INDEMNITY AND DAMAGES

According to the Law Lexicon1 indemnity is defined as “the obligation or duty resting on one
person to make good any loss or damage another has incurred while acting at his request or for
his benefit”.

The Law Lexicon defines Damages as “a compensation for legal injury. As a general rule the
theory upon which the law allows damages for the violation of a civil right is based upon the
doctrine that where a civil injury has been sustained the law provides a remedy that should be
commensurate to the injury sustained”.

Section 124 of the Indian Contract Act, 1872 (“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”.

Section 73 of the Act gives a right to the parties of a contract, to claim for damages in case of
breach of contract. Section 73 of the Act is extracted below:

“When a contract has been broken, the party who suffers by such breach is entitled to receive,
form the party who has broken the contract, compensation for any loss or damage caused to him
thereby, which naturally arose in the usual course of things from such breach, or which the
parties knew, when they made the contract, to be likely to result from the breach of it.

Such compensation is not to be given for any remote and indirect loss of damage sustained by
reason of the breach.

Compensation for failure to discharge obligation resembling those created by contract : When an
obligation resembling those created by contract has been incurred and has not been discharged,
any person injured by the failure to discharge it is entitled to receive the same compensation from
the party in default, as if such person had contracted to discharge it and had broken his contract.

Explanation : In estimating the loss or damage arising from a breach of contract, the means
which existed of remedying the inconvenience caused by non-performance of the contract must be
taken into account.”

Difference:
 The major point of difference between Damages and Indemnity is that Indemnity can be
claimed for loss arising out of action of a third party whereas damages can only be claimed
for loss arising out of the actions of the parties to the contract upon breach of contract.

 Another difference between damages and indemnity is that damages can only be claimed for
breach of contract whereas in the case of indemnity a breach of contract does not have to take
place. Indemnity may be claimed for loss caused by action of a third party which may not
necessarily result from the breach of contract.

1
Law Lexicon by A. Ramanatha Aiyar, Pub. Wadhwa Nagpur

Electronic copy available at: http://ssrn.com/abstract=2020687

 The main principle behind indemnity is to put a person back into the place he was before the
loss occurred. Hence when a person is indemnified he will never make a profit or a loss out of
it, he will be restored to his original position. Whereas, damages may be awarded more than
the actual loss occurred (in case of punitive damages) or damages may be awarded less than
the actual loss occurred.

Advantages:
 Indemnity can be claimed for actions of a third party, whereas damages can only be claimed
for actions of the parties to the contract.

 Indemnity covers loses even if the contract is not breached, whereas damages can only be
claimed for loss arising out of breach of contract.

 Indemnity can be claimed even before the actual loss has occurred, whereas damages can
only be claimed for a loss that has already occurred upon breach of contract. “To indemnify”
does not merely mean to reimburse in respect of moneys paid but to save from loss in respect
of the liability against which indemnity has been given. Where a person contracts to
indemnify another in respect of any liability which the latter may have undertaken on his
behalf, such other person may compel the contracting party, before actual damage is done, to
place him in a position to meet the liability that may hereafter be cast upon him.

When can indemnity be claimed?

In the case of Shankar Nimbaji Shintre v Laxman Supdu Shelke2 the High Court of Bombay held
that the indemnitee could not ask the indemnifier to cover his losses until the loss actually
occurred.

However the High Court of Bombay changed this view itself in the landmark judgement of
Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri3. In this judgement, Chagla J. stated
that:

“It is true that under the English common law no action could be maintained until actual loss had
been incurred. It was very soon realized that an indemnity might be worth very little indeed if the
indemnified could not enforce his indemnity till he had actually paid the loss. If a suit was filed
against him, he had actually to wait till a judgment was pronounced, and it was only after he had
satisfied the judgment that he could sue on his indemnity. It is clear that this might under certain
circumstances throw an intolerable burden upon the indemnity-holder. He might not be in a
position to satisfy the judgment and yet he could not avail himself of his indemnity till he had
done so. Therefore the Court of equity stepped in and mitigated the rigour of the common law.
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. As a matter of fact, it has been conceded at
the bar by Mr. Tendolkar that in England the plaintiff could have maintained a suit of the nature
which he has filed here; but, as I have pointed out, Mr. Tendolkar contends that the law in this
country is different. I have already held that Sections 124 and 125 of the Indian Contract Act are
not exhaustive of the law of indemnity and that the Courts here would apply the same equitable

2
AIR 1940 Bom 161
3
AIR 1942 Bom 302 (http://www.indiankanoon.org/doc/1361099/)

Electronic copy available at: http://ssrn.com/abstract=2020687

principles that the Courts in England do. Therefore, if the indemnified has incurred a liability
and that liability is absolute, he is entitled to call upon the indemnifier to save him from that
liability and to pay it off.”

The Law Commission of India accepted the view that „to indemnify does not mean to reimburse
in respect of the money paid, but, in accordance with its derivation, to save from loss in respect of
the liability against which the indemnity has been given‟, and recommended adding a section to
the act specifying the rights of the indemnity-holder, and the remedies available to him even in
cases when he is not sued.

When can damages be claimed?

Damages can be claimed only when there is a breach of contract.

Extent of Liability:
The extent of Liability under an indemnity depends on the nature and terms of the contract and
each must be governed by its own facts and circumstances.4

The parties to a contract may decide in the contract, the extent to which the indemnifier can be
liable for the loss caused to the indemnitee.

4
Smith v South Wales Switchgear Ltd [1978] All ER 18