LL. M.

III SEMESTER

Business Law Group

Specific Contract
CODE- L-3006

CONTRACT OF INDEMNITY: DEFINITION, NATURE,

EXTENT AND COMMENCEMENT OF LIABILITY
According to Longman’s Dictionary of Contemporary English-
“indemnity is protection against loss, especially in the form of a promise
to pay or payment for loss of money, goods etc.”
It is a security against, or compensation for loss etc.1(Chambers New
English Dictionary)
According to Chitty2 ------ The term indemnity is used the law in several
different cases. In its widest sense it means recompense for only loss or
liability which one person has incurred , whether the duty to indemnity
comes from an agreement or not. For example , where a breach of
contract arise gives to a claim for damages, that may include a claim to
be indemnified against some loss or liability.
Under English law, “ an indemnity is a contract, express or implied
to keep a person, who has entered into or who is about to enter into, a
contract or incur any other liability, indemnified against loss,
independently of the question whether a third person makes a default.”3

1
BANGIA Dr. R.K., CONTRACT-II, Allahabad Law Agency, Reprinted. 2014 p -1
2
Chitty on Contract 23rd Edition Vol. II, p. 771.
3
Halsbury Laws of England , Vol. 15, para 870.
 In Adamson v. Jervis 4 , 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
mde the auctioneer in his turn sued the defendant for indemnity for the
loss he had thus suffered by acting on the defendant’s directions.
The court laid down that 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 indemnifiedby the defendant.5
In English Law indemnity means a promise to save a person
harmless from the consequences of an act. The promise may be express
or it may be implied from the circumstances of the case.
In Dugdale v. Lovering6, certain trucks were in possession of the
plaintiff. The defendant as well as a company claimed them. On the
demand of delivery of trucks by the defendants, the plaintiff demanded
an indemnity bond , but no reply was received yet they delivered the
trucks to the defendants. Subsequently the said company (K.P. Co.) sued
the plaintiff for conversion of property and succeeded in the suit . It was
held that the defendants were liable to indemnify the plaintiff for in the
opinion of the Court the demand of indemnity bond led to the creation of
an implied promise.
In Sheffield Corp. v . Barclay7 the Court held:
“Where a person invested with a statutory or common law duty of
a ministerial character is called upon to exercise that duty on the request,
direction or demand of another….. whether any default on his own part
acts in a manner which is apparently legal but is , in fact illegal and

4
(1827) 4 Bing 66: 29 RR 503.
5
Singh Dr. Avtar, Contract & Specefic Relief ,Eastern Book Company, 12th Edition 2017 (Reprinted) 2020 p.591
6
(1875) LR 10CP 196
7
1905 AC 392
breach of the duty, and thereby incurs liability to third parties , there is
implied by law a contract by the person making the request to keep
indemnified the person having the duty against any liability which may
result from such exercise of the supported duty.”8

According to Sec. 124 of Indian Contract Act, 1872, a contract of

indemnity means- 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 conduct of any other person.
This provision incorporates a contract where one party promises to
save the other from loss which may be caused either.—
(1) By the conduct of the promisor himself or
(2) By the conduct of any other person
Illustration :- A contract to indemnity B against the consequences
of any proceedings which may take against in respect of a certain
sum of Rs.200. This is a contract of indemnity.
Indemnifier- The person who promises to indemnify or bear the
loss
Indemnified or Indemnity holder- The person for whose
protection it is given or the person in whose favor such a promise
is made.
Essentials of Contract of Indemnity.
1- Two parties in the contract – Indemnifier and Indemnified or
Indemnity holder
2- Security or protection against loss.
3- The contract of indemnity may be express or implied.
4- Essentials of a valid contract i.e., competent of parties, free
consent, lawful object & lawful consideration.
8
Kapoor Dr. S.K., Contract II, Central Law Agency, Thirteenth Edition 2012 p.1& 2
 5- It covers only the actual loss.
6- The loss must be caused either by the promisor or by any other
person.
Insurance indemnity
Almost all insurances other than life and personal accident
insurance are contracts of indemnity. The insurer’s promise to
indemnify is an absolute one. A suit can be filed immediately
upon failure of performance, irrespective of actual loss. If the
indemnity holder incurred liability and that liability was
absolute, he would be entitled call upon the indemnifier to save
him from that liability by paying it off.9

Extent of liability
Sec. 125 Rights of indemnity holder when sued.
The indemnity holder, acting within the scope of his authority,
is entitled to recover the follwing amounts--

(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
9
New India Assurance Co Ltd v. State Trading Corp. of India , AIR 2007 NOC 517 (Gujrat), see in Singh Dr. Avtar,
Contract & Specefic Relief ,Eastern Book Company, 12th Edition 2017 (Reprinted) 2020 p.594
promisee to make in the absence of any contract of indemnity, or if the
promisor authorized him to compromise the suit.

Commencement of liability- There has been a difference of opinion

between various High Courts in India as to whether the indemnity-
holder can claim indemnity before he has actually suffered the loss.
According to the view expressed by the Lahore 10 and Nagpur 11
High Courts , a person must be demnified before he can be indemnified,
i.e., no indemnity can be claimed until the indemnity-holder had already
actually suffered the loss.
The High Courts of Bombay12 , Calcutta13, Madras14, Patna15, and
Allahabad16 have expressed a different view, and they are in favour of
the application of law similar to the one recognized in England by the
Court of Equity. According to the decisions of these courts, an
indemnity-holder can compel the indemnifier to indemnify even before
the indemnity-holder has actually suffered the loss.
Referring to the equitable principle and also the desirability of its being
followed in India, Chagla, j. while delivering the judgment in the
Bombay High Court decision of Gajanan Moreshwar v. Moreshwar
Madan observed:17
“The Court of equity held that if his (indemnity-holder’s) liability
had become absolite , than he was entitled either to get the indemnifier

10
Shyam sunder v. Chandu Lal , A.I.R. 1935 Lahore 974.
11
Ranganath v. Pachusao, A.I.R. 1935 Nag. 117.
12
Gajanan Moreshwar v. Moreshwar Madan, A.I.R. 1942 Bom. 302 A different view was expressed by this Court in
its earlier decision, shankar v. Laxman, A.I.R. 1940 Bom. 161.
13
Prafulla Kumar v. Gopee Ballabh Sen I.L.R. (1944) 2 Cal. 318.
14
Ramaligna v. Unnamolai, 38 Mad. 791.
15
Chuni Bai v. Nathu Bai, 22 Pat 655.
16
Abdul majeed v. Abdul Rashid, A.I.R. 1936 All. 598.
17
AIR 1942 Bom. 302
to pay off the claim or to pay into Court off the claim whenever it was
made … I have already held tha Ss. 124 and 125 Contract Act, are not
exhaustive of the law of indemnity and the Courts here would apply the
same equitable principle that the Courts in England do. Therefore, if the
indemnified has intitled to cell upon the indemnifier to save him from
that liability and to pay it off.’’
The Law Commission of India has expressed the opinion that “the
view expressed by Chagla, J. is corret and should be adopted by the
legislature.” 18 The Law Commission recommended that as in English
law , “ the right of the indemnity-holder should be indicated even in
cases where he has not been sued.”
In State Bank of India v. Mula Sahakari Sakhar Karkhana
Ltd.,19 the respondent , a co-operative society, having a sugar factory,
entered into a contract with one M/s Pentagon Engineering Pvt. Ltd. for
the installation of a paper plant. As per the agreement the pentagon
furnished a Bank Guarantee/Indemnity for the release. The retention
money of 10% from the proforma Invoices of the material reached at the
site. The operative portion of the Bank Guarantee read as” to indemnify
and keep indemnified Mula Sahakari Sakhar Karkhana Ltd. against all
losses claims damages actions and cost in respect of such sums which
the supplier shall become liable to pay as the terms of the said order.”
Disputes and differentces arose between the parties and as a result,
the respondent terminated the contract and invoked the Bank Guarantee
against the pentagon. Holding that the document indemnifying the
respondent was a contract of indemnity and not guarantee, the Apex

18
13th Report on Indian Contract Act, 1872 at 51 & 52.
19
AIR 2007 SC 2361
Court said that the claim made by the assured on termination of contract
need not be honoured by the Bank without the proof of loss20.

Compiled by:-
Dr. Yogendra Kumar
Assistant Professor
ILS, CCSU Campus, Meerut
E-mail: [email protected]
Contact No. 9058995499

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20
BANGIA Dr. R.K., CONTRACT-II, Allahabd Law Agency, Reprinted. 2014 p -5&6