NATIONAL LAW INSTITUTE UNIVERSITY

BHOPAL

CONTRACT - I

CONTRACT OF INDEMNITY

Submitted to- Submitted by -

Ms. Neha Sharma
(Faculty in Law of Contracts) Venkatesh Sahu
Roll- 2018BA.LLB.18
Enrollment no. –1925
Second Trimester
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 TABLE OF CONTENTS

1. Certificate……………………………………………………….
2. Acknowledgement……………………………………………...
3. Review Of Literature…………………………………………...
4. Introduction…………………………………………………….
5. Rights of Indemnity Holder…………………………………….
6. Rights of Indemnifier…………………………………………..
7. Specified time for notice……………………………………….
8. Difference between contract of Indemnity and Guarantee…….
9. Leading case laws………………………………………………
10.Conclusion……………………………………………………..
11.Bibliography……………………………………………………

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 CERTIFICATE

This is to certify that the Project titled ‘CONTRACT OF INDEMNITY’ has been
prepared and submitted by Venkatesh Sahu who is currently pursuing B.A. L.L.B (Hons.)
from The National Law Institute University, Bhopal in fulfilment of his Contract-I Course.
It has also been certified that this is an Original Research Project, and has not been
submitted to any other journal or publication.

Date:-

Signature of the Student:-

Signature of the Faculty:-

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 ACKNOWLEDGEMENT

On completion of this Project it is my esteemed privilege to acknowledge my profound

gratitude and indebtedness towards many people for their valuable suggestions and
constructive criticism. Their precious guidance and unrelenting support kept me on the
right track throughout the project. I gratefully acknowledge my deepest sense of gratitude
to: Prof. (Dr.) V. Vijayakumar, National Law Institute University, Bhopal for providing
me with the infrastructure and the means to make this project; Our Law of Contracts
teacher, Ms. Neha Sharma, who provided me this wonderful opportunity and guided me
throughout the project work. I would also like to thank my batch mates and seniors for
their constant help and guidance which helped me in completing this project.I am also
thankful to the library and computer staffs of the University for helping us find and select
books from the University library. Finally, I am thankful to my family members and
friends for the affection and encouragement with which doing this project became a
pleasure.

Venkatesh Sahu

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 INTRODUCTION

“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."1

Indemnity is a recompense for damages or loss and in legal language it may also refer to an
exemption from liability for damages. The concept of indemnity is based on a contractual agreement
made between two parties, in which one party agrees to pay for potential losses or damages caused by
the other party.

A typical example is an insurance contract, whereby one party (the insurer or the indemnifier) agrees to
compensate the other (the insured or the indemnified) for any damages or losses, in return
for premiums paid by the insured to the insurer.

This definition in the Indian contract act deals with only one type of indemnity which arises from the
promise made by the indemnifier to the indemnified for any loss which occurs to him by the conduct of
the promisor(indemnifier) himself or by the conduct of the third party but does not deal with the type
of cases where the damage is caused by the and incident such as accident or does not depend on the act
or conduct of the promisor or of that of any other party or by the liability incurred when an act is done
by the indemnified at the request of the indemnifier.

Tropical Insurance Co. Ltd. v. Zenith Life Insurance Co. Ltd., AIR 1941 Lah 68

Section 124 deals with one particular kind of indemnity which arise from a promise made by the
indemnifier to save the indemnified from the loss caused to him by the conduct of indemnifies
himself, as by the conduct of any other person or from loss caused by events or accidents which
do not or may not depend upon the conduct of the indemnifies or any other person, or by reason
of liability incurred by something done by the indemnified at the request of the indemnifier.2

1
Section 124 of the Indian Contract Act
2
https://www.manupatrafast.in/pers/Personalized.aspx
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 FUNDAMENTALS OF INDEMNITY

1. It is a promise made by a party to compensate for or security against damage, loss or injury
2. It comprises of all the contracts of insurance,guarantee. Its not a collateral but and independent
contract.
3. The indemnity clause must be clear and specific as to under which circumstances the liability to
pay damages will arise and if the contract of indemnity is invoked then what will be the
damages which can be payable.

ENFORCEMENT OF INDEMNITY

1. “A contract of indemnity can be enforced according to its terms.

2. Claim of Indemnity holder can include: damages, legal costs of adjudication, amount paid under
the terms of compromise.
3. The measure of damages is the extent to which the promisee has been indemnified.
4. Indemnifier should ideally be informed of the legal proceedings or should be joined as third
party.”3

3
http://www.legalservicesindia.com/article/379/Indemnity-in-a-contract.html
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 RIGHTS OF INDEMNITY HOLDER

(SECTION 125)

Section 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.

For example, if A contracts to indemnify B against the consequences of any proceedings which C may
take against B in respect of a particular transaction. If C does institute legal proceeding against B in that
matter and B pays damages to C, A will be liable to make good all the damages B had to pay in the
case.

(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.

In the case of Adamson vs. Jarvis [1827], Adamson was entitled to recover the money he had to pay to
the true owner of the cattle as well as any expenses incurred by him to get a legal counsel.

(3) All seems 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.”4

The indemnity holder is also entitled to losses due to change of law not foreseen by the parties when
they entered into such contract of indemnity.

4
Section 125 of the Indian Contract act
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 RIGHTS OF THE INDEMNIFIER

Unlike the rights of the indemnified which are expressly mentioned in the section 125 of the Indian
contract act the rights of the Indemnifier haven’t been mentioned anywhere in the act.

It was decided under a case that an indemnifier has rights similar to that of the surety which has been
discussed under the section 141 that is he has the entitlement to all benefits of the securities that a creditor
has against the principal debtor whether or not he was under the cognizance of the securities or not.5

When any person promises to indemnify a person then upon the successful indemnification he will be
entitled to succeed to all the ways and means by which the person originally indemnified might have
protected himself against loss or set up his compensation for the loss.

It is deemed that once the indemnifier has paid the compensation for the losses caused to him then he steps
into the shoes of the indemnified and then all the rights of the indemnifier are transferred to the
indemnified and he can practice those rights just like the indemnified. It can be also said that the rights of
the indemnified are the duties of the indemnifier and the rights of the indemnifier are the duties of the
indemnified.

The exceptions to the liability of indemnity arises when-

1. Indemnity holder acts negligently.

2. The wilful acts of the indemnity holder tends to cause any damage.
3. If the indemnified acts against the instructions given by the indemnifier.

5
Jaswant Singh vs. Section of state 14 bom 299
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 SPECIFIED TIME FOR NOTICE

For the performance of the contract of indemnity there are certain terms and conditions which are laid
down in the contract according to which the indemnified must act in order to claim his compensation in
the form of indemnity. If the indemnifier deviates from the fulfilment of the terms in the contract then he
is not held fit for the claim of compensation through Indemnity.

In the case of Prafulla Kumar v Oriental Insurance Co. Limited ,the insured motor vehicle of the plaintiff
was stolen without any hope of recovery of the vehicle. The insurance policy required the assured to send
the company a notice regarding the lost of the vehicle immediately after theft oer any other criminal act.

The insurer made a police report immediately after the theft but sent the notice to the company after a
month. The question before the court was that whether this notice can be regarded as given immediately.
Upon some analysis of the case the court decided that the notice can be said to be given as immediate as
there was no deliberate or unnecessary delay on the part of the defendant and the report to the insurer after
the period of one month can’t be regarded as unreasonable and therefore the right to indemnification
cannot be denied to him.6

This case tells us that even if there is a specified time for the notice for the performance of the contract of
indemnity it can be mapped down to a reasonable period of time rather than specific as “immediately
implies that the act to be done should be done at a convenient speed. In other words, the thing should be
done as quickly as reasonably possible.”7

6
Prafulla Kumar v Oriental Insurance Co. Limited ,1997
7
Thompson v Gibson, 10lj Ex 243
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 DIFFERENCE BETWEEN CONTRACT OF INDEMNITY AND
CONTRACT OF GUARANTEE

In the contract of indemnity, one party makes a promise to the other that he will compensate for any loss
occurred to the other party because of the act of the promisor or any other person while in the contract of
guarantee, one party makes a promise to the other party that he will perform the obligation or pay for the
liability, in the case of default by a third party.

The contract of indemnity is defined in the section 124 of the Indian contract act while the contract of
Guarantee is defined in the section 126 of the Indian contract act,1872. And as we have seen that there
are two different parties in the Contract of indemnity i.e.

-Indemnified (The party to whom promise is made for the compensation of any loss suffered by him)

-Indemnifier (The party who make a promise for the indemnification of the other party)

While in the Contract of guarantee there are three parties that are-

-Creditor (The person to whom the guarantee is given)

-Debtor(The person in respect of whose default the guarantee is given)

-Surety(The person who gives the guarantee)

 LIABILITIES OF THE PARTY

The liability of the party in the Contract of indemnity is primary as the indemnifier only can be held
liable to pay for the damages suffered by the party there is no third prty upon whom the liability can be
imposed to pay for the damages incurred.

While in the contract of Guarantee the liability of the Surety is secondary as the liability of the Principal
debtor is considered as Primary , as he is the first person to whom the creditor has to approach in case of
any breach of contract and damages incurred through it.

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 PURPOSE

The main purpose in the contract of Indemnity is to save the party from suffering any kind of loss which
can occur buy the actions of the promisor himself or any other party, it aims for the welfare of the
person who is indemnified.

The purpose in the Contract of guarantee is not only compensatory in nature but its of the assurance to
the Creditor that either there will be a performance of a contract or the liability will be discharged upon
the surety.

 MATURITY OF LIABILITY

The liability of the Indemnified in the contract of indemnity arises when the contingency or the event
which leads to the damage of the indemnified occurs, While the liability in the case of the contract of
guarantee already exists.

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 LEADING CASE LAWS

Adamson Vs. Jarvis

The plaintiff, is an auctioneer who sold certain cattle on the instruction of the
defendant. It subsequently learned out that the livestock sold was not owned by the
defendant but belonged to another person who made the auctioneer (plaintiff) liable for
the conversion. The auctioneer in turn sued the defendant for indemnity for the loss and
damage suffered by him while acting the defendant‟s direction. The court laid down
that the plaintiff has acted upon the request of the defendant and was entitled to
presume that if anything went wrong he would be indemnified. Hence, the defendant
was order to indemnify the loss and damage to the plaintiff.8

Osman Jamal and Sons Ltd. vs. Gopal Purshottam

In this case the plaintiff company was in liquidation. Represented by the official
liquidator. The plaintiff company was acting as the commission agent for the defendant
firm for the purchase and sale of certain goods. Further the defendant firm would
indemnify the plaintiff company against all loss and damage in respect of such
transaction. The defendant firm failed to take the delivery; as a result the goods were
resold by the vendor at less than the contract price. Under the aforesaid indemnity by the
defendant, the plaintiff consequently seeks for the recovery of the sum. It was held that
the amount could be recoverable to the Official Liquidator even though the company had
not actually paid the vendor.

8
Avtar Singh. Textbook On Law Of Contract And Specific Relief. Eastern Book Co; 2013
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 CONCLUSION

From the Case laws and the different aspects of the contract of Indemnity discussed above we can
conclude that Indemnity as a concept is a sub set of the compensation which are paid while the Contract
of Indemnity is a part of the Contract. The obligation to pay the damages to the indemnified is a
voluntary obligation which is taken up by the indemnifier in return for some consideration. It is also
observed that the contract of indemnity is not formed only when there is an expressed consent but the
contract of indemnity can also arise when there is an implied condition which forms it.9

We have also observed that one can only be indemnified when the loss has actually occurred and not
only on the mere possibility of it happening.

My opinion that indemnifier should not always be held liable specially in action of natural cause as well
as remote acts. On the rigid nature it does not take into consideration the acts of God. Here, the
individual is only liable to take care of the liability which is expressed and implied. And if in case the
indemnifier is charged for the unforeseen damages then it will be unjust.10

9
Secretary Of State Vs. The Bank Of India

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 BIBLIOGRAPHY

BOOKS

 CONTRACT AND SPECIFIC RELIEF

AUTHOR: AVTAR SINGH

PUBLISHER: EASTERN BOOK COMPANY

 MULLA INDIAN CONTRACTAND SPECIFIC RELIEF ACTS

AUTHOR: DR. RG PADIA

PUBLISHER: LEXIS NEXIS

 INDIAN CONTRACT ACT SECTION 124-125

INTERNET SOURCES:

 http://www.legalservicesindia.com/article/379/Indemnity-in-a-contract.html
 https://www.manupatrafast.in/pers/Personalized.aspx
 http://www.ijser.in/archives

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