DSK Legal Knowledge Center
March 27, 2018
Introduction
To indemnify means to reimburse for a loss or damage or liability suffered because
of a third party’s or one’s own act or default 1. The word ‘indemnis’ is a latin word
which means ‘harmless’ or ‘free from loss or damage’.
The right of indemnification accordingly is the right of the injured party to claim
reimbursement for its loss, damage or liability from a person who has such a duty.
The person who promises to protect from loss is known as the “indemnitor”,
“indemnifier” or “indemnifying party” and the person who receives the right to be
indemnified is known as the “indemnitee”, “indemnity holder” or the “indemnified
party”. These terms have been used accordingly in this article.
Why is indemnity important?
Indemnity is a tool used by contracting parties to apportion risks associated with
any commercial transaction, which makes the provision of indemnity one of the
most debated issues in any commercial contract. Therefore, a lot of focus and care
1
Black’s Law Dictionary
Contract of Indemnity
is and must be imposed while drafting and finalising an indemnity clause. A loosely
worded indemnity clause can lead to serious enforcement issues. When a contract is
breached, there are two kinds of reliefs claimed i.e. monetary reliefs and non-
monetary reliefs. In the case of monetary reliefs, the same may either be claimed
through an indemnity or damages. These two monetary reliefs though fundamentally
different, are often confused with one another. This article seeks to bring out a
general awareness about certain key differences between these two concepts.
Contract of indemnity under the Indian Contract Act, 1872
Section 124 of the Indian Contract Act, 1872 (“ICA”) provides that, “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, is called a “contract of
indemnity.”
Section 125 of the ICA provides that, “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; and (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.”
It has been recognised by various Indian courts that these provisions under the
ICA do not embody the entire law on the subject of contract of indemnity. The
Bombay High Court, while interpreting indemnity provisions held that the ICA is
not exhaustive and common law principles are to be relied upon. Hence, unless
there is a conflict with the ICA 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 provisions2.
Indemnity Claim vs Claim for Damages
To begin with, damages are a statutory relief available under the ICA, whether or
not the parties have specifically agreed to it, while an indemnity is a special
contract which parties specifically enter into. The reason parties prefer to enter
into a contract of indemnity is that indemnified parties are typically on a better
footing for claiming monetary reliefs than parties merely claiming damages.
 Actual Loss. It is not required for the actual loss to occur to invoke an
indemnity and accordingly, indemnity claims can be made even prior to the
indemnified party having suffered any actual loss.
 Indirect, consequential, and remote losses. Section 73 of the ICA specifically
excludes any claim for indirect and remote losses from the claim of damages.
No such restriction applies for an indemnity claim. Thus, indirect,
consequential and remote losses can be claimed by the indemnified party
under an indemnity claim unless specifically excluded. “Indemnity” may refer
to all loss suffered which is attributable to a specified cause, whether or not it
2
MANU/MH/0039/1942 (Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri)
was in the reasonable contemplation of the parties 3. Hence, unlike damages,
indemnity can be claimed for third-party losses as well.
 Nexus with breach of contract. Indemnity can be claimed for losses without
establishing that the loss has arisen on account of an event constituting a breach
of contract, whereas for damages, a clear connection and sufficient nexus
between the events constituting a breach of contract and damages suffered has
to be established.
 Co-existence of Indemnity and Damages. Where a contract contains an indemnity
clause but does not specifically exclude the right to damages or provide that the
indemnity claim is the sole monetary remedy available, the indemnified party has
the option to claim damages for breach, or to claim payment on the indemnity.
The fundamental similarity of the two concepts is that indemnity and damages
place the injured party in the same position in which he would have been, had he
not sustained the injury4. However, for avoidance of doubt, the injured party
must recover for his/her loss either through an indemnity or by claiming damages
and there is no ability for the injured party to recover for the same loss twice.
Despite the above principles, indemnity provisions are to be interpreted pragmatically
by applying common law principles, and not merely by relying on what is written in
the ICA. Accordingly, in the Indian context, indemnity claims often require the injured
party to establish that the liability has been incurred or suffered.
Drafting an indemnity clause
When drafting an indemnity clause, one should always remember that…there is no
“law” of indemnity as such, and the meaning of each indemnity clause will be judged
on its own facts and circumstances and the merits (or de-merits) of its own
3
Total Transport Corporation v. Arcadia Petroleum Limited, [1998] 1 Lloyd’s Rep. 351
4
AIR 1941 Sind 146 (Motilala v Seth Jamnadas)
construction5. Careful consideration should be given to how the indemnity is
intended to operate and whether the indemnified party is seeking to recover a loss
as a debt or to be safeguarded from suffering a loss, or both.

While drafting indemnity provisions, the indemnitee must analyse the value of the
indemnity that he/she would be seeking through the clause and whether or not
the indemnitor has the ability to sustain a claim under such indemnity provisions.
Based on such analysis, the indemnitee can decide whether any holdback or
escrow or other mechanism is required to safeguard his/her indemnification rights.

Furthermore, parties giving an indemnity may also look to ensure that they have
adequate provisions for limiting their liability under the contract as well as
ensuring that the indemnity is the sole monetary remedy under the said contract.

Authored by Jinal Shah and Sakshi Prasad

5
Total Transport Corp. v Arcadia Petroleum Ltd (The Eurus) [1998] 1 Lloyd’s Rep 351
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