Enforcement of Indemnity Clause in Contracts in India

The principle of indemnity is embodied under section 124 of the Indian Contract Act, 1872 ("Act")
which defines it 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".

A perusal of Section 124 reflects that a prior promise should be made to protect the Indemnity
Holder and the question of indemnification arises only when the loss or damage which has occurred
is with regard to the prior promise which was made by the Indemnifier to the Indemnity Holder to
protect from such loss or damage. Furthermore, Section 125 of the Act encompasses the rights of an
Indemnity Holder. According to the said provision, the Indemnity Holder will be entitled 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 promise to indemnify applies;
 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 authorised him to
bring or defend the suit;
 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 authorised him to compromise the suit.

Enforcement of Contract of Indemnity

Indemnity clauses in India are generally enforceable, subject to certain conditions. An indemnity
clause is a contractual provision that requires one party to compensate the other party for any
losses, damages, or expenses that may arise out of the performance of the contract or the breach of
any terms of the contract.

Under Indian law, an indemnity clause must be clear and unambiguous, and the language used in the
clause must be given its plain and natural meaning. The clause should also be reasonable in scope
and not against public policy. In case of any ambiguity or uncertainty in the language used, Indian
courts may interpret the clause against the party seeking indemnification.

Furthermore, the indemnity must be for a specific loss or damage, and the loss or damage must be
caused by the indemnifying party's breach of contract or negligence. The indemnity must also not
exceed the actual loss suffered by the party seeking indemnification.

If the indemnity clause satisfies these conditions, Indian courts will generally enforce the clause and
hold the indemnifying party liable for any losses or damages suffered by the other party. The party
seeking indemnification may initiate legal proceedings against the indemnifying party to recover the
losses suffered, and the court may order the indemnifying party to pay compensation.

In India, there is no clear-cut provision which states that when a contract of indemnity is
implemented. There have been conflicting legal conclusions throughout. First Indian case where the
right to be indemnified was identified was of Osmal Jamal & Sons Limited vs. Gopal Purushotham in
1728. But at present, a general agreement is formed in favour of the opinion of the equity courts. In
K. Bhattacharjee vs. Nomo Kumar, Shyam Lal vs. Abdul Salal and G. Moreshwar Vs. M. Madan cases, it
was decided that the indemnified can constrain the indemnifier to place him in a position to meet
liability that may be built upon him without waiting until the indemnified has cleared the same.

Indemnity requires that the party who will be indemnified shall not at any time be called upon to
pay. Therefore, the liability of the indemnifier starts the moment the loss or damages in the form of
liability to the indemnified becomes absolute and without limit.

In summary, while indemnity clauses are generally enforceable in India, it is important for parties to
carefully negotiate and draft such clauses in order to avoid ambiguity and ensure that they are
enforceable in case of a dispute.

Significance of Specific Indemnity Clause

The claim of indemnity may arise due to the conduct of Indemnifier or due to the conduct of any
other person. The risk of future losses shifts towards the Indemnifier once he agrees to an
indemnification obligation as spelled out in his contract. Moreover, the Indian courts have time and
again observed that an indemnity holder is entitled to sue the indemnifier even before incurring any
actual damage or loss and that an indemnity is not necessarily given by repayment after payment,
provided however the Parties do not agree otherwise.

An indemnity clause takes precedence over claim for damages as under section 73 of the Act. As per
the latter, only compensation for any loss 'which the parties knew, when they made the contract, to
be likely to result from the breach of it' at the time of entering into the contract can be claimed.
However, no such restriction applies for an indemnity clause. It is a separate contract and not
something arising as a consequence of breach necessarily to perform the contract. Therefore, any
consequential, remote, indirect, or third-party losses can all be claimed by the indemnified party
unless specifically excluded in the indemnity clause. Whether the party is an indemnifier or the
indemnified, it is imperative to have a well drafted indemnity clause which provides full-proof
protection and balances the interests of the parties to the contract.

Case Laws –

The case of Jet Airways (India) Limited v. Sahara Airlines Limited and Ors, 2011 (113) Bom LR 1725,
concerns a dispute over an indemnity clause in a lease agreement between the two airlines. In brief,
Sahara Airlines had leased an aircraft from Jet Airways, and the lease agreement included an
indemnity clause that stated that Sahara Airlines would be responsible for any loss or damage to the
aircraft during the lease period. During the lease period, the aircraft was damaged due to a fire, and
Jet Airways filed a claim for indemnity under the lease agreement. Sahara Airlines disputed the
claim, arguing that the indemnity clause was too broad and that they should not be held responsible
for the damage.

The court ultimately ruled in favour of Jet Airways, holding that the indemnity clause was clear and
unambiguous, and that Sahara Airlines was responsible for the damage to the aircraft. The court also
noted that the purpose of an indemnity clause is to allocate risk between the parties, and that it is
not unusual for such clauses to be broad in scope. Overall, this case underscores the importance of
carefully drafting and negotiating indemnity clauses in lease agreements and other contracts, as well
as the need to clearly understand the scope and implications of such clauses.

In the case of DHFL Pramerica Life Insurance Co. Ltd. v. PGN Logistics Pvt. Ltd., 2020 SCC OnLine
Bom 1438, Bombay High held that an indemnity clause in a lease agreement was valid and
enforceable, and that the indemnifying party was liable to indemnify the other party for any loss
suffered due to breach of the lease agreement. The court emphasized that indemnity clauses are
generally given a wide and liberal interpretation, and that the language used in the clause must be
given its plain and natural meaning.

In the case of Duro Felguera SA v. Gangavaram Port Ltd., (2017) 9 SCC 729, the Supreme Court of
India held that an indemnity clause in a contract was valid and enforceable, and that the
indemnifying party was liable to indemnify the other party for any loss suffered due to breach of the
contract. The court held that an indemnity clause represents a transfer of risk from one party to
another, and that it is necessary for such clauses to be construed reasonably in order to give effect to
the intention of the parties.

In Amtek Auto Ltd. v. Uttam Galva Steels Ltd., (2017) 14 SCC 314, the Supreme Court of India held
that an indemnity clause in a share purchase agreement was valid and enforceable, and that the
indemnifying party was liable to indemnify the other party for any losses suffered due to breach of
the agreement. The court emphasized that indemnity clauses are generally given a wide and liberal
interpretation.

Supreme Court of India in DLF Commercial Developers Ltd. v. Alpha G Corp Development Pvt. Ltd.,
(2015) 2 SCC 265 held that an indemnity clause in a joint development agreement was valid and
enforceable, and that the indemnifying party was liable to indemnify the other party for any losses
suffered due to breach of the agreement. The court emphasized that indemnity clauses are a
common feature of commercial contracts and must be given effect to.

These cases demonstrate that indemnity clauses are generally upheld and enforced by Indian courts,
as long as they are clear, unambiguous, and reasonable in scope. However, it is important for parties
to carefully negotiate and draft such clauses in order to avoid ambiguity and ensure that they are
enforceable in case of a dispute.