Himachal Pradesh National Law University

Nature And Extent Of Liability Under The Contract Of Indemnity

Course In-charge Submitted By

Dr. Ruchi Sapahia Keshav Aggarwal1

1
1120192022
BBA LLB (Hons.) 3rd Semester
 ACKNOWLEDGEMENT

I would like to take this opportunity to express my heartfelt gratitude and deep
regard to Dr. Ruchi Sapahia for her guidance and valuable feedback and constant
support throughout the duration of project.
Her suggestions were of monumental help in the rough work of my project. I
would also like to express my gratitude to Himachal Pradesh National University
of Law for giving me the topic that enriched my knowledge.
I would also like to thank the library staff for constant support. Lastly, I am
thankful to my parents and friends for their constant support and coordination in
the completion of research work
Table of Contents
1. Introduction
2. What is indemnity
3. Nature of indemnity
4. Extent of liability caused
5. Clause (1) right to recover damages paid in a suit.
6. Clause (2) right to recover costs incurred in defending
7. Clause (3) right to recover sums paid under compromise
commencement of liability
8. Scope of indemnity
9. Conclusion
10. References
 Introduction
The concept of contract of Indemnity has originally been borrowed from English Law or the
Common Law. The case of Adamson v. Jarvis2 explains efficiently the Contract of Indemnity.
Facts of the case are as follows – The auctioneer who is the plaintiff. The plaintiff on the
demand by the defendant auctioned cattle to someone else. Later it was founded that the
defendant was not the real owner of the cattle . The person who bought the cattle sued the
auctioneer and after that auctioneer sued the defendant. The court, in its verdict, laid out that
the plaintiff having acted on defendant’s commands was qualified to recover the loss from the
defendant in case of any harm incurred.

Similarly, in the case of Dugdale v. Lovering3 , the plaintiff was in possession of certain
trucks. The trucks were claimed both by the defendant as well as a company named K.P. Co.
as the defendants demanded delivery of the trucks, the plaintiffs asked for the Indemnity
bond. The plaintiffs received no reply but delivered the trucks on time. Later, the plaintiffs
were sued by the K.P. Co. The plaintiffs sued the defendant to recover the loss incurred. The
defendants claimed that they had not promised any Indemnity bond and therefore were not
liable to pay. But the court declared that the promise of Indemnity bond was implied through
the contract as the plaintiff expressed the intention of creating one.

Many jurists have claimed that the English Law of Indemnity has the widest possible
interpretations. It incorporates all kinds of losses occurring from any reason whatsoever. This
implies that all kinds of insurances except from life insurances are included under the ambit
of the contract of Indemnity

Defination of Indemnity and Essentials

Literally, Indemnity means Insurance or Security or Protection.

2
Adamson v. Jarvis, [1875] LR 10 CP 196
3
Dugdale v. Lovering, 10 CP 196: 44 LJ (CP) 157:32 LT 155
Indemnity is a special type of contract giving protection to the one indemnified against the
future course of events that may happen. This shows the existence of two parties clearly,
namely-

I. Indemnifier
II. Indemnified

The Indian Contract Act, 1872 under Section 124 defines Indemnity as -

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 .4

For better understanding of the contract of Indemnity, it is better to understand its essentials
first.

Essentials of Indemnity

I. Loss has to be proven

II. It has to be proved that the loss is caused by promisor or any other person
III. Indemnifier is liable only for the loss.

The essentials very much clear the meaning of the clause. One party has to promise to the
other party in terms of protecting that other party from a loss that would arise in future. When
consent in terms of offer and acceptance would be deductible from both the sides, then the
contract can be termed to have been fructified.5

The obligation to pay for the damages that may arise in the future would emanate from the
assured alone for the contract of indemnity that exists between the parties. Hence, the right of

4
Section 124, Indian Contract Act, 1872
5
State of Orissa v. United India Insurance Co. Ltd., (1997) 5 SCC 512
the indemnified is not only dependent upon the privity of contract but the nature of the
indemnity clause that exists between the parties6

Nature of Indemnity

Indemnity is treated as a sub-species of compensation and a Contract of Indemnity may be

a species of contracts. the requirement to indemnify may be a voluntary obligation taken by the
indemnifier.
Mere possibility of loss occurring won't make the indemnifier liable. Loss to the indemnity
holder is crucial, otherwise, the indemnifier can not be held liable. Plus, the loss must
arise thanks to the conduct of the indemnifier or the other person related. to be
precise this doesn't cover the acts of God; otherwise various insurance transactions are rendered
untenable. Under Indian law, the definition of contract of indemnity is restricted to cases
wherein the loss is caused by human agency. Losses from other causes are covered in other
chapters of the Indian Contract Act, 1872.

A contract of Indemnity may arise due to

I. Express Promise. There will be an agreement between parties to indemnify one party.
II. Operation of Law. Under Section 145 of the ICA, 1872 if the surety pays the creditor, the
principal debtor in lieu of whom the surety had to pay must indemnify the surety.

In Gajanan Moreshwar v. Moreshwar Madan7, it had been decided that law referring

to indemnity is by no means exhaustive and thus, the Courts in India shall follow the
English Law. within the same case, English equity law was discussed; whether requiring an
indemnity holder to truly pay and clear the damages before claiming them from the indemnifier
places an undue burden on the indemnity holder. Thus, if the liability of an indemnity holder
became absolute, he was held entitled to induce the indemnifier to pay off the claim or to pay
the court sufficient amount of cash for creating a fund to pay the claim as and when it had
been made.

6
Union of India v. Sri Sarada Mills, 1972, SCC 877
7
Gajanan Moreshwar v. Moreshwar Madan, (1942) 44 BOMLR 703
 A right of indemnity exists where one party is obliged to make good certain losses suffered
by the other party. The losses which the indemnifying party must make good will depend on
the wording of the indemnity.

No third person or a stranger to the contract of indemnity cannot sue the indemnifier due to
the principle of privity of contract as decided in the case of National Petroleum Company v.
Popal Lal8 by the Bombay High Court.

Extent of Liability

The Extent of liability under the contract of Indemnity is explained in Sectio-125 of the
Indian Contract Act, 1872 in the form of Rights of the Indemnity holder.

“Rights of indemnity-holder when sued, The promisee in a very contract of indemnity, acting

within the scope of his authority, is entitled to pass though the promisor .The
promisee  during a contract of indemnity, acting within the scope of his authority, is entitled
to endure the promisor"
(1) all damages which he could also be compelled to pay in any suit in respect of
any touch which the promise to indemnify applies

(2) all costs which he could also be compelled to pay in any such suit if, in bringing or
defending it, he failed to  contravene the orders of the promisor, and acted because
it would are prudent for him to act within 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 wasn't  contrary to the orders of the promisor, and was one which it
might are  prudent for the promisee  to form within the absence of any contract of indemnity,
or if the promisor authorized him to compromise the suit.”9

8
National Petroleum Company v. Popal Lal, (1936) 38 BOMLR 610, 165 Ind Cas 338
9
Section 125, Indian Contract Act, 1872
 CLAUSE (1) – Right to recover Damages Paid in a suit

When a third party lays down a claim against the indemnity holder, it is well established the
duty to pay the latter arises for the indemnifier at the first place. The damages would
definitely be the end result of the total liability that the indemnity holder had to carry.

The logical principle is that a person who had acted on the faith of another party should be
indemnified. An indemnity-holder has the right to recover from the indemnifier, all the
damages which he may be compelled to pay in any suit.

In Parker v. Lewis,10 case, the logical principle of providing the indemnity to a person who
had acted on the faith of another party is upheld. The Court laid down that it would be
obvious for the person indemnified, who has altered his position and faced action for that
action, to be indemnified and be protected by the third party. Once a suit is decided against
the indemnified and he, being the judgment debtor, pays the money to the judgment creditor,
or, when in a compromise, he prudently settles the dispute by paying the damages:
indemnifier becomes absolutely liable to indemnify him (i.e the decree becomes conclusive
for the purpose of invoking indemnity). Notwithstanding that the suit could have been
brought or could have been appealed against. Also, if the indemnifier trusts indemnified to
further appeal against the judgment he will still be liable to pay under the indemnity contract
to the indemnified, if the latter had paid the decreed amount under the previous suit. It is only
if indemnified finally wins the case, shall the judgment debtor will pay the decreed amount to
the indemnifier.

In Alla Venkataramanna v. Palacherla Mangamma11, the Court held that the suit. in which
the indemnified is roped in, has a binding effect on the indemnifier in terms of its final result,
even though he was not a party to the contract. This is not an exception to the rule of res
judicata rather; it is s because the claim against which the indemnification had been promised
has been conclusively established.

damages from the indemnifier provided they are reasonable

Clause (2) right to recover costs incurred

Where pursuing a suit in which the purpose or the action of the indemnity is being involved, the

10
Parker v. Lewis, (1873) 8 Ch App 1035
11
Alla Venkataramanna v. Palacherla Mangamma, AIR 1944 Mad 457
indemnity holder is being provided with the statutory right to claim costs as well with the
damages from the indemnifier provided they are reasonable.
An indemnity-holder has the correct to pass though the indemnifier all incidental costs which
he is also compelled to pay in any such suit if in bringing or defending it, he didn't contravene
the orders of the promisor, and acted because it would are prudent for him to act within
the absence of any contract of indemnity, or if the promisor authorized him to bring or defend
the suit.
In Pepin v. Chunder Seekur Mookerjee, (1880) case, the Court held that the expenses do arise
while reducing or ascertaining or resisting the claim. Hence the cost of such a nature can be
recovered.
In Gopal Singh v. Bhawani Prasad. (1888) case the Court held that only those costs would be
recoverable that are supposed to be incurred by a prudent man.

Clause (3) right to recover sums paid under compromise

This is similar to previous right, but it arises in the case of compromise. An indemnity-holder
also has the right to recover all amounts from the indemnifier which he may have paid under
the terms of any compromise of any such suit if the compromise was not contrary to the order
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 Alla Venkataramanna v. Palacherla Mangamma12 the court laid down the conditions for the
claim by the promisee, to be valid. If the indemnity holder genuinely wants the amount to be
recovered, certain conditions with respect to the compromise so affected would have to fulfil:

I. The compromise should have been put to effect in a bona fide manner.
II. It has been resolved without any sort of collusion.
III. It has not been impeached as an immoral bargain

An indemnity-holder is entitled to sue for carrying out if he has incurred absolute liability and

therefore the contract covers such liability. The promisee during a contract of indemnity, acting
within the scope of his authority, is entitled to live through the promisor
Rights of Indemnifier:

12
Alla Venkataramanna v. Palacherla Mangamma, AIR 1944 Mad 457
The rights of the indemnifier haven't been mentioned expressly anywhere within the Act in
Jaswant Singh v. Section of State 13, it had been decided that the rights of the indemnifier
are almost like the rights of a surety under Section 141 where he becomes entitled to
the advantage of all securities that the creditor has against the principal debtor whether he
was responsive to them or not. Where an individual agrees to indemnify, he will upon such
indemnification be entitled to succeed to any or all the ways and means by which the person
originally indemnified might need protected him against loss or founded his compensation for
the
commencement of liability

Indian Contract Act, 1872 doesn't provide the time of the commencement of the indemnifier’s
liability under the contract of indemnity. But different High Courts in India have held the
subsequent rules during this regard:

I. Indemnifier isn't liable until the indemnified has suffered the loss.

II. Indemnified can compel the indemnifier to form good his loss although he has not
discharged his liability.

In the leading case of Gajanan Moreshwar v. Moreshwar Madan14 an observation was made
by the judge that “If the indemnified has incurred a liability and the liability is absolute, he is
entitled to call upon the indemnifier to save him from the liability and pay it off.”15

Thus, Contract of Indemnity is a special contract in which one party to a contract (i.e. the
indemnifier) promises to save the other (i.e. the indemnified) from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other person. Section 124 and 125
of the Indian Contract Act, 1872 are applicable to these types of contracts

SCOPE OF INDEMNITY

13
Jaswant Singh v. Section of State, 1966 CriLJ 451
14
Gajanan Moreshwar v. Moreshwar Madan, (1942) 44 BOMLR 703
15
Ibid.
 This section will deal with critical analysis of the contract of Indemnity and its relation with
the concept of Insurance. Do we really need indemnity in insurance in India? Section 125
provides that an indemnity holder may ask for damages from the indemnifier only to the
extent of indemnity contract as decided between them. This means that the liability for the
indemnifier will be only to the extent he has agreed to undertake as per the contract (whether
implied or express). This means that in a contract of indemnity, there is a substance of prior
knowledge as to the possible repercussions and losses that a promisee may suffer in a
particular contract of indemnity.

However, in cases of insurance, the policy-holder or the insurer is unaware of what possible
damage can occur to his insured property. There is a wide array of possibilities and the absence
of any well-defined, limited conditions for only which the insuring company should pay. There
is no prior assent to only a few particular kinds of accidents to the insured property for which
liability will be that of the company. Any loss that occurs to the insured property will make the
insurer liable.

CONCLUSION

Simply put, indemnity requires that one party indemnify the opposite if certain expenses spoken
of within the contract of indemnity are incurred by him. as an example, self-drive companies
stipulate that the person hiring are going to be accountable for damage to the rental car caused
by his reckless driving and can need to indemnify the rental company.
Most attention these days has been given to development of indemnity contracts within the IT
industry. There are some circumstances within which the existence of an indemnity would
make a major difference while in others; a contract of indemnity will have little or no role to
play. Another new concept called ‘Indemnity Lottery’ may be found within the law of contract
that implies that in civil cases of indemnity results can never be predicted. Brazilian jurist
Leonardo Castro is credited for coining the term. A simple indemnity clause isn't the solution to
liability issues. The law leans disfavouably towards for those that attempt to avoid liability or
seek exemption from liability of their actions. The underlying reasoning is that a negligent
party mustn't be ready to completely shift all claims and damages made against it to a different,
non-negligent party.
REFERENCES

 https://economictimes.indiatimes.com/definition/indemnity
 https://corporatefinanceinstitute.com/resources/knowledge/other/indemnity-
definition/
 https://mobile.manupatra.in/
 https://indiankanoon.org/
 https://kanwarn.wordpress.com/2010/11/25/indemnity-under-indian-contract- act-
1872-part-2/
 http://www.legalservicesindia.com/article/1768/Damages-Under-Indemnity.html
 https://legodesk.com/legopedia/contract-of-indemnity/
 www.scconline.com