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CONTRACTS II PROJECT:
Damages under
Indemnity: A
Comparative Analysis of
the Indian and English
Legal Positions

Advaith Govind
Roll No: 829
IV Semester
NUALS

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CONTENTS
Acknowledgement.....................................................................................................2

Introduction...............................................................................................................3

Concept of Indemnity................................................................................................4

Insurance Indemnity..................................................................................................6

Damages under English Law.....................................................................................9

Damages under Indian Law.....................................................................................12

Conclusion...............................................................................................................14

Bibliography............................................................................................................15

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Acknowledgement.
I express deep sense of gratitude to my teacher, Professor Dr. Anil R. Nair Sir for giving me an
opportunity to work upon the topic of my interest. I also thank my parents and friends who were
always in constant support and guidance. I am always indebted to Lord Almighty for his
blessings to bring out my best.

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Introduction
What is Indemnity?
Indemnity, in the widest sense, is to recompense any loss or liability which a person has
incurred, such as one arising from any duty or promise. Put in simple words, an indemnity is a
promise made by one party, called the indemnifier, to protect the other, called the indemnified
party; from loss caused to the latter as a result of a specified act or event. The purpose of this is
not to merely reimburse the person in terms of any amount paid, but is basically the liability of
the indemnifier to save the indemnified from a claim made by a third party. In a sense, indemnity
can be said to be a form of insurance to the indemnified party to bear certain risks and loss. For
example, an insurer (indemnifier) agreeing to pay for the loss which has been suffered by the
insured (indemnified party) as a result of a road accident is an indemnity.
The contract of Indemnity can be said to be a species of contract and Indemnity can be treated as
a subspecies of compensation. For a valid contract of indemnity, it must fulfill all the essentials
required for a valid contract. Such a contract for indemnity may arise either by an express
promise where there is an agreement between parties to indemnify each other or by operation of
law. Under the latter, the provisions for such are provided under the Negotiable Instruments Act,
1938. Also, under Section 13 of the Indian Partnership Act, 1932, a firm is bound to indemnify
an agent for loss suffered to him while doing any lawful act for the firm.
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.1
Section 73 of the Indian Contract Act gives a right to the parties of a contract, to claim for
damages in case of breach of contract.
1 Infra n.18.

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Concept of Indemnity.
Before taking a look at the damages covered under the English and the Indian law, the
provisions of indemnity that is covered under the English and Indian law has to be scrutinized.
The basic concept of Indemnity iterated by the English law could be explained by the English
case Adamson V. Jarvis2. The plaintiff, an auctioneer, sold certain cattle on the instruction of the
defendant. It subsequently turned out that the livestock did not belong to the defendant, but to
another person, who made the auctioneer liable and the auctioneer in his turn sued the defendant
for indemnity for the loss he had thus suffered by acting on the defendants directions. The court
laid down that the plaintiff having acted on the request of the defendant was entitled to assume
that the, if, what he did, turned out to be wrongful, he would be indemnified by the defendant.
Thus indemnity in English law means a promise to save a person harmless from the
consequences of an act. But it is wide enough to include a promise of indemnity against loss
arising from any cause whatsoever, like loss caused by fire or by some other accident. Even
every contract of insurance other than life insurance is a contract of indemnity.3 The Promise can
even be an express or implied depending on the circumstance of the case.
For example, in Dugdale v. Lovering4, the plaintiffs were in possession of certain trucks which
were claimed both by defendants and one K.P. Co. The defendants demanded delivery of and the
plaintiffs asked for an indemnity bond, but received no reply. Even so they delivered the trucks
to the defendant. K.P. Co having successfully sued the plaintiff for conversion of their property,
the plaintiffs were held entitled to recover indemnity from the defendants on an implied promise
as evidenced by the facts that by demanding an indemnity, they made it quite clear that they had
no intention to deliver except on indemnity.

2 (1827) 4 Bing 66: 29 RR 503.

3Oriental Fire and General Insurance Co v Savoy Solvent Oil Extractions Ltd, (1997) 6 ALD 1
4 (1875) 10 CP 196

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But the Section 124 of the Indian Contract Act defines Indemnity as follows:
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. 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.
Thus in the Indian Contract Act, the scope of indemnity is by the very process of definition
restricted to cases where there is a promise to indemnify against loss, caused by the promisor
himself or by any other person. The definition excludes from its purview cases of loss arising
from fire or perils of the sea. Loss must be caused by human agency.5
In Gajanam Moreshwar Parelkar v Moreshwar Madan Mantri, Justice Chagla asserted that
ICA is both an amending and a consolidating Act, and it is not exhaustive of the law of
contract. Moreover, he stated that section 124 deals only with one particular kind of indemnity
in which the loss is caused by the conduct of the indemnifier himself or of other person, but does
not cover the cases outside this or cases when liability arises because of something done by the
indemnified at the request of the indemnifier.

Moreover situations like those in Adamson v. Jarvis6 where cattle were sold under the instruction
a wrongful owner is outside the scope of the definition. Such cases and the cases of a loss arising
from an act done at the request of the promisor are covered under Section 223 of the Act.
The indemnity as envisaged by the section may be expressed or implied. An Illustration
of implied indemnity is the decision of the Privy Council in Secy of State for India in Council v
Bank Of India Ltd.7
5 Gajanam Moreshwar Parelkar v Moreshwar Madan Mantri, AIR 1942 Bom 302
6 Supra n.2
7 AIR 1938 PC 191

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An indemnity bond which permits an employee to leave the employment earlier than the
minimum agreed period only at the cost of the forfeiture of the bond money is valid provided
both the period of restriction and the bond money are reasonable. Only the bond money can be
retained which is necessary to indemnify the employer for his loss.8

Insurance Indemnity
Almost all insurance other than life and personal accident insurance are contract in indemnity.
The insurers promise to indemnify is an absolute one. A suit can be filed immediately upon the
failure of performance, irrespective of the actual loss. If the indemnity holder incurred liability
and that liability was absolute, he would be entitled to call upon the indemnifier to save him from
the liability by paying it off.9
Section 125 of the Indian Contract Act lays down the extent of Liability. It discusses the Rights
of an indemnity holder when sued i.e. 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 contrary to the orders of the promisor, and was one which it would have

8 P.N.V.S.V. Prasad v Union of India, 1 An WR 126

9 New India Assurance Co Ltd v State Trading Corpn of India, AIR 2007 NOC 517 (Guj).

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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.
Section 125 (1) speaks that the indemnity-holder is entitled to recover all the damages which he
may compelled to pay in any suit in respect of any matter to which the promise of indemnity
applies. This was noted in Parker v Lewis.10
This case conclusively holds that once a suit is decided against the indemnified and he, being the
judgment debtor, pays the money to the judgment creditor, or, when in a compromise, he
prudently settles the dispute by paying the damages; indemnifier becomes absolutely liable to
indemnify him (i.e. the decree becomes conclusive for the purpose of invoking indemnity),
notwithstanding that the suit could have been brought or could have been appealed against.
Also, if the indemnifier trusts indemnified to further appeal against the judgment, he will still be
liable to pay under the indemnity contract to th
e indemnified, if latter had paid the decreed amount under the previous suit. It is only if
indemnified finally wins the case, shall the judgment debtor will pay the decreed amount to the
indemnifier.
In addition to this, Section 125 (2) and 125 (3) enables an indemnified to recover all costs he
may be compelled to pay in a suit in respect concerning indemnity, either in bringing or
defending the suit or even in case of a compromise with respect to such a suit.11
A person who encashes an indemnity bond which is in the nature of a bank guarantee can retain
only that part of the amount of the bond which represents the damage or loss suffered by the
bond-holder as a result of the contracting partys breach. Anything more would be undeserved
windfall for one party and penalty for the other.12
Commencement of Liability

10 Parker v Lewis, (1873) 8 Ch App 1035, 1056.

11 Pepin v Chunder Seekur Mookerjee, ILR (1880) 5 Cal 811.
12 Cargill International SA v Bangladesh Sugar & Food Industries Corpn.

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An important question in this connection is when does the indemnifier becomes liable to pay?
Or, when is the indemnity-holder entitled to recover his indemnity? The original English rule
was that indemnity was payable only after the indemnity-holder has suffered actual loss by
paying off the claims. The maxim of law was: you must be damnified before you can claim
to be indemnified. But the law is not any different. This process was well explained in
Gajanam Moreshwaar Parelkar v Moreshwar Madan Mantri.13
It is true that under the English common law no action could be maintained until the actual loss
has 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 is
filed against him, then he had to actually 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 thus 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.
This principle was expounded in Richardson Re, Ex parte The Governors of St. Thomass
Hospital14. It was observed in this case that indemnity is not necessarily given by repayment
after payment. Indemnity requires that the party to be indemnified shall never be called upon to
pay. The High Court of Calcutta followed this principle in Osman Jamal & Sons Ltd v Gopal
Purshttam15. The High Court of Allahabad, Madras and Patna have all expressed their
concurrence in the principle that as soon as the liability of the indemnity-holder to pay becomes
clear and certain
he should have the right to require the indemnifier to put him in a position to meet him the claim.
But contrary views have also been expressed.
13 Supra n.5.
14 (1911) 2 KB 705,715 (CA).
15 ILR (1929) 56 Cal 262.

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Where an authorized agent of the insurance company collected the premium amount from the
assured against proper receipt, the liability of the insurer began from that moment though the
agent deposited the collection with the company after the occurrence. 16

Specified Time for Notice .

An insured motor vehicle was lost by theft. The insurance policy required the assured to send
notice to the insurer immediately after theft or any other criminal act. The assured made police
report of the theft immediately after the incident, but informed the insurer after one month. The
question was whether this could be regarded as a notice given immediately. The court said that
the expression immediately implies notice to be given with promptitude avoiding unnecessary
delay. Immediate police report showed the bona fides of the assured in the matter. Report to the
insurer after one month could not be regarded as unreasonable. Indemnification could not be
denied.

Damages under English Law.

The basic concepts with respect to any damages are as follows:
(a) Causation- It simply refers to the requirement that there must be a causal connection between
the defendants breach of contract and the claimants loss. It has been held that the breach of
contract need not be the sole reason for the loss suffered so as to recover damages, but it should
be an effective or dominant cause of such breach.

16 Oriental Insurance Co Ltd v Asha Patel, 1996 AIHC 2043 (J&K).

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(b) Remoteness of damage- The damages that can be recovered for a breach of contract are
governed by this principle. In case the damage/loss suffered by the claimant is too remote a
consequence of the breach, then the defendant is not entitled to pay damages. The general norms
under common law for remoteness of damages were laid down in the landmark case of Hadley v.
Baxendale.17 In this case, the court pointed out that only such damages are recoverable such as
may fairly and reasonably be considered as arising naturally, i.e., according to the usual course of
things from such breach itself, or when they are such as may reasonably be supposed to have
been in the contemplation of both parties at the time they made the contract, as the probable
result of the breach of it.

(c) Mitigation- This has been another principle which limits the amount of damages that can be
recovered in case of breach. It stipulates that the person who has suffered a loss must take any
reasonable steps available to him to mitigate the extent of the damage caused by the breach. The
rationale behind this rule is that a claimant should not be compensated for loss suffered which is
not an actual result of the breach, but is because of his own fault.

Usually, the mitigation of damage principle comprises of three different rules. Firstly, a
claimant can never recover an avoidable loss. Secondly, where the claimant does take reasonable
steps to mitigate loss, however, he remains unsuccessful, then he would be entitled to claim
damages for such losses. Thirdly, when such attempt to mitigate remains successful, he would
not be entitled to recover for such loss or damage.18

Indemnity is generally preferred over other forms of recovery because there remains no
hindrance as regard to the quantum of loss that can be recovered. Thus, the claimant can
successfully recover all kinds of losses suffered by him as a consequence of a breach of the
related indemnity. Traditionally, an indemnity claim was regarded as a debt claim, so principles
17 [1854] EWHC J70
18 "Damages Under Indemnity." Legal Services India - Laws in India, Supreme Court Judgments,
Lawyers in India. N.p., n.d. Web. 20 Apr. 2015.

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related to mitigation and remoteness which are generally Applicable for damages in case of a
breach, were deemed inapplicable in case of indemnity. In this regard, the case of Royscot
Commercial Leasing Ltd v Ismail19 is pertinent.
In this case, a director who had provided an indemnity for an equipment lease granted to the
company claimed that the lessor should have mitigated the loss suffered by reason of default of
the lessee. Rejecting this claim, the court pointed out that a claim under a contract of indemnity
is not a claim in damages at all, but it is a claim in debt for a specified sum due on the happening
of an event which has occurred.
So, traditionally, it was believed that these principles related to remoteness and mitigation do not
apply in the case of indemnity, and Royscot was cited as an authority for the same. However, this
norm was questioned by the Court of Appeal in The Eurus case. Here, the court held that when
indemnity is triggered by a breach of contract, such indemnity, as a matter of construction,
covers only foreseeable consequences caused by such trigger. The Court of Appeal affirmed a
paragraph from Halsbury's Laws of England stating that the "extent of a person's liability under
an indemnity depends on the nature and terms of the contract.
Thus, it can be concluded that the parties have their own freedom to an agreement containing no
provision to the contrary, however, an express exclusion will be required to persuade the courts
to look into the matter of whether the contractual indemnity in question was intended to cover
more than the normal indemnity in terms of damages.
Though the two afore-said decisions might appear to be contrary, yet, it has been suggested that
they are reconcilable.
The judgment delivered in The Eurus case, categorically pin-pointed that there remains no
inherent indication as to what is covered by an indemnity, as the same is dependent on the
individual contract which can vary from one to another. In Royscot, indemnity had specific
reference to a sum equivalent to a debt, and since there remains no duty to mitigate in debt like in
case of damages, the results varied in these two cases. Thus the conclusion is a little uncertain.
Despite this, it appears that the rules of remoteness and mitigation will be applicable to
indemnities triggered by reason of a breach of contract.
19 29 April 1993 (CA)

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Also, the legal position related to applicability of such principles to indemnities for loss arising
out of specific circumstances/situations is ambiguous, since there remains no authority in this
issue. In the Eurus case, it was specifically stated that the court did not address such situations
where an indemnity is triggered other than by breach of a contract. However, a common belief
exists as to such rules being not applicable in the above circumstances.

Damages under Indian Law.

At the outset, it is important to first examine the statutory provisions related to indemnification
and the main points of difference between right to indemnification and right to damages. Thus, it
is pertinent to study the definition of indemnity as per the Indian Contract Act, 1872. The Act
defines indemnity in a narrow sense to mean a contract where the indemnifier agrees to protect
the indemnified party from any loss caused to it either by the conduct of the indemnifier himself
or by the conduct of any other (third) person. It is noteworthy to mention that the above
definition does not cover within its ambit losses consequential to events which do not depend on
the conduct of the indemnifier or any other third person, such as by reason of any event caused
by an act of God. Even the Law Commission had taken note of this anomaly in its 13th report
and recommended expanding the definition of indemnity by providing for an amendment in the
Indian Contract Act so as to bring more clarity and certainty on this issue.
Section 73 of the Indian Contract Act relates to damages which gives the contracting parties a
right to claim damages in case of breach of a contract. However, quite often these two concepts
are confused with each other, since they seem to coincide with each other in the case of breach of
contract. Interestingly, the end result comes out to be the same, even though they are essentially
two distinct and unrelated legal concepts.
Though, there are many key differences between the two sections, the one concerning quantum
of recovery is definitely the most striking. A plain reading of the language of sections 73 and 124
gives an inference that the right to recover a loss out of an indemnity may not necessarily be
subject to all the statutory constraints on right to claim damages as set out under section 73, such

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as the requirement that the loss should be direct, immediate and not remote, thus not covering
consequential loss, etc.
Section 124 does not only restrict its scope to loss which has already been suffered by the
indemnity holder, but also includes the obligation to save such holder from an expected loss,
which would otherwise vitiate the very purpose of an indemnity.

Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri 20 is one of the most important case
laws in respect to the concept of indemnity.
The Law Commission of India accepted the view that, to indemnify does not only mean to
reimburse in respect of the money paid, but, in accordance with its said derivation, it includes to
save from loss in respect of the liability against which the indemnity has been given.

20 Supra n.5

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Conclusion.
Recently, indemnity clauses have become quite popular and are used widely in commercial
transactions, especially due to an increased risk of loss from various sorts of tax liabilities, labour
troubles, etc., which are essentially unforeseeable events at the time of entering into contract.
As it is known and specifically provided, one cannot claim compensation for a breach of contract
when the loss suffered is indirect and/or remote. However, there remains no such exception for a
contract of indemnity. Much is left to the contractual freedom and will of the parties. A typical
indemnity clause thus provides for protection against all kinds of losses, claims and liabilities,
howsoever arising in relation to the specified transaction.
Thus, the Indian law position seems to be no different from the common law one in this regard,
though much depends on the nature and wordings of the contract in question and the Court's
inference of the intention of the contracting parties to include consequential losses. Thus it can
be concluded that as a general rule, the law usually leans unfavourably towards those who try to
avoid liability or seek exemption from liability of their actions, irrespective of where the cause of
action arises.

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Bibliography.
Mercantile Law- Avtar Singh
Law of Contracts and Specific Relief Act- Avtar Singh
Indian Contract Act, 1872
Indian Partnership Act, 1932