INDEMNITY

LAW OF INDEMNITY UNDER INDIAN CONTRACT ACT 1872

Topics Case Laws - Landmark

• Concept of Indemnity
• Contract of Indemnity under Section 124
• Nature and extent of liability of the indemnifier
• Commencement of liability of the indemnifier
• Rights of the indemnity holder when sued
• Indemnity v. Guarantee
• Contractual Indemnity under Indian Law and
English Law
• Gajanan Moreshwar v. Moreshwar Madan, A.I.R.
1942 Bom, 302
• Shanti Swarup v. Munshi Singh, AIR 1967 SC 1315
• Adamson v. Jarvis [(1827) 4 Bing 66
Statutory Provisions
• Sections 124-125 of the Indian
Contract Act, 1872
CONCEPT OF INDEMNITY
• Term – Indemnity – has many meanings
• Widest Meaning: Recompense for any Loss or Liability which a person has incurred
• Security against an anticipated loss
• An Obligation of Indemnity can arise due from a
 Contract – Express / Implied  covered under ICA
 An Obligation resulting from relation of the parties – if there is a state of circumstances to which
the law attaches a legal or equitable duty to indemnify.
• Contract of Indemnity – An agreement which gives rise to such a duty – Various Types
including Contracts of Insurance & Guarantee
• Indemnity – Usually denotes a contract by which the promisor undertakes an original and
independent obligation to indemnify
CONTRACT OF INDEMNITY
Section 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.”

• Contract of Indemnity – One party promises to save the other from loss caused to him by the conduct of the
promisor or any other person.
• It is a separate contract – Independent of the Main Contract
• The possibility of risk of any loss happening is only contingent as against the indemnifier.
• Is the Obligation to Indemnify an Absolute Obligation?
• May or May Not be - Matter of Construction –
• If the Obligation is absolute – the Promisor can sue for its enforcement – without the occurrence of
actual loss
• Right to Indemnify v. Right to Damages Arising from the Breach of Contract
Right to Indemnity is given by the Original Contract Right to Damages arises in consequence of Breach of
that Contract
CONTRACT OF INDEMNITY
• ICA does not embody the whole law of Indemnity.
• It only deals with one particular kind of indemnity which arises from the 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 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.

Person who gives the Indemnity Indemnifier / PROMISOR

Person for whose protection it is given Indemnity Holder / Indemnified / PROMISEE
• ELEMENTS:
• It is promise to indemnify against the loss caused:
• By the promisor himself or
• By any other person LOSS BY HUMAN INTERFERENACE
• The definition excludes from its purview cases of loss arising from accidents like fire or perils of the sea.
CONTRACT OF INDEMNITY
GAJANAN MORESHWAR PARELKAR V. MORESHWAR MADAN MANTRI [AIR 1942 BOM 302]
FACTS:
• BMC leased a plot to Plaintiff (P) for 999yrs. P allowed Defendant (D) to construct a building on that land.
• D, in this course, incurred debt of Rs.5ooo from building material supplier (K), twice.
• On both the occasion, P mortgaged part of the land (including the title deed) to K on the condition that D will
safeguard & indemnify P against loss, if any, caused to P through this transaction
• D fails to repay the amt to K.
• P sues D for recovery of Property& indemnify him for the loss suffered on account of D’s failure to
payback under Sec 124.
ISSUE: Whether the suit for indemnity was premature as P had not yet incurred any loss as such?
CONTENTIONS (Defendant):
• As per s. 124, the promisor promises to safeguard the other from the damage that is caused to him, not the
damage which may be caused to him. Since there is no damage to the plaintiff as yet, P is not entitled to sue
the indemnifier.
• The liability of the plaintiff is not absolute but contingent. There is nothing to show that if the mortgagee was
to sue to enforce his mortgage and the property was sold, there would be any deficit for which the plaintiff
would be liable.
CONTRACT OF INDEMNITY
GAJANAN MORESHWAR PARELKAR V. MORESHWAR MADAN MANTRI [AIR 1942 BOM
302]
HELD:
• (w.r.t 1st contention of D) ICA is both an amending and a consolidating Act, and it is not exhaustive
of the law of contract. 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. S. 124 talks about subsequent conduct but here the liabilities were past, i.e. prior to the
date when the contract was actually entered into force. Earlier to this contract, all the acts were done
merely on request and without any consideration and hence, were not binding. Therefore s.124 is
inapplicable here.
• (w.r.t 2nd contention of D) Under both the mortgage and the further charge there is a personal covenant
by the plaintiff to pay the amount due, and it would be open to the mortgagee to sue the plaintiff on the
personal covenant reserving his rights under the security. Therefore, the liability of the plaintiff under
the personal covenant is absolute and unconditional.
• Principles of equity (as applied in English Courts) can be applied here to relieve P from all the liabilities
(as ICA is not exhaustive of the law of indemnity).
CONTRACT OF INDEMNITY
LALA SHANTI SWARUP V. MUNSHI SINGH [1967 SCR (2) 312]
FACTS:
• The plaintiff-respondents (PR) mortgage their land to Bansidhar and Khub Chand (BK) for Rs. 12,000.
• Half of this mortgaged property was then sold by the real owner (PR) to Shanti Saran(S) (defendant-
appellant, DA) at Rs. 16,000.
• As agreed, out of this, a sum of Rs. 13,500 was to be paid by S, as the amount, due to the mortgagee
(BK). S defaulted on payment, B-K filed a suit.

ISSUE:
Whether or not there is a contract of Indemnity?

JUDGEMENT :
• Court of 1st instance: ordered P-R to pay the whole mortgage due.
• Special Judge, UP Encumbered Estates Act: Apportioned the liability between PR & S.

APPEAL BEFORE THE SUPREME COURT

CONTRACT OF INDEMNITY
LALA SHANTI SWARUP V. MUNSHI SINGH [1967 SCR (2) 312]

HELD: SUPREME COURT (favoured PR)

• 1. Two separate causes of action may arise:
• The failure of S to pay off the encumbrance (within reasonable time) enables the PR to sue S and
bring himself in a position to meet the liability which the S failed to meet.
• PR can bring a suit on the contract of indemnity (implied in this case) if as a result of the failure of
S to discharge the encumbrance the vendor incurs a loss.
• 2. (w.r.t 2nd issue & 2nd contention of DA) There covenant was not one only to purchase the PR’s
property but also one to relieve the PR from the liability of the mortgage, and in that sense there was an
implied contract of indemnity in favour of the vendor.
• 3. (w.r.t 3rd contention of DA) The cause of action arises when the PR was actually damnified i.e. had to
mortgage ¾ of the half of the unsold land to fulfill the liabilities.
RIGHTS OF INDEMNITY HOLDER WHEN SUED
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;
(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
RIGHTS OF INDEMNITY HOLDER WHEN SUED
• Section 125 describes the rights of the promisee under a contract of indemnity when sued
• The promisee is entitled to recover the damages which he has been compelled to pay in a suit in respect of
the matter for which he has been indemnified, the cost which he was compelled to pay in a suit and the
amounts paid by him under the terms of any compromise.

• Damages: (Section 125 (1))

• Conclusive Judgement obtained. – No Appeal lies thereafter.
• This is because the claim against which indemnification has been promised has been conclusively
established against the party indemnified.
• The promisor under a contract of indemnity cannot impeach the decree passed against the promisee.
• If the Indemnity Holder 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.
RIGHTS OF INDEMNITY HOLDER WHEN SUED
• Costs:
• The Indemnity Holder can recover all costs he has been compelled to pay in a suit to which the promise to
indemnify relates if:
• The promisor had authorized him to bring or to defend the suit; or if
• In bringing or defending the suit he had not contravened the orders of the promisor and had acted in a prudent manner.

• The liability of the indemnified party to a third person is not contemplated at the time of indemnity but is the
very moving cause of that contract.
• And in cases of such nature, the costs reasonably incurred in resisting or reducing or ascertaining the claim
may be recovered.
• The cost must be such as would have been incurred by a prudent man.

• .
RIGHTS OF INDEMNITY HOLDER WHEN SUED
• Amounts Paid Under a Compromise:
• The promisee under a contract of indemnity is entitled to receive all sums which he may have paid under the
terms of compromise of any such suit if:
• The Promisor authorised him to compromise the suit or
• The Compromise was not contrary to the orders of the promisor and the promisee had acted in a prudent manner in
effecting the compromise.
• Even if the promisee has not given notice to the promisor the compromise is conclusive against the promisor if
it is effected bonafide and without collusion and is not impeached as an imprudent bargain.

• .
RIGHTS OF INDEMNITY HOLDER WHEN SUED
• Commencement of Liability
• When does the indemnifier become liable to pay or when is the indemnity holder entitled to recover his
indemnity?
English Law:
• Indemnity is payable only after the indemnity holder
has suffered actual loss by paying off the claim.
• You must be damnified before you can claim to be
indemnified
• .
Indian Law: Gajanan Moreshwar Case:
• If his liability has 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 decision was made to entertain those cases,
where the amount of loss was huge – the indemnity
holder might not be in a position to pay in the first
instance.
• Hence relief was provided to the indemnity holder in
such cases by the courts of equity.
INDEMNITY V. GUARANTEE
INDEMNITY V. GUARANTEE
INDEMNITY V. INSURANCE
• Except in the case of Contract of Life Insurance, personal accident and sickness, all contracts of
insurance entitles the assured for the re-imbursement of actual loss that is proved to have been
suffered by him.
• The happening of the event against which the insurance cover has been taken does not by itself
entitle the assured to claim the amount stipulated in the policy.
• It is only on proof of actual loss that the assured can claim reimbursement of the loss to the extent
it is established not exceeding the amount stipulated in the contract of insurance which stipulates
the outer limit of the insurance company’s liability.
• Contract of Indemnity is not uberrimae fidei
• Under Insurance Contracts there is a legal and not merely an equitable right on the part of the
assured to claim under the policy as soon as the event assured against occurs
INDEMNITY UNDER INDIAN LAW & ENGLISH LAW
you must be damnified before you can claim to be indemnified
• until and unless promisee has not undergone any injury, he cannot claim indemnity.
• English Law – Broader than Indian Law
• It includes promises to save the promisee from harm or loss caused by the events or accidents
which do not or may not depend on the conduct of any person or on the part of the assured to
claim under the policy as soon as the event assured against occurs.
• English Law: Indemnity means a promise to save a person harmless from the consequences of an
act.
• The loss may be due to the conduct of an individual or it can also arise from some event or
accident, like in case of fire. But in India, only the former condition applies.
• In U.K., life insurance is not considered as the contract of indemnity. This is because the value of
an individual’s life cannot be determined and where the loss is not a certain contract of indemnity
does not arise.
INDEMNITY UNDER INDIAN LAW & ENGLISH LAW

Adamson v. Jarvis [(1827) 4 Bing 66

• Facts:
• The plaintiff (an auctioneer) sold certain cattle on the instruction of the defendant.
• Subsequently it turned out that the livestock did not belong to the defendant but to another
person X
• X sued the auctioneer and in turn auctioneer sued the defendant for indemnifying the loss he
had thus suffered by action on the defendant’s directions.
• Held:
• 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.