CONTRACT OF INDEMNITY

(SECTIONS 124 & 125 OF INDIAN CONTRACTS

ACT,1872)

PRESENTED BY,

K.AISHWARYA

I YEAR LLM

BUSINESS LAW
MEANING OF INDEMNITY
 In General, The word ‘Indemnity’ means security or protection against a financial
liability. It is a promise to compensate for or security against damage, loss or injury.

 It typically occurs in the form of a contractual agreement made between parties in

which one party agrees to pay for losses or damages suffered by the other party.

 SECTION 124 Indian contracts act,1872 defines 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”

 In simple words, the meaning of contract of indemnity is when two parties enter into
a legal relationship where one party promises another party to compensate him if
any loss incurred by the promisor himself or by any other third party.
ILLUSTRATIONS
  Mr. A enters into a contract with Mr. B that if Mr. C is not able to pay the
loan that Mr. B gives to Mr. C , then Mr. A will be liable to pay the loan
amount. The contract between Mr. A and Mr. B is a contract of indemnity.

 A is an insurance company and B is his client who has taken the insurance
policy of his house from A. B’s house catches fire due to gas leakage and B
faces a huge loss. The insurance company i.e. A shall indemnify B with such
loss against the policy taken by B. Such an insurance contract will be a
contract of indemnity.

 A promises to indemnify B against the cost which B has borne due to

initiating the suit proceedings against C. This is a contract of indemnity.
OBJECTIVE OF INDEMNITY
 The objective of entering into a contract of indemnity is to protect the promisee
against unanticipated losses.

PARTIES TO THE CONTRACT OF INDEMNITY

A contract of indemnity has two parties,

 The promisor or indemnifier: He is the person who promises to bear the loss.
 The promisee or the indemnified or indemnity-holder: He is the person
whose loss is covered or who is compensated.
TYPES OF INDEMNITY

 1. Express indemnity
This is a written agreement to indemnify, where the terms and conditions by
which the concerned parties must abide are usually indicated.
These include insurance indemnity contracts, construction contracts, agency
contracts, etc.

 2 .Implied indemnity
This is an obligation to indemnify that arises, not from a written agreement,
but more from circumstances or the conduct of parties involved.
One practical example is an agent-principal business relationship.
When the principal refuses to accept the goods that the agent supplies him,
the agent can sell them to others; however, if the agent sustains a loss while
selling, the principal is obligated to pay for it.
ESSENTIALS OF CONTRACT OF INDEMNITY
 PARTIES TO A CONTRACT: There must be two parties, namely, promisor or indemnifier and the
promisee or indemnified or indemnity-holder.

 PROTECTION OF LOSS: A contract of indemnity is entered into for the purpose of protecting
the promisee from the loss. The loss may be caused due to the conduct of the promisor or any
other person. The basic aspect is the saving of another person from loss caused to him by –
1.His/ Her own Conduct
2.Conduct of the third party
 EXPRESS OR IMPLIED: The contract of indemnity may be express (i.e. made by words spoken
or written) or implied (i.e. inferred from the conduct of the parties or circumstances of the
particular case).

 ESSENTIALS OF A VALID CONTRACT: A contract of indemnity is a special kind of contract. The

principles of the general law of contract contained in Section 1 to 75 of the Indian Contract Act,
1872 are applicable to them. Therefore, it must possess all the essentials of a valid contract.

 NUMBER OF CONTRACTS: In a contract of Indemnity, there is only one contract that is

between the Indemnifier and the Indemnified.
RIGHTS OF INDEMNITY HOLDER WHEN SUED
Section 125 of Indian Contract deals with the rights of the Indemnity Holder (i.e. The
person whose loss is covered). All these rights would arise in the sole situation of the
indemnity holder getting sued at the hands of any third party.

 Right to recover Damages

The indemnity holder can recover all the damages from the indemnifier which he is
forced to pay in a suit proceeding. But only those damages will be indemnified against
which promise is made.

 Right to recover Costs

Costs incurred due to an institution or defending of suit shall be indemnified by the
Indemnifier. But he shall recover only reasonable costs act as a prudent person would
have acted in the absence of such a contract.

 Rights to recover sums paid under Compromise

 Amount paid in case of compromise of the suit can also be recovered from the
indemnifier without violating the orders of indemnifier.
DIFFERENCE BETWEEN INDIAN LAW AND ENGLISH LAW
BASIS INDIAN LAW ENGLISH LAW

PRE No specific pre condition to claim The English Law uses a concept that,’
CONDITION indemnity Until and unless promisee has not
undergone any loss/ injury, he cannot
claim indemnity.

NATURE Contract of indemnity under Indian law It is a wider concept in English law as
is a narrow concept  compared to Indian law
TYPE OF Indian law only accepts express English law accepts both expressed
CONTRACT contracts of indemnity. and implied contracts of indemnity.
The cause of loss can be only via a The cause of loss could be both human
CAUSE OF human agency and not otherwise. agencies as well as events and
LOSS accidents such as Act of God etc.,

Indian laws are silent about the In English, Law enforceability depends
ENFORCEAB enforceability of indemnity contracts. upon the payment of losses.
ILITY
IMPORTANCE OF INDEMNITY IN BUSINESS
 Indemnity is prevalent in most agreements that involve an individual and a
business; however, it also applies to businesses and governments, or
between governments of different countries. This provides financial
protection to cover costs in the event of negligence, mistakes, accidents, or
some unavoidable circumstances that could highly impact the flow of the
business.
 Many businesses require indemnity for their directors and executives
because lawsuits are common in business. It covers court costs, lawyer’s
fees, and settlements.
CASE LAWS

 GAJANAN MORESHWAR v. MORESHWAR MADAN

Facts- The plaintiff got a plot for a lease. Then he transferred the lease to the
defendant Moreshwar madan. The defendant decided to construct a building
on the plot and he got the construction materials from a 3 rd party named
Mohan das. When the 3rd party Mohan das asked the defendant for payment,
for the materials ,the defendant could not pay. So the plaintiff executed a
mortgage deed in favour of the 3rd party. Later the defendant did not pay the
principle and interest. So, the plaintiff sued him for indemnity.

Holding- If the Indemnity holder has incurred an absolute liability, he can turn
to the indemnifier to take care of the liability and pay it off. Thus the plaintiff
was entitled to be indemnified by the defendant against all liability under the
mortgage and deed of charge.

Also in this case , the court said that the provisions of the Indian contracts act
is not exhaustive and thus courts in India shall follow English law.
 .

 The New India Assurance Company Ltd. v The State Trading Corporation of India
Ltd. and Anr
In this case , The Gujarat High Court upheld the view of Gajanan Moreshwar v
Moreshwar Madan by stating that indemnifier or the defendant is liable to pay in
case of breach of promise irrespective of actual loss. 

 ADAMSON v. JARVIS
In English law, The principle of indemnity originated in the case of Adamson v. Jarvis.
In this case, the plaintiff on the instructions of the defendant sold a cattle to some
person. Later, it was realized that the defendant was not the real owner of the cattle and
the plaintiff had to pay damages for such sale. Plaintiff claimed indemnity from the
defendant.
The court held that the actions of the plaintiff were according to the directions of
the defendant, therefore the defendant was liable to indemnify the plaintiff.