INTRODUCTION.

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".

Different definitions of the term Indemnity.

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.

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.

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.

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.

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.

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

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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
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).

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 thereof1

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 312.

Under English law the word indemnity carries a wider meaning. It includes a contract to save the
promise from the loss whether it is caused by human agency or by natural calamity like accident
or fire. Contract of insurance3 except life insurance is a contract of indemnity.

1 Topis v Crane, 5 Bing NC 636 cited in Saharay, H.K. Dutt on Contract, Eastern Law House, 2006, Kolkata.

2 Bhadbhade, Nilima (ed), Pollock & Mulla. Mulla Indian contract and specific relief acts. 12th ed., Butterworth,
2001.

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Concept of Indemnity.

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 facts of the case Adamson v Jarvis,5
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.

4 Markanda, P.C. Law of Contract. Wadhwa Publishers. 2008. Nagpur.

5 (1827) 4 Bing 66 referred from, Singh, Avtar. Law of Contract. Eastern Book Company. 2008. Lucknow.

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In another case Dugdale v Lovering,6

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 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.7

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.

Indemnity shifts liability from the legally responsible person to an8other person. Indemnity is a
claim for reimbursement by a party who has paid or may pay money for a loss or liability against

6 (1875) 10 CP 196

7 Markanda, P.C. Law of Contract. Wadhwa Publishers. 2008. Nagpur.

8 Saharay, H.K. Dutt on Contract, Eastern Law House, 2006, Kolkata.

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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.

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.

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 question of profit does not arise. Some marine insurance policies also
constitute an exception because the settlement 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

9 Markanda, P.C. Law of Contract. Wadhwa Publishers. 2008. Nagpur.

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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.

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.

Indemnity and contribution are distinct remedies. Contribution is when the parties responsible
for a loss share its liability.
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 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

10 Chitty, Chitty on Contracts, Sweet and Maxwell, 2004, London.

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indemnity.

"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."

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.11
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.

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.

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."
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.12

11 Saharay, H.K. Dutt on Contract, Eastern Law House, 2006, Kolkata.

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Scope of Sec 124 & 125 in Indian Contract

Act.

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.

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.

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.

This sections deal a particular type 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 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 any

12 Bangia, R.K. Contract -2, Allahabad Law Agency, 2004, Faridabad.

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other person.13

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.
The right of indemnity is not confines to cases of contract. 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.
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.
In contract of indemnity there are two parties and in contract of guarantee there are three parties.
In order to create a contract of suretyship 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

13 Gajanna moreshwar Parelkar v Mereshwar Madan Mantri. AIR 1942 Bom 302

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creditor is not collateral undertaking but creates an original liability, then it is a contract of
indemnity.14

English cases establish the right of indemnity in several ways,15

(1) It may be created by express contract, that is, if it is given in terms of the contract itself
between two parties.
(2) 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.
(3) 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.
(4) If there is a state of circumstances to which the law attaches a legal duty to the
indemnify.
(5) A right of indemnify may be given in statute.

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

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

14 Bangia, R.K. Contract -2, Allahabad Law Agency, 2004, Faridabad.

15 Markanda, P.C. Law of Contract. Wadhwa Publishers. 2008. Nagpur.

16 Bangia, R.K. Contract -2, Allahabad Law Agency, 2004, Faridabad.

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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.

125. 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—

(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 authorized 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
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.17

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

17 Saharay, H.K. Dutt on Contract, Eastern Law House, 2006, Kolkata.

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contravene the orders of the promisor or in absence of such authority or orders, his acts should
be acts of a prudent.18

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. 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 equity relief was 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 indenifier 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.19

But in 1942 (Gajanna Moreshwar Parelkar v Mereshwar Madan Mantri20) 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 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.”

18 Ibid.

19 Bangia, R.K. Contract -2, Allahabad Law Agency, 2004, Faridabad.

20 AIR 1942 Bom 302.

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13th Law Commission 1958 had expressed the opinion that the view expressed by Chagla J. is
correct and should be adopted by the legislature. The Law Commission recommended that as in
English Law “The right of the indemnity-holder should be more fully defined and the remedies of
an indemnity-holder should be indicated even in cases where he has not been sued”

In Osman Jamal & Gopal,21

The plaintiff company before having actually made any payment to the vendor in respect of its
liability to him was entitled to recover from the indemnifier under the contract of indemnity. The
plaintiff company in liquidation was commission agents for the defendant firm in the purchase
and sale of certain goods and was to be indemnified against all losses in such transaction. The
plaintiff company in that capacity bought the goods from the vendors resold the goods at a loss.
He sought to recover it from the plaintiff company. Hence the plaintiff company was seeking to
recover this sum from the defendant firm before paying over the amount of the loss to the vendor
on the basis of indemnity given by a contract. It was held that the official liquidator could
recover it to the vendor.

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.22

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

21 ILR 56 Cal 262.

22 Mitra, S.C. Law of Contract. Vol-2, Orient Publishers, 2005, New Delhi.

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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.23
Plaintiff has two causes of action that it was permissible for the plaintiff to call upon the
defendant to pay the amounts claimed and it was also permissible for the plaintiff to wait till he
suffers loss. Such suits will lie within the period of three years under Art 113 of Limitation Act
from the date of payment.24
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.

Conclusion.
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

23 Ibid.

24 Saharay, H.K. Dutt on Contract, Eastern Law House, 2006, Kolkata.

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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.

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