CONTRACT OF INDEMNITY

The term Indemnity literally means “Security against loss”. In a contract of

indemnity one party – i.e., the indemnifier promises to compensate the other party
i.e., the indemnified against the loss suffered by the other.

The English law definition of a contract of indemnity is – “it is a promise to save a

person harmless from the consequences of an act.” The promise may be express or
it may be implied under English law.

An illustration in English law of the meaning and effect of contract of indemnity is

to be found in the facts of Adamson v. Jarvis. The plaintiff, an auctioneer sold
certain cattle on the instruction of the defendant. It subsequently turned out that
the livestock did not belong to the defendant, but to another person, who made
the auctioneer liable and the auctioneer in his turn sued the defendant for
indemnity for the loss he had suffered by acting on the defendant’s directions.

The court laid down that the plaintiff having acted on the request of the defendant
was entitle to assume that, if, what he did, turned out to be wrongful, he would be
indemnified by the defendant.

In Dugdale v. Lovering, the plaintiff was in possession of certain trucks which were
claimed both by the defendants and one K.P. Company the defendants demanded
delivery and the plaintiffs asked for an indemnity bond, but received no reply. Even
so they delivered the trucks to the defendant. K.P Company, having successfully
sued the plaintiffs for conversion of their property, the plaintiffs were held entitled
to recover indemnity from the defendants on an implied promise as evidenced by
the fact that by demanding an Indemnity, they made it quite clear that they had no
intention to deliver except on indemnity.

Similarly, in Sheffield Corporation v. Barklay, A corporation, having registered to

transfer a stock on the request of a banker, was held entitle to recover indemnity
from the banker when the transfers were discovered to be forged.

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DEFINITION: - As provisions made in section 124 of the Indian Contract Act- 1872
says that, “whenever one party promises to save the other from loss caused to
him by the conduct of the promisor himself or by the conduct of other by the
conduct of the any other person is called a Contract of Indemnity.”

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.
New India Assurance Company Ltd. V. Kusumanchi Kameshwra Rao & Others, A
Contract of indemnity is a direct engagement between two parties thereby one
promises to save the other harm. It does not deal with those classes of cases where
the indemnity arises from loss caused by events or accidents which do not or may
not depend on the conduct of indemnifier or any other person.

Under a contract of indemnity, liability of the promisor arises from loss caused to
the promisee by the conduct of the promisor himself or by the conduct of other
person. Punjab National Bank v. Vikram Cotton Mills.

Every contract of insurance, other than life insurance, is a contract of indemnity.

The definition is restricted to cases where loss has been caused by some human
agency. Gajanan Moreshwar v. Moreshwar Madan

NATURE OF CONTRACT OF INDEMNITY

A contract of indemnity may be express or implied depending upon the

circumstances of the case, though Section 124 of the Indian Contract Act does not
seem to cover the case of implied indemnity.
A broker in possession of a government promissory note endorsed it to a bank with
forged endorsement. The bank acting in good faith applied for and got a renewed
promissory note from the Public Debt Office. Meanwhile the true owner sued the
Secretary of State for conversion who in turn sued the bank on an implied
indemnity. It was held that – it is general principle of law when an act is done by
one person at the request of another which act is not in itself manifestly tortious to
the knowledge of the person doing it, and such act turns to be injurious to the

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rights of a third person, the person doing it is entitled to an indemnity from him
who requested that it should be done. [Secretary of State v Bank of India].

ESSENTIAL ELEMENTS:
The following are the essentials of the Contract of Indemnity:-
1. There must be a loss.
2. The loss must be caused either by he promisor or by any other person.
3. Indemnifier is liable only for the loss.

Thus it is clear that this contract is contingent in nature and is enforceable only
when the loss occurs.
RIGHT OF THE INDEMNITY HOLDER – (SECTION 125)

An indemnity holder (i.e. indemnified) acting within the scope of his authority is
entitled to the following rights –

1. Right to recover damages – he is entitled to recover all damages which he

might have been compelled to pay in any suit in respect of any matter
covered by the contract. Parker v. Lewis

2. Right to recover costs – He is entitled to recover all costs incidental to the

institution and defending of the suit. Gopal Singh v. Bhavani Prasad

3. Right to recover sums paid under compromise – he is entitled to recover

all amounts which he had paid under the terms of the compromise of
such suit. However, the compensation must not be against the directions
of the indemnifier. It must be prudent and authorized by the indemnifier.
Bepin v. Chunder Seekur Mookrjee

4. Right to sue for specific performance – he is entitled to sue for specific

performance if he has incurred absolute liability and the contract covers
such liability. The promisee in a contract of indemnity, acting within the
scope of his authority, is entitled to recover from the promisor - Bihal
Chandra v. Chattur Sen

(1) Right of recover Damages: - All the damages that he is compelled to

pay in a suit in respect of any mater to which the promise of
indemnity applies.
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 (2) Right of recover all Costs: - All the costs that he is compelled to pay in
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 authorised him in bringing or defending the suit.

(3) Right of recovery all sums :- All the sums which he may have paid
under the terms of a compromise in any such suite 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.

In case of Mohit Kumar saha v. New India Assurance Co. It was 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 the lesser value is arbitrary and unfair and
violates art.14 of the constitution. all sums which he may have paid under the
terms of any compromise of any such suit, if the compromise was not It is
important to note here that the right to indemnity cannot be claimed of
dishonesty, lack of good faith and contravention of the promisor’s request.
However, the right cannot be negatived in case of oversight. Yeung v HSBC

RIGHT OF INDEMNIFIER –

Section 125 of the Act only lays down the rights of the indemnified and is quite
silent of the rights of indemnifier as if the indemnifier has no rights but only liability
towards the indemnified.

In the logical state of things if we read Section 141 which deals with the rights of
surety, we can easily conclude that the indemnifier’s right would also be same as
that of surety.

Where one person has agreed to indemnify the other, he will, on making good the
indemnity, be entitled to succeed to all the ways and means by which the person
indemnified might have protected himself against or reimbursed himself for the
loss. Simpson v. Thomson

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Principle of Subrogation is applicable because it is an essential part of law of
indemnity and is based on equity and the Contract Act contains no provision in
contravention with Maharaja Shri Jarvat Singhji v. Secretary of State for India

COMMENCEMENT OF LIABLITY

The original English rule was that indemnity was payable only after the
indemnity-holder had suffered actual loss by paying off the claim. The maxim of
law was: "you must be damnified before you can claim to be indemnified." But
the law is now different.

The process of transformation is well-explained by Chagla J of the Bombay High

Court in Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri

If a suit was filed against him he had actually to wait till a judgment was
pronounced and it was only after he had satisfied the judgment that he could
sue on his indemnity. He might not be in a position to satisfy the judgment and
yet he could not avail himself of his indemnity till he had done so. Therefore,
the court of equity stepped in and mitigated the rigour of the common law. The
court of equity held that if his liability had 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 principle was expounded in Richardson Re, where Buckley LJ observed:

"Indemnity is not necessarily given by repayment after payment. Indemnity
requires that the party to be indemnified shall never be called upon to pay...."
The High Court of Calcutta in its well-known decision in Osman Jamal & Sons
Ltd. v Gopal Purshttam, followed this principle.

A company was acting as the commission agents of the defendant firm and in
that capacity bought certain goods for the defendants which they failed to take.
The supplier became entitled to recover from the company certain sum of

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money as damages for breach. The company went into liquidation before
paying the claim.

It was held that the Official Liquidator could recover the amount even though
the company had not actually paid the vendor. The court, however, directed
that the amount, should be set apart so that it is used in full payment of the
vendor in respect of whose contract the company had incurred liability.
Prafulla Kumar v. Gopi Ballabh.