CONTRACT OF INDEMNITY

The term Indemnity literally means “Security against loss” or make good the 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”. Thus,
it includes within its ambit losses caused not merely by human agency but also those caused by
accident or fire or other natural calamities.

A Contract of indemnity is a direct engagement between two parties whereby one promises to save
another from harm. According to section 124 of the Indian Contract Act 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 the conduct of any other person.” The definition provided
by the Indian Contract Act confines itself to the losses occasioned due to the act of the promisor
or due to the act of any other person. This gave a very broad scope to the meaning of indemnity
and it included promise of indemnity due to loss caused by any cause whatsoever. Thus, any type
of insurance except life insurance is a contract of indemnity.

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. Vs 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

ESSENTIAL ELEMENTS:

The following are the essentials of the Contract of Indemnity:-

1. There must be a loss and the loss must be caused either by the promisor or by any other
person.
It means that contract of indemnity covers loss caused by human agency only not by Act
of God or any event which is beyond the control of human beings. English law differs from
Indian law as in contract of indemnity English law covers the loss caused by the act of God
as well.
United India Insurance Co. Vs. M/S Aman Singh Munshilal, Insurance contracts
covering the loss suffered due to uncontrollable event or beyond the power of human
agency are covered under Insurance Act, 1938.
Law Commission in its 13th report also recommended that act of God should be included
in contract of indemnity.
2. Thus, it is clear that this contract is contingent in nature and is enforceable only when the
loss occurs. Nature of contract of indemnity lies in contingent contract as the liability of
the indemnifier is based on happening of an uncertain event that is anticipated loss. The
best example of contract of indemnity is insurance contracts. Generally, all insurance
contracts are contracts of indemnity except life insurance.
3. There are two parties indemnifier and indemnity holder and the promise to save the other
party from loss can be express or implied. Implied can be from relationship or statutory
provisions. For example, section 145 of Contract Act provides for implied promise to
 indemnify surety similarly section 222 and 223 provides for indemnification of agent
acting lawfully or in good faith.
Adamson vs. Jarvis:
This is a landmark case that established important principles regarding indemnity in agency
relationships. Plaintiff Adamson was the auctioneer and the defendant was Jarvis who
claimed ownership of certain cattle and goods. Jarvis instructed Adamson to sell cattle and
goods, asserting he was the rightful owner. Relying on this representation, Adamson
auctioned the items. Subsequently the true owner sued Adamson for conversion. Adamson
also incurred some amount in legal costs defending himself. Adamson then sought
indemnity from Jarvis for these losses.
Legal Issues:
Is Adamson entitled to indemnification from Jarvis for the losses incurred due to the sale
of goods under Jarvis’s misrepresented ownership?
The court held in favour of Adamson deciding that an agent (Adamson) who acts on the
principal’s (Jarvis) instructions, without knowledge of any illegality is entitled to indemnity
for losses arising from those actions. Agents are protected when acting in good faith on the
their principal’s instructions. (Section 223 of the Indian Contract Act).

COMMENCEMENT OF LIABILITY OF INDEMNIFIER

An important question arises in case of indemnity that when does indemnifier becomes liable to
pay or when is the indemnity holder entitled to recover his indemnity?

The original English rule was laid down in the case of Adamson versus Jarvis that indemnity was
payable only after the indemnity holder had suffered the actual loss by paying off the claim. The
maxim on which it is based, “ you must be demnified before you can claim to be indemnified.”
According to this rule, indemnity holder had to first pay the loss then claim the indemnity from
the indemnifier.

But later on with the passage of time it was realized that this rule is unreasonable and against the
principles of justice as in such cases the value of the indemnity would be very low for the indemnity
holder as he could not enforce his indemnity till he had actually suffered or paid the loss.
Therefore the court of equity stepped in and overruled this rule of common law in the case of Re
Richardson (1911). Justice Buckley 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…..

Gajanan Moreshwar vs. Moreshwar Madan, Justice Chagla in this case well explained the
transformation of this rule and applied the same and held that the liability of indemnifier arises at
the moment when the liability of the indemnity holder arises or become absolute. Indemnity is not
repayment after payment, in fact it requires that the party to be indemnified shall never be called
upon to pay.

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.

2. Right to recover costs- He is entitled to recover all costs incidental to the institution and
defending of the suit.

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.

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to
recover from the promisor-

(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.

(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. 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.

In Nallappa Reddi vs. Virdhachala Reddi (1914), it was held in this case that right to get
indemnified arises as soon as the decree is passed against the promisee.

To claim any sum under section 125 the indemnity holder has to act prudently and without
contravening the orders of the promiser. He has to act in the same way as if no contract of
indemnity is there. These conditions are imposed on indemnity holder to restrict him from taking
any unfair advantage in the contract. The indemnity holder must have acted within his authority
and if he fails to do so then he cannot be indemnified under section 125.