MANISHA PAWAR

B.Sc., LL.M. (Criminology) LL.M. (Human Rights),

Master in Business Laws (National Law School of India

University, Bangalore)

M.Sc. (Subject Communication), D.L.L. & L.W., D.P.M.,

D.C.M.

LAW OF CONTRACT II

MODULE 1

CONTRACTS OF INDEMNITY - SECTIONS 124-125 OF THE INDIAN

CONTRACT ACT, 1872

1. PRINCIPLE OF INDEMNITY IN GENERAL

Principle of Indemnity states that the insured shall be compensated
appropriately for the losses caused to the goods by the insurer, only to
the extent that the insurer does not make a profit out of the loss that
occurred.

In other words, principle of indemnity deals with the premise that in the
event of a loss, the insurer must put the insured to the position in which
he was before the loss occurred. This means that the insurer shall
receive any compensation that is neither more nor less than the actual
loss that has taken place.

The limit of the compensation is always subject to the sum insured and
the terms and conditions that govern the policy.

Principle of Indemnity is applicable in case of fire insurance and marine

insurance contracts.

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Functions of Principle of Indemnity

Following are the functions of Principle of Indemnity:

1. It should compensate the insured (victim) in such a way that the

insured is placed in a situation where they were before the event of loss
that occurred.

2. The compensation that is received by the insured should not in any

circumstances result in increasing the asset of the insured as the whole
purpose of the insurance policy is not to serve as a source of profit for
the insured.

2. DEFINITION OF THE CONTRACT OF INDEMNITY

Indian Contract Act, 1872 has defined the contract of Indemnity.

According to the Section 124 of ICA, "A contract by which one party
promises to save the other from the loss caused to him by the conduct of
the promisor himself or by the conduct of any person is called a contract
of Indemnity“.

Example: P contracts to indemnify Q against the consequences of any

proceedings which R may take against Q in respect of a certain sum of
money.

According to the English Law a contract of indemnity is ' a promise to

save another harmless from loss caused as a result of a transaction
entered into at the instance of the promisor."

English Law in comparison to the Indian law is wider in relation to the

definition of the term.

According to the Indian contract Act;

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The loss must be caused either by the conduct of the promisor or any
other person and if loss is caused by accident there would not be
contract of indemnity.

But the According to English law seems wide than Indian law and also
covers the loss caused by accident or natural causes etc.

Objective Of Contract Of Indemnity

The objective of entering into a contract of indemnity is to protect the

promisee against unanticipated losses.

3. FORMATION AND ESSENTIAL FEATURES

Features of Contract of Indemnity:

1. The contract is made for protecting the promise against anticipated or

contingent loss.

2. The liability of the indemnifier started as soon as the loss is occurred

to the indemnified.

3. Indemnification is made for actual loss.

4. The event specified in the contract must be happen.

5. The Indemnified himself responsible for the loss if the loss is caused
by his own misconduct.

6. Contract may be implied and expressed.

Essentials Of Contract Of Indemnity

1) Parties To A Contract: There must be two parties, namely,

promisor or indemnifier and the promisee or indemnified or
indemnity-holder.

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 2) Protection of loss: A contract of indemnity is entered into for the
purpose of protecting the promisee from the loss. The loss may be
caused due to the conduct of the promisor or any other person.

3) Express or implied: The contract of indemnity may be express (i.e.

made by words spoken or written) or implied (i.e. inferred from the
conduct of the parties or circumstances of the particular case).

4) Essentials of a valid contract: A contract of indemnity is a special

kind of contract. The principles of the general law of contract
contained in Section 1 to 75 of the Indian Contract Act, 1872 are
applicable to them.

Therefore, it must possess all the essentials of a valid contract.

Parties to the contract of indemnity

A contract of indemnity has two parties.

1) The promisor or indemnifier

2) The promisee or the indemnified or indemnity-holder

The promisor or indemnifier: He is the person who promises to bear the

loss.

The promisee or the indemnified or indemnity-holder: He is the person

whose loss is covered or who are compensated.

In the above-stated example,

P is the indemnifier or promisor as he promises to bear the loss of Q.

Q is the promisee or the indemnified or indemnity-holder as his loss is

covered by P.

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4. PURPOSE OF THE CONTRACT OF INDEMNITY, AND ITS USE IN
FACILITATING AND SUPPORTING TRANSACTIONS

Purpose of the contract of indemnity

1) To make good the loss incurred by another person

2) To compensate the party who has suffered some loss

3) To protect a party from incurring a loss

The purpose of inserting the indemnity clause in a contract is to shift or

allocate the risk, or cost from one party to another. More precisely it can
said business transaction between the two parties by obligating one
party to pay the expenses incurred by the other party under certain
circumstances.

To facilitate more business, the business nurturing environment has to

be provided by the government which includes giving tax exemptions
and also amending various business laws. The most basic law which
governs almost all business relationships in India is the Indian Contract
Act.

This type of contract is needed especially for companies dealing with

high-risk businesses as they enable one party to be protected against
the liability arising from the act of another party. This type of contract
ensures that one party is protected from any unforeseen circumstances
and contract like these promote the business as companies can trade
without having to worry about incurring losses from the third parties as
they are secured in that front.

5. NATURE AND EXTENT OF LIABILITY OF THE INDEMNIFIER

Extent of liability in Contract of Indemnity

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Section 125, defines the rights of an indemnity holder. These are as
follows -

The promisee (Indemnity holder) in a contract of indemnity, acting within

the scope of his authority, is entitled to recover from the promisor
(Indemnifier).

It means the promisee is entitled to recover damages that he was

compelled to pay in a suit for which he was being indemnified-The
promisor shall be liable in any event whether or not the promisee makes
default.

1. Right of recovering Damages - all damages that he is compelled to

pay in a suit in respect of any matter to which the promise of indemnity
applies.

2. Right of recovering Costs -all costs that he is compelled to pay in any

such suit if, in bringing or defending it, he did not contravene the orders
of the promisor and has acted as it would have been prudent for him to
act in the absence of the contract of indemnity, or if the promisor
authorized him in bringing or defending the suit.

A prime example would be the case of Adamson v. Jarvis where the

court held that since the plaintiff acted according to the defendant’s
instructions and incurred a loss because of the same, the plaintiff was
entitled to compensation.

3. Right of recovering Sums -all sums which he may have paid under the
terms of a compromise in any such suit, if the compromise was not
contrary to the orders of the promisor and was one which would have
been prudent for the promisee to make in the absence of the contract of
indemnity, or if the promisor authorized him to compromise the suit.

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In the case of United Commercial Bank vs Bank of India AIR 1981. In
this

case, Supreme Court held that the courts should not grant injunctions
restraining the performance of contractual obligations arising out of a
letter of credit or bank guarantee if the terms of the conditions have been
fulfilled. It held that such LoCs or bank guarantees imposed on the
banker an absolute obligation to pay.

In the case of Mohit Kumar Saha vs New India Assurance Co AIR 1997,
Calcutta HC held that the indemnifier must pay the full amount of the
value of the vehicle lost to theft as given by the surveyor. Any settlement
at lesser value is arbitrary and unfair and violates art 14 of the
constitution.

6. COMMENCEMENT OF LIABILITY OF THE INDEMNIFIER

COMMENCEMENT OF LIABILITY OF PROMISOR/ INDEMNIFIER

Indian Contract Act, 1872 does not 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 following rules
in this regard:

Indemnifier is not liable until the indemnified has suffered the loss.

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

In the leading case of Gajanan Moreshwar vs. Moreshwar Madan(1942),

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”.

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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.

On the basis of judicial pronouncements it can be stated that the liability

of an indemnifier commences as soon as the liability of the indemnity-
holder becomes absolute and certain. This principle has been followed
by the courts in several cases. Example: A promises to compensate X
for any loss that he may suffer by filling a suit against Y. The court
orders X to pay Y damages of Rs 10000 . As the loss has become
certain, X may claim the amount of loss from A and pass it to Y.

BANK DEPOSIT RECEIPT

A deposit receipt is a receipt issued by a bank to a depositor for

cash and checks deposited with the bank. The information
recorded on the receipt includes the date and time, the amount
deposited, and the account into which the funds were deposited.

A commencement certificate is a document that proves the

legitimacy of a real estate project. We explain what exactly a
commencement certificate is and its importance for a developer, as
well as a home buyer.

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