom
protection is given is called “indemnity holder’ or “indemnified’.
For example, B (indemnifier) contracts to indemnify C (indemnified) against
the consequences of any proceedings which D may take against C in respect of
a certain sum of Rs. 2,500. This is a contract of indemnity.
Other illustration is “Mr. A holds some shares in a company and wants the
company to register him as a shareholder. At the company’s request, he fills an
indemnity bond promising to save the company from any loss which it may
suffer in case some person other than Mr. A is proved to be the owner of those
shares. Mr. A has made a contract of indemnity”
The objective of entering into a contract of indemnity is to protect the promisee
against unanticipated losses. These contracts basically help businesses in
indemnifying their losses and therefore, reduce their risks. Contract of
Indemnity is really a kind of contingent contract as the liability of the
indemnifier, is based on an event whose occurrence is contingent.
HOW IS IT DIFFERENT FROM ENGLISH LAW?
Compared to English definition of indemnity i.e. “it is a promise to save a
person harmless from the consequences of an act”, the Indian definition is
narrower. The former is wide enough to include a promise of indemnity against
loss arising from any cause whatsoever, e.g., loss caused by fire or by some
other accident. Thus as per this definition every contract of insurance, other than
life insurance, is contract of indemnity. As per Section 124 of the Act the loss
must have been caused either by the conduct of the promisor or any other
person, it does not include loss caused by natural factors, not involving human
factors.2

2 1704, 1 Salkend, 27
3 AIR 1941 Lah 68
2
4 Section 10 of ICA, 1872
 ESSENTIALS OF CONTRACT OF
INDEMNITY
A valid contract of indemnity should fulfill the following
conditions:
1. It must fulfill all the conditions of a valid contract: A Contract
of Indemnity, being a species of contract, must contain all the
essential of the parties, capacity of the parties to contract, etc. for
example, contract of indemnity made under the influence of coercion
or one of the parties is of unsound mind, the contract made is invalid.

2. There must be two parties to the contract: Under every contract

there must be two parties, the ‘indemnifier’ (more or likely a
promisor) and the ‘indemnity holder’ or ‘indemnified’ (more or likely
a promisee).

3. Promise to protect from Loss: A contract of indemnity is entered

into for the purpose of protecting the promisee from the loss. Liability
of the promisor arises from loss caused to the promisee due to the
conduct of the promisor or any other person. The same was held in
Punjab National Bank v Vikram Cotton Mills.5

4. Loss must be caused by human agency: The definition excludes

from its purview cases of loss arising from accidents like fire or perils
of the sea. It only covers the indemnity for loss caused by human
agency only. Contracts of insurance against loss are covered by the
chapter on Contingent Contracts6.
5. Covers only the actual loss: It covers only the loss caused by an
event mentioned in the contract. The event mentioned in the
contact must
happen. The promisee must have suffered the loss before he can
hold the promisor liable. In the celebrated case of Gajanan
Moreshwar vs Moreshwar Madan7, Bombay high court observed
that the contract of indemnity held very little value if the indemnity
holder could not enforce his indemnity until he actually paid the loss.
If a suit was filed against him, he had to wait till the judgement and
pay the damages upfront before suing the indemnifier. He may not be
able to pay the judgement fe3es 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. Indemnity may be express or implied: Although Section 124

applies only to an express promise, yet a duty to indemnify may arise
by operation of law in several circumstances, Section 69 which deals
with the “Quasi Contract” is one such example. Implied indemnity
was recognized for sure by the Privy Council in the case of Secretary
of State v. The Bank of India Ltd.8 In this case, “the note with
forged indorsement was given to a bank which received it for value
and in good faith. The bank sent it to the Public Debt Office for
renewal in their name. The true owner of the note recovered
compensation from the State and the State was allowed to recover
from the bank on an implied promise of indemnity”. In the 13th
Report of Law Commission of India9, it has recommended two
amendments in ICA, 1872 regarding loss to be compensated for loss
both caused by human conduct as well as any event or accident.
Moreover, it has also demanded the inclusion of implied contracts of
indemnity.
7. Consideration must be lawful: It must be noted that the
consideration or object of the contract of indemnity must be lawful.
For example, an agreement to indemnify the publisher of a libel by
the writer of the same cannot be legally enforced. Similarly, an
agreement by an accused person or any other person to indemnify the
person who has given bail is illegal and cannot be enforced.
8. Number of Contracts: In a contract of indemnity, there is only one
contract that is between the indemnifier and the indemnified.

3
5 AIR 1970 SC 1973
6 Tropical Insurance Co v Zenith Life Assurance, (1941) 196 IC 198 (Lah)
7 (1942) 44 BOMLR 703
8 (1937-38) 65 IA 286: AIR 1938 PC 191: (1938) 175 IC 327.
9 1958
RIGHTS OF INDEMNITY HOLDER OR INDEMNIFIED
As per Section 125 of the Indian Contract Act, 1872 the following
rights are available to the indemnity-holder against the indemnifier,
provided he has acted within the scope of his authority.
RIGHT TO RECOVER DAMAGES PAID IN A SUIT
[SECTION 125(1)]: 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 to which the contract of indemnity
applies. For instance, A and B enter into a contract that A will
indemnify B if C sues B in a particular matter. Now, C sues B and B
had to make some payment. According to the contract, A will have to
make good all the payment which B made to C in relation to that
matter.
In the case of Alla Venkataramanna vs. Palacherela
Manqamma10, It has been held by the Court that the suit in which
the indemnified is roped in, has a binding effect on the indemnifier
even though he is not a party to contract because the claim against
which the indemnification had been promised has been conclusively
established.
RIGHT TO RECOVER COSTS INCURRED IN DEFENDING A
SUIT [SECTION 125(2)]: An indemnity-holder has the right to
recover from the indemnifier 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.
In the judicial pronouncement of Adamson v Jarvis11, 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 because4 he acted as per the instructions given by Jarvis.
RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE
[SECTION 125(3)]: An indemnity-holder also has the right to
recover from the indemnifier 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. In Pepin vs. Chunder Seekur Mookerjee12,
the Court held that expenses arisen while reducing or resisting or
ascertaining the claim is a part of the rights guaranteed to the
indemnity holder, thus the cost of such a nature can be recovered.
Rights of Indemnifier: The rights of the indemnifier have not been
mentioned expressly anywhere in the Act but it is a well-known
principle of law that where one person has agreed to compensate
another, he will agree to do well for his losses, so indemnifier has
right to protect or reimburse himself in any way or means from the
losses. In Jaswant Singh vs. Section of State13 it has been decided
that the rights of the indemnifier are similar to the security under
section 141 where it is the right to benefit from all the securities that
the creditor has against the principal debtor, whether or not he has
been aware of them. Duties of Indemnity holder= Rights of
Indemnifier Except as otherwise stated in the contract, the
indemnifier shall not be liable for damages under the following
circumstances. He is also called the duty of indemnity-holder.
Duty to act prudently: – Except as otherwise stated in the contract,
the indemnifier shall not be indemnified for the loss caused by the
negligence of the indemnity holder.

4
10 AIR 1944 Mad 457
11 1827 4 BING 66
Duty not to cause any harm or loss: – If the indemnified acts with
the intention of causing any loss or damage, the indemnifier shall not
be liable for such loss.
Duty to comply with the intentions of the Indemnifier: – If the
indemnity-holder acts against the instruction of the other party or the
promisor, the indemnifier shall not be liable for such damages as the
Indemnity holder goes beyond the instructions given by the
Indemnifier.5

5
12 1880 ILR 5 Cal 811
13 14 BOM 299
 CONCLUSION
Thus, Indemnity can be considered as a sub-species of compensation.
And therefore, a contract of indemnity deals with compensation in
cases of contracts. The responsibility to indemnify is taken voluntarily
by the indemnifier, and even the mere possibility of occurrence of a
loss will make him liable. The loss should arise due the conduct of the
indemnifier or any third party. A contract of indemnity should also
have the essential elements of a contract like free consent, legality,
etc. So in the case of indemnity, the promisor is under the obligation
to save the promisee from any kind of loss due to the promisor’s own
conduct or conduct of any other party. In short, Contract of Indemnity
is a special contract in which one party to a contract (i.e. the
indemnifier) promises to save the other (i.e. the indemnified) from
loss caused to him by the conduct of the promisor himself, or by the
conduct of any other person. Section 124 and 125 of the Indian
Contract Act, 1872 are applicable to these types of contracts.
With this, the difference between Contract of Indemnity and Contract
of Guarantee also finds a worthy mention. Section 124 lays down the
procedure for indemnity whereas Section 126 of the Indian contract
Act 1872, states about a contract of guarantee. A contract by which
one party promises to indemnify for the loss by his conduct or by the
conduct of other people whereas under section 126 contract of
guarantee states that where one party promises to compensate for the
loss in default of their person. In the contract of Indemnity two parties
are essential indemnifier and indemnity holders whereas in the
contract of guarantee three parties are required creditor, principal
debtor, and surety. In the contract of indemnity, the liability of
indemnifier is primary, whereas in the contract of guarantee the
liability of the promisor is secondary. Therefore, guarantee and
indemnity are inherently different in nature. In conclusion, an
indemnity is a very useful contractual device, which can be employed
to afford the indemnified party a sort of guaranteed payment against
claims against such party that rightfully pertain to the indemnifier.

BIBLIOGRAPHY

BOOKS:
CONTRACT II BY DR. R.K. BANGIA, SEVENTH EDITION

CONTRACT & SPECIFIC RELIEF BY AVTAR SINGH, TWELFTH EDITION

WEBSITES:

https://lexpeeps.in

https://legodesk.com

https://strictlylegal.in

https://www.lawcolumn.in

https://thefactfactor.com

https://www.lawctopus.com