1

INTRODUCTION.
1. According to Indian Contract Act 1872

Sec 124.Contract of indemnity defined.- 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".

2. Different definitions of the term Indemnity.

a) As a legal concept, it has a more specific meaning, to compensate another party

to a contract for any loss that such other party may suffer during the performance

of the contract.

b) Indemnity is a duty to make good any loss, damage or liability incurred by

another. It is the right of an injured party to claim reimbursement for any loss,
damage, or liability from any person who had such a duty.

c) According to Longman’s dictionary indemnity is protection against loss esp. in the

form of a promise to pay, or payment for loss of money, goods etc.

d) In a contract of Indemnity, the person who promises to indemnify is known as

indemnifier and the person in whose favor such a promise is made is known as

indemnified or indemnity holder.

e) In sec 124 the provision incorporates a contract where one party promises to
save the other from loss which may be caused either by the conduct of the
promisor himself or by the conduct of any other person.

f) To indemnify someone means to cover them for their loss in a certain

circumstance. Most forms of insurance - except life insurance– are based on the
 2

indemnity principle. This means you can only recover the replacement value of
your loss.

g) According to the definition of Indian Contract Act the definition covers indemnity

for loss caused by human agency and it does not deal with those class of cases

where the indemnity.

h) arises from loss caused by events or accidents or natural calamity which do/may
not depend upon the conduct of the indemnifier or any other person, or by reason
of liability incurred by something done by the indemnified at the request of the
person who promises to indemnify (indemnifier).

i) When an act has been done by the Plaintiff under the express directions of the
defendant which occasions injury to the rights of the third persons, yet if such an
act is not apparently illegal, but is done in honest and bona fide in compliance
with the defendant’s directions, he shall be bound to indemnify the Plaintiff
.
against the consequence thereof
j) So we see that the definition of Indemnity in Indian Contract Act 1872 and

English law is different in certain extend. The definition under English Law is
much broader. In India contract of insurance is not covered by the definition of
Sec 124 of ICA. Thus if under a contract of insurance, an insurer promises to pay
compensation in the event of loss by fire, such a contract does not come under
the purview of Sec 124. Such contracts are defined under Sec 31 .

k) Under English law the word indemnity carries a wider meaning. It includes a

contract to save the promisee from the loss whether it is caused by human

agency or by natural calamity like accident or fire. Contract of insurance except

life insurance is a contract of indemnity.

 3

Concept of Indemnity.

3. An agreement by one person (X) to pay to another (Y) sums that are owed, or may
become owed, to him by a third person (Z). It is not conditional on the third person
defaulting on the payment, i.e. can sue X without first demanding payment from Z. If
it is conditional on the third person's default (i.e. if Z remains the principal debtor
and must be sued for the money first) it is not an indemnity but a guarantee. Unlike
a guarantee, an indemnity need not be evidenced in writing.
4. The concept of indemnity can be found in the Under mentioned facts:-

a) The case Adamson v Jarvis-

The plaintiff who is an auctioneer sold certain cattle on the instruction of the
defendant. It turned out later that the livestock did not belong to the defendant but it
belonged to another person, who made the auctioneer liable and the auctioneer
sued the defendant for indemnity for the loss he had thus suffered by acting on the
defendant’s directions. The court held that the plaintiff having acted on the request
of the defendant was entitled to assume that if what he did turned out to be
wrongful, he would be indemnified by the defendant.

b) Case of Dugdale v Lovering

The plaintiff possessed some trucks which were claimed by both the defendant and

K.P. Co. the defendant demanded delivery and the plaintiff asked for an indemnity

bond, but received no reply. Even then the trucks were delivered to the defendant.

K.P.Co sued the plaintiff for conversion of property. The plaintiff were held entitled to

recover indemnity from the defendant on an implied promise as evidence by the

facts that by demanding an indemnity, they made it clear that they have no intention

to deliver except on indemnity. Section 124 of the Act deals only with one particular
 4

kind of indemnity which arises from a promise made by the indemnifier to save the

indemnified from the loss caused to him by the conduct of the indemnifier himself or

by the conduct of any other person, but does not deal with those classes of cases

where the indemnity arises from loss caused by events or accidents which do not or

may not depend upon the conduct of the indemnifier or any other person, or by

reason of liability incurred by something done by the indemnified at the request of

the indemnifier.

5. Section 125 of the Act deals only with the rights of the indemnity-holder in the
event of his being sued. It is by no means exhaustive of the rights of the indemnity-
holder, who has other rights besides those mentioned in the section. Where the
indemnified has incurred a liability and that liability is absolute, he is entitled to call
upon the indemnifier to save him from that liability and to pay it off.
6. Indemnity shifts liability from the legally responsible person to an other person.
Indemnity is a claim for reimbursement by a party who has paid or may pay money for
a loss or liability against a party who should reimburse the payor because of an
agreement, relationship, or duty. Indemnity's roots are grounded in principles of
equity. Indemnity, a form of restitution, is founded on equitable principles; it is allowed
where one person has discharged an obligation that another person should bear; it
places the final responsibility where equity would lay the ultimate burden.
7. A contract of insurance an example of a contract of indemnity . In consideration
of a premium the insurer promises to make good the loss suffered by the assured on
account of the destruction by fire of his property insured against fire. However the
contract of life insurance does not come under the category of contract of indemnity.
This is because the life of a person cannot be valued and replaced.

8. Indemnity is one of the basic tenets of insurance that the insured should not profit
from a loss or damage but should be returned as near as possible to the same
financial position that existed before the loss or damage occurred. In other words the
insured cannot recover more than his or her actual loss from the insurer. There are,
however, certain exceptions to this rule, such as personal accident and life insurance
policies where the policy amount is paid on occurrence of accident or death and the
 5

question of profit does not arise. Some marine insurance policies also constitute an
exception because the settelement of a total loss is based on a sum agreed upon at
the time the insurance policy was written.
9. Most contracts of insurance are contract of indemnity, whereby the insurer
agrees to compensate the assured for the loss that the later may sustain through the
happening of the event upon which the insurer’s liability may arise but not always so.
Contracts such as life insurance and insurance provides for specified sum of money
when the accident has already happened are actually contingency contracts. Courts
consider it unlikely that an insurance contract will indemnify the assured against a loss
which is inevitable. The fundamental nature of insurance is that they insure against
risks and not certainty.
10. Indemnity is implicated when a person discharges another's duty: A person who,
in whole or in part, has discharged a duty which is owed by him but which as between
himself and another should have been discharged by the other, is entitled to indemnity
from the other, unless the payer is barred by the wrongful nature of his conduct.
11. The unexpressed premise has been that indemnity should be granted in any
factual situation in which, as between the parties themselves, it is just and fair that the
indemnifier should bear the total responsibility, rather than to leave it on the
indemnity-holder or to divide it proportionately between the parties by contribution. It is
sometimes said that a right to indemnity arises when the indemnifier owns an
independent duty to the indemnity-holder. This may prove to be nothing more than a
way of stating the problem (when is the duty owed?), but it happens to be true in
some of the instances in which the indemnity-holder would have an action of tort
against the indemnifier, irrespective of a right of indemnity.
12. Indemnity and contribution are distinct remedies. Contribution is when the parties
responsiblefor a loss share its liability.

13. Indemnity shifts the entire liability from one legally responsible person to another.
"Contribution is based on concurrent negligence of the parties toward the injured
party, and before there can be contribution among tortfeasors, there must be
tortfeasors. Contribution requires common liability to the injured party. Where the
parties have no common liability, there can be no right of contribution. Indemnity, on
 6

the other hand, does not require common liability and is permitted in circumstances
where there is no common liability to the injured party, provided there is an
agreement, relationship, or duty between the indemnifier and indemnity-holder that
allows for indemnity.
14. "A third party's action for indemnity is not exactly for "damages" but for
reimbursement,"' although this seems to be a distinction without a difference. The
indemnifier receives no consolation by calling the money paid to the indemnity-holder
"reimbursement" or "restitution" rather than "damages."

15. A claim for indemnity is also not a claim for breach of contract. A claim for breach
of contract is separate and distinct from a claim for indemnification. The plaintiff may
choose between the claims or include both in the same action.

16. A contract claim requires proof of a breach of a contractual duty and proximate
cause of the claimed damages, while an indemnity claim has other elements, including
the requirement that the indemnity-holder is liable for the underlying claim.
17. A right to indemnification is not a "promise to pay."Unless modified by contract,
the indemnity-holder’s liability generally must be fixed first by settlement or judgment.

18. Contractual indemnity is the promise of "'one party the indemnifier to hold
another party (the indemnity-holder harmless for loss or damage of some kind."
Courts do not disfavor contractual indemnity and will generally enforce it. The parties
need no special words to establish the obligation and it can arise "without specifically
expressing the obligation as indemnification ."

19. The parties create an indemnification agreement when their words express the
"intention by one party to reimburse or hold the other party harmless for any loss,
damage, or liability. As with other issues of contract law, intent is the controlling
consideration for whether an indemnity agreement exists.
 7

Scope of Sec 124 & 125 in Indian Contract Act.

20. Section 124 of the Act deals only with one particular kind of indemnity which

arises from a promise made by the indemnifier to save the indemnified from the loss

caused to him by the conduct of the indemnifier himself or by the conduct of any other

person, but does not deal with those classes of cases where the indemnity arises from

loss caused by events or accidents which do not or may not depend upon the conduct

of the indemnifier or any other person, or by reason of liability incurred by something

done by the indemnified at the request of the indemnifier.

21. Section 125 of the Act deals only with the rights of the indemnity-holder in the
event of his being sued. It is by no means exhaustive of the rights of the indemnity-
holder, who has other rights besides those mentioned in the section. Where the
indemnified has incurred a liability and that liability is absolute, he is entitled to call
upon the indemnifier to save him from that liability and to pay it off.

22. Section 125 of the Act deals only with the rights of the indemnity-holder in the
event of his being sued. It is by no means exhaustive of the rights of the indemnity-
holder, who has other rights besides those mentioned in the section. Where the
indemnified has incurred a liability and that liability is absolute, he is entitled to call
upon the indemnifier to save him from that liability and to pay it off.

23. The cause of action for the claim against the promise accures to the promise

when the later is actually demnified. Under a contract of indemnity the promise can

claim only damages as distinguished from the debt for the non-payment of which the

promisor as agreed to indemnify him. So a suit before the actual loss may be

considered as premature. The main thing is that the person must prove a loss.

24. This sections deal a particular type of indemnity which arises from a promise
 8

made by the indemnifier to save the indemnified from the loss caused to him by the
conduct of any other person but does not deal with those classes of cases where the
indemnity arises from the loss caused by the event of accident which do not depend
on the conduct of the indemnified or anyother person.
25. The sections 124 and 125 in Indian Contract Act have a narrow meaning. The
word “indemnity” has a wider scope than what is mentioned in Sec124 and 125. A fire
insurance or marine insurance is always a contract of indemnity though under the
contract act it would more properly come under Sec 31 which defines contingent
contract. Fire contract is a contract of indemnity and when loss occurs it is assured to
prove the actual loss in the absence of which no decree can be passed. English
usage of the word Indemnity is much wider. It includes promise to save the promise
from harm or loss caused by events like accident which do not or may not depend on
the actions of the promisor. In the case of life insurance, it is not a contract of
indemnity. In case of life insurance, death in inevitable and contact of indemnity will
not be against an inevitable event.
26. The right of indemnity is not confined to cases of contract only. It exists where
the relation between the parties is such that, either in law or equity, there is an
obligation upon one party to indemnify the other. The right of indemnity may arise
between the principal and agent, an employer and employee, in favor of a trustee
from the trust fund.
27. The obligation to indemnify may arise out of a legal duty to indemnify in particular
circumstances. Whenever an act is done by one person at the request of another
which act turns out to be injurious to the right of a third party, the person doing it is
entitled to indemnify from him who requested that it should be done.
28. English cases establish the right of indemnity in several ways:-
a) It may be created by express contract, that is, if it is given in terms of the contract
itself between two parties.
b) It may arise from implied contract, that is, if the true inference to be drawn from
the facts is that the parties intended such indemnity even if they did not express
themselves to that effect.
 9

c) The position of the parties is such that either in law or in equity there is an
obligation on the parties to indemnify the other.
d) If there is a state of circumstances to which the law attaches a legal duty to the
indemnify.
e) A right of indemnify may be given in statute.

29. There is a distinction between right of indemnity and damage. Right of indemnity
is given in the original contract whereas the right of damages is not present in the
original contract but arises out of breach of the particular contract. It is often seen that

when contract is broken the indemnity and damage coincides. 16

30. When an act is done by one person at the request of another which act not itself
tortuous to the knowledge of the person doing it and if such an act turns out to be
injurious to the rights of the third party, the person doing it is entitled to an indemnity
from him who requested that it should be done. This is implied contract of indemnity.
The right of indemnity arises from contract which may be express or implied. The right
of indemnity exists where there exists a relationship either in law or in equity. There
should be an obligation to indemnify the other party. Where there is no contract of
indemnity no claims can be made for the damages. Where there is no express
contract of indemnity, even if the facts are true as mentioned by the defendant, the
defendant will not be indemnified.

31. Sec125. Rights 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—

a) All damages which he may be compelled to pay in any suit in respect of any
matter to which the promise to indemnify applies;

b) 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;
 10

c) 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.

32. Sub-sec (1) requires that the suit must be in the respect of any matter to which
the promise to indemnify applies. Sub-sec (2) and (3) also state that in bringing or
defending or compromising, such suit, the indemnity holder should have been either
authorized by the promise or he did not contravene the orders of the promisor or in

absence of such authority or orders, his acts should be acts of a prudent. 18

33. Controversies.There are controversies regarding the point that whether the

indemnifier can be asked to indemnify before the indemnity-holder has actually

suffered the loss or his liability arises only after the loss has been suffered by the

indemnity-holder.

a) In English Law no action can be brought against the indemnifier until the

indemnity-holder has suffered actual loss. But a problem arises in such cases.

There are situations where the indemnity-holder is not in a position to pay from his

own. In the court of English law an equity relief is provided. So a rule has evolved

“it was no more necessary for the indemnity-holder to be demnified before he

could be indemnified.” That is the indemnity-holder can now compel the

indemnifier to save him from loss in respect of liability against which the indemnity

has been promised. In India it is a rule that no indemnity can be claimed until the

indemnity-holder has actually suffered loss.

20
b) But in 1942 (Gajanna Moreshwar Parelkar v Mereshwar Madan Mantri ) the
Indian courts applied the rules of the Court of equity that the indemnity-holder can
compel the indemnifier to indemnify even before the indemnity-holder has actually
 11

suffered losses. It was held by Chagla J. in the case Gajanna Moreshwar Parelkar
v Mereshwar Madan Mantri “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.” He also held “I have already held that
Sections 124 and 125 of the Indian Contract Act are not exhaustive of the law of
indemnity and that the Courts here would apply the same equitable principles that
the Courts in England do. Therefore, if the indemnified has incurred a liability and
that liability is absolute, he is entitled to call upon the indemnifier to save him from
that liability and to pay it off.”

c) Where a person contracts to indemnify another in respect of any liability which

the latter may have undertaken on his behalf, such other person may compel the
contracting party, before actual damage is done, to place him in a position to meet
the liability that may be cast upon him. “May be compelled to pay” cannot have a
narrow meaning so as to signify that indemnity cannot be claimed unless and until
damages have already been made.
d) Halsbury’s Laws of England says that as soon as the liability to a third person
has arisen, the indemnity-holder can obtain relief even before he as suffered losses.
When A has agreed to indemnify B against any loss or injury, B is entitled to have
recourse to this indemnity and to call upon A to discharge his liability as soon as the
loss or injury becomes imminent. Indemnity holder B is going to wait until he has
actually suffered loss or injury.
e) In Sec 125 there is no provision in the Act for the rights of a promisor in such a

contract. The absence, however, of such a provision does not take away the rights

which such a promisor has according to English Law, and which are same as the

rights of surety mentioned in Sec 141.

34. Contract of indemnity and guarantee . In contract of indemnity there are two
parties and in contract of guarantee there are three parties. In order to create a
 12

contract of surety ship there must be a creditor, a principal debtor and a guarantor or
surety, who makes himself liable for the liability of the principal debtor. The
relationship may be established in an agreement between the principal debtor and the
surety to which the creditor is the party. It may also be established by an agreement to
which the creditor is not a party, where there is a collateral contract between the
surety and the principal debtor that one shall be liable to the default of the other. But
where the contract between the surety and the creditor is not collateral undertaking
but creates an original liability, then it is a contract of indemnity .

35. Distinction between contract of indemnity and a contract of guarantee -

S.NO CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE

1. It contains only one contract
2. There are only two parties
involved.
3. The promiser gives the promise
on his own without being asked
by anyone
4. Promiser’s liability is primary
5. The promise of indemnity is
rooted in a contingency i.e a
probable liability.
6. The promise for example an
insurance company, after
meeting his obligation can
recover compensation form a
third party, only in the name of
promissee, unless the right is
assigned in his favour.
It contains three contracts
There are three parties involved.
The promiser gives the promise
at the request of the debtor
Promiser's liability is secondary,
i.e it arises on default by debtor.
The promise of guarantee is
rooted in a real liability i.e of
debtor
The promise can claim
compensation from debtor in his
own name after meeting the
obligation towards the creditor.
 13

7. Indemnity is generally promise Guarantee Is generally given to

as a compensation for loss. secure a loan or acquire a job.

Conclusion.
36. Indemnity is a special contract under the Indian Contract Act, 1872. The
legislation is a very well drafted one, but has given a very narrow definition of
indemnity, due to which the Indian Courts have time and again held that certain
documents do not come under the purview of the definition of indemnity contained in
the Act. Such decisions have not created a problem, since the courts covered the
liability under other provisions of the same Act, mainly under Section 31 of the Act
dealing with contingent contracts. Therefore, it would suffice to say that though the
definition of indemnity under the Indian Contract Act is narrow, the principles regarding
indemnity which have been laid down by common law are definitely addressed by
other provisions of the Act.The main purpose of construction and interpretation of a
contract of indemnity is to ascertain and give effect to the intention of the parties. While
interpreting the indemnity clause in a business contract, care should be taken so as to
give the meaning to the terms and phrases according to the common parlance used in
that business rather than resorting to other means of interpretation, unless such
construction leads to absurdity. The extent of liability under a contract of indemnity
depends on the nature and terms of the contract, and each case must be governed by
its own facts and circumstances. Interpretation of the contract or clause of indemnity
thus plays a crucial role in fixing the liability.
14