CONTRACT OF INDEMNITY
The term ‘indemnity’ basically means “security or protection against a loss” or compensation. If a person
is promised by another that he will be protected or compensated in case of loss or damage, he is said to be
indemnified.
Section 124 of the Indian Contract Act, 1872 defines Contract of Indemnity as follows: A contract by
which one party promises to save the other from loss caused to him by the contract of the promisor
himself, or by the conduct of any other person, is called a "contract of indemnity".
There are two parties to contract of indemnity i.e. promisor or indemnifier (the person who promises to
bear the loss) and promisee or the indemnified or indemnity-holder (the person whose loss is covered or
who are compensated). The objective of entering into a contract of indemnity is to protect the promisee
against unforeseen losses.
Illustration: A contracts to indemnify B against the consequences of any proceedings which C may take
against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.
Here, A is the indemnifier or promisor as he promises to bear the loss of B. B is the promisee or the
indemnified or indemnity-holder as his loss is covered by A. When A pays B to cover damages that B had
to pay C, and then A has indemnified B.
In Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942) 44 BomLR 704 the Bombay High
Court while interpreting indemnity provisions held that the Contract Act is not exhaustive and common
law principles are to be relied upon. Hence, unless there is a conflict with the Contract Act or any judicial
decisions rendered by the Courts in India, the common law principles pertaining to interpreting contracts
will continue to be applicable to indemnity provisions.
NATURE & VALIDITY OF CONTRACT OF INDEMNITY
A contract of indemnity may be express or implied depending upon the circumstances of the case. Section
124 lays down case of an express contract of indemnity but there are implied contracts too. The principles
applicable to contracts in general are also applicable to contracts of indemnity such as free consent,
legality of object.
In Secretary Of State v. The Bank of India Ltd. AIR [1938] PC 19, a broker endorsed a government
promissory note in his possession to a bank with false endorsement. The bank applied in good faith for a
renewed promissory note. The bank was given the renewed promissory note from the Public Debt Office.
In the meantime, the true owner sued the Secretary of State for conversion. The Secretary of State, in
turn, sued the bank on basis of implied indemnity. Court held that it is a principle of law that when an act
if done a person at the request of another and the act is not itself manifestly tortiuous to the knowledge of
the person doing the act, the person doing the act has a right to indemnity from the man who requested
such an act be done when the act in question turns out to be injurious to the rights of a third party.
The Indian Contract Act also deals with cases of implied indemnity under following sections:
According to Section 69 if a person who is interested in payment of money which another is
bound by law to pay and therefore pays it, he is entitled to be indemnified. Example- If a tenant
pays certain electricity bill to be paid by the owner, he is entitled to be indemnified by the owner.
Section 145 provides for right of a surety to claim indemnity from the principal debtor for all
sums which he has rightfully paid towards the guarantee.
Section 222 provides for liability of the principal to indemnify the agent in respect of all amounts
paid by him during the lawful exercise of his authority.
ENFORCEMENT OF CONTRACT OF INDEMNITY
i. A contract of indemnity can be enforced according to its terms.
ii. Claim of Indemnity holder can include: damages, legal costs of adjudication, amount paid under
the terms of compromise
iii. The measure of damages is the extent to which the promisee has been indemnified.
iv. Indemnifier should ideally be informed of the legal proceedings or should be joined as third party
v. There is no burden to show breach or actual loss.
RIGHTS OF INDEMNITY HOLDER
Section 125 of the Indian Contract Act, 1872 deals with indemnity-holder’s right against the
indemnifier provided that he has acted within scope of his authority.
1. Right to recover damages paid in a suit: An indemnity-holder has the right to recover from the
indemnifier all damages which he may be compelled to pay in any suit in respect of any matter to
which the contract of indemnity applies.
2. Right to recover costs incurred in defending a suit: An indemnity-holder has the right to recover
from the indemnifier 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. Right to recover sums paid under compromise: An indemnity-holder also has the right to recover
from the indemnifier 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.
In Sham Sunder v. Chandu Lal AIR 1935 Lahore 974 and Rangnath v. Pachusao AIR 1935 Nag
117, court held that indemnity-holder can only make indemnifier liable when he actually suffered the
loss i.e. a person must be demnified before he can indemnified. But in Gajanan Moreshwar v.
Moreshwar Madan AIR 1942 Bom 302, Prafulla Kumar v. Gopee Ballabh ILR 1944, 2 Can 318,
Abdul Majeed v. Abdul Rashid AIR 1936 All 598, the court held that even before suffering the actual
loss, the indemnity-holder can compel the indemnifier to indemnify.
REFERENCES
Bare Act, Indian Contract Act, 1872
www.legalservicesindia.com
www.lawteacher.net
www.legodesk.com
www.kanwarn.wordpress.com
www.indiankanoon.org
