CONTRACT OF INDEMNITY

Meaning
 Longman’s Dictionary of Contemporary English: It
is protection against loss or security or compensation
in case of loss.
 Sec 124 ICA: 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”
Example:
 A Contracts to indemnify B against the consequences of any

proceedings which C may take against B in respect of a sum of Rs.

200. This is a contract of indemnity (Illustration to Sec. 124 ICA)

 A receipt pertaining to certain goods was lost by A while travelling in

a train.
 B who found the receipt claimed the goods from railways.
 Railways asked B to furnish an Indemnity bond in their favour.
 Now if A (original Owner) sued the Railways for the damages, they
can claim the same from B
 Here Railways is Indemnity holder and B is Indemnifier.
 Essentials of a contract of indemnity
 It must be a valid contract under section 10 of Indian Contract Act:
 Free consent
 parties competent to contract
 lawful consideration, lawful object
 not expressly declared void

 Two parties:
 Indemnifier (Promisor)
 Indemnity holder (Promisee)

 Loss to indemnity holder:

 Occurrence of loss or damage is a contingency upon which liability
of the indemnifier comes into existence.
Indian law vs. English Law
 Under English law, the term “Indemnity” carries wider
meaning.
 It includes compensation for any loss caused to a party
whether by human agency or not.
 But in India indemnity includes only loss which is
caused by the human agency.
 Under English Law Contact of Indemnity includes
Insurance also, which is not true in Indian context.
 Ex: Insurance in case of damage due to fire is a
contract of indemnity under English.
Exceptions (Exclusion)
A contract of indemnity does not include:
 Cases where loss arises due to accidents such as

fire/marine, or any unforeseen event.

 Any event not depending on the conduct of the

person, for e.g. Death

Amendment required
 Law Commission of India in its 13th report (1958)
had recommended that the definition of ‘Contract
of Indemnity’ in this section be expanded to include
cases of loss caused by the events which may or
may not depend upon the conduct of human beings.
 Rights of Indemnity Holder
Sec. 125:- Right of indemnity-holder when sued -
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 authorised him to bring or defend the suit;
(3) all sums which he may have paid under the terms of any compromise of any
such suit, if the compromise was not contract to the orders of the promisor, and
was one which it would have been prudent for the promise to make in the
absence of any contract of indemnity, or if the promisor authorised him to
compromise the suit.
Section 125 - Rights of indemnity- holder when sued

Preconditions:
 Existence of a contract of indemnity
 Indemnity holder should have acted within the scope of his authority

Indemnity holder entitled to recover from the indemnifier –

 Damages
 All costs
Provided:
 Indemnity holder did not contravene the orders of the indemnifier
 Indemnity holder acted prudently; or
 Indemnifier authorized indemnifier to bring/defend the suit
 Any compromise payment
Provided:
 compromise is not contrary to the orders of the indemnifier
 Indemnity holder acted prudently
 Indemnifier authorized indemnity holder to compromise the suit
Indemnity holder, When to made liable?

 There is a controversy in this regard that whether a

indemnity holder can claim to be indemnified
before the actual loss has been occurred?
 Earlier view based on English Common Law:
 No action can be maintained against the indemnifier till the indemnity
holder has suffered actual loss.

 Present view based on equitable principles:

 Existence of a clear enforceable claim suffices to call the indemnifier’s
obligation into action. The indemnity holder can compel the
indemnifier to place him in a position to meet the liability that may be
cast upon him without waiting until he has actually discharged it.
In India
 Lahore and Nagpur High Court’s view:
 A Person must be demnified before he can be
indemnified.
 Bombay, Madras, Calcutta, Patna High Court’s
view:
 Above high courts recognises the English principle
followed in court of equity. i.e. Indemnity holder
can compel the indemnifier to indemnify even
before the actual loss occurs.
Equitable View - Landmark Case
 Gajanan Moreshwar Parelkar Vs. Moreshwar Madan Mantri – AIR
1942 Bom 302

Sections 124 and 125 of the Indian Contract Act are not exhaustive of the
law of indemnity. The Courts in India would apply the same equitable
principles that the Courts in England do.

“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.” Chagla J.
 The Law Commission of India
supported the views of Justice
Chagla and recommended the
amended in concerned sections
of Indian Contract Act.
 Indemnity Vs. Guarantee

Indemnity
Contract of indemnity is a bilateral
contract: Requires the concurrence of
only two persons - the indemnifier and
the indemnity holder.
Guarantee
Contract of guarantee is a tripartite
contract: Requires concurrence of three
parties - the creditor, the surety and the
principal debtor.

Indemnifier is primarily and There must be contract by which the

independently liable. principal debtor, expressly or impliedly
requests the surety to act as surety.

Indemnifier’s liability arises from loss Surety’s liability arises from principal
caused by the conduct of indemnifier debtor’s default.
himself or by the conduct of another
person.
Indemnity Clause
 A provision in a contract under which one party (or
both parties) commit to compensate the other (or
each other) for any harm, liability, or loss arising
out of the contract.
 The formula to compute the amount of
compensation is usually included in the contract.
 Nature of Indemnity Clauses
 Broad version of indemnity clause:
“Contractor agrees to indemnify and hold harmless Owner from any
and all liabilities, claims, actions, demands, losses, damages,
penalties, lawsuits, judgments, including attorneys’ fees and costs,
arising out of or relating to the work of Contractor.”
 Narrower version of indemnity clause:

“Contractor agrees to indemnify and hold harmless Owner from any

and all liabilities claims, actions, demands, losses, damages,
lawsuits, judgments, including attorneys’ fees and costs, but only to
the extent caused by, arising out of, or relating to the work of
Contractor.”
 Capping: “In no event shall the maximum liability hereunder

exceed the sum of Rs. ____. The limitation should bear a reasonable
commercial relationship to the contract”
Indemnification clause - Things to
remember
 Every indemnification clause is different so read it
carefully - Don't assume that it is "standard" or "fair."
 Who is agreeing to pay who - Are you agreeing to pay the
counter party if there is a problem or is the counter party
agreeing to pay you? Don't go out of your way to offer
indemnifications; it increases your potential risk.
 What kinds of losses will be covered - Will the indemnifier
pay the attorneys' fees, Court costs and actual damages?
 Which party gets to control the legal strategy - Who is
picking the attorney? Who gets to decide whether to settle
the case?
Indemnification clause - Things to remember

 What kind of event triggers the obligation to indemnify -

Breach of contract or negligence by the other party? Third-
party claims?
 Limitation of liability – It is advisable to exclude
consequential and remote damages from the scope of
indemnity.
 Indemnity holder’s duty to co-operate with the
indemnifier – The indemnifier’s obligation can be made
conditional to the indemnity holder promptly notifying the
indemnifier of any claim in writing and cooperating with the
indemnifier in the defense of the claim.
Stamp Duty
 Indemnity Bond is listed at no. 34 of the Indian
Stamp Act 1899
 When an agreement includes an indemnity clause, the
stamp duty payable shall be:
 stamp duty payable on the agreement + stamp duty payable on
an indemnity bond
 It differs in different states.
 Example: Duty payable in Delhi:
 When the amount secured does not exceed Rs. 1000/- : 2%
 In other case: Rs.100/-
Thank You