The PPT explains the contract of indemnity, a part of special contract syllabus in the course of B.A. LL.B. It helps students understand the concept of indemnity in Indian contract act and its relationship with guarantee.

1. CONTRACT OF INDEMNITY

2. Meaning
 Longman’s Dictionary of Contemporary English:
It is protection against loss or security or
compensation in case of loss.
 Sec 124 ICA: 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, is called a
“Contract of Indemnity”

3. Example:
 A Contracts to indemnify B against the consequences of any
proceedings which C may take against B in respect of a sum of
Rs. 200. This is a contract of indemnity (Illustration to Sec. 124
ICA)
 A receipt pertaining to certain goods was lost by A while
travelling in a train.
 B who found the receipt claimed the goods from railways.
 Railways asked B to furnish an Indemnity bond in their favour.
 Now if A (original Owner) sued the Railways for the damages,
they can claim the same from B
 Here Railways is Indemnity holder and B is Indemnifier.

4. Essentials of a contract of
indemnity
 It must be a valid contract under section 10 of Indian
Contract Act:
 Free consent
 parties competent to contract
 lawful consideration, lawful object
 not expressly declared void
 Two parties:
 Indemnifier (Promisor)
 Indemnity holder (Promisee)
 Loss to indemnity holder:
 Occurrence of loss or damage is a contingency upon which
liability of the indemnifier comes into existence.

5. Indian law vs. English Law
 Under English law, the term “Indemnity” carries
wider meaning.
 It includes compensation for any loss caused to
a party whether by human agency or not.
 But in India indemnity includes only loss which
is caused by the human agency.
 Under English Law Contact of Indemnity
includes Insurance also, which is not true in
Indian context.
 Ex: Insurance in case of damage due to fire is a
contract of indemnity under English.

6. Exceptions (Exclusion)
A contract of indemnity does not include:
 Cases where loss arises due to accidents
such as fire/marine, or any unforeseen event.
 Any event not depending on the conduct of the
person, for e.g. Death

7. Amendment required
 Law Commission of India in its 13th report
(1958) had recommended that the definition of
‘Contract of Indemnity’ in this section be
expanded to include cases of loss caused by
the events which may or may not depend upon
the conduct of human beings.

8. Rights of Indemnity Holder
Sec. 125:- Right of indemnity-holder when sued -
The promisee in a contract of indemnity, acting within the scope of his
authority, is entitled to recover from the promisor-
(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 authorised 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 contract to the orders of the
promisor, and was one which it would have been prudent for the promise
to make in the absence of any contract of indemnity, or if the promisor
authorised him to compromise the suit.

9. Section 125 - Rights of indemnity- holder when sued
Preconditions:
 Existence of a contract of indemnity
 Indemnity holder should have acted within the scope of his authority
Indemnity holder entitled to recover from the indemnifier –
 Damages
 All costs
Provided:
 Indemnity holder did not contravene the orders of the indemnifier
 Indemnity holder acted prudently; or
 Indemnifier authorized indemnifier to bring/defend the suit
 Any compromise payment
Provided:
 compromise is not contrary to the orders of the indemnifier
 Indemnity holder acted prudently
 Indemnifier authorized indemnity holder to compromise the suit

10. Indemnity holder, When to made
liable?
 There is a controversy in this regard that
whether a indemnity holder can claim to be
indemnified before the actual loss has been
occurred?

11.  Earlier view based on English Common Law:
 No action can be maintained against the indemnifier till the
indemnity holder has suffered actual loss.
 Present view based on equitable principles:
 Existence of a clear enforceable claim suffices to call the
indemnifier’s obligation into action. The indemnity holder can
compel the indemnifier to place him in a position to meet the
liability that may be cast upon him without waiting until he has
actually discharged it.

12. In India
 Lahore and Nagpur High Court’s view:
 A Person must be demnified before he can be
indemnified.
 Bombay, Madras, Calcutta, Patna High
Court’s view:
 Above high courts recognises the English
principle followed in court of equity. i.e.
Indemnity holder can compel the indemnifier to
indemnify even before the actual loss occurs.

13. Equitable View - Landmark
Case
 Gajanan Moreshwar Parelkar Vs. Moreshwar Madan Mantri –
AIR 1942 Bom 302
Sections 124 and 125 of the Indian Contract Act are not exhaustive
of the law of indemnity. The Courts in India would apply the same
equitable principles that the Courts in England do.
“An indemnity might be worth very little indeed if the indemnified
could not enforce his indemnity till he had actually paid the loss. 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. It is clear that this might under
certain circumstances throw an intolerable burden upon the
indemnity-holder. 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

14.  The Law Commission of India
supported the views of
Justice Chagla and
recommended the amended
in concerned sections of
Indian Contract Act.

15. Indemnity Vs. Guarantee
Indemnity Guarantee
Contract of indemnity is a bilateral
contract: Requires the concurrence of
only two persons - the indemnifier and
the indemnity holder.
Contract of guarantee is a tripartite
contract: Requires concurrence of three
parties - the creditor, the surety and the
principal debtor.
Indemnifier is primarily and
independently liable.
There must be contract by which the
principal debtor, expressly or impliedly
requests the surety to act as surety.
Indemnifier’s liability arises from loss
caused by the conduct of indemnifier
himself or by the conduct of another
person.
Surety’s liability arises from principal
debtor’s default.

16. Indemnity Clause
 A provision in a contract under which one party
(or both parties) commit to compensate the
other (or each other) for any harm, liability, or
loss arising out of the contract.
 The formula to compute the amount of
compensation is usually included in the
contract.

17. Nature of Indemnity Clauses
 Broad version of indemnity clause:
“Contractor agrees to indemnify and hold harmless Owner
from any and all liabilities, claims, actions, demands, losses,
damages, penalties, lawsuits, judgments, including
attorneys’ fees and costs, arising out of or relating to the
work of Contractor.”
 Narrower version of indemnity clause:
“Contractor agrees to indemnify and hold harmless Owner from
any and all liabilities claims, actions, demands, losses,
damages, lawsuits, judgments, including attorneys’ fees and
costs, but only to the extent caused by, arising out of, or
relating to the work of Contractor.”
 Capping: “In no event shall the maximum liability hereunder
exceed the sum of Rs. ____. The limitation should bear a

18. Indemnification clause - Things to
remember
 Every indemnification clause is different so read it
carefully - Don't assume that it is "standard" or "fair."
 Who is agreeing to pay who - Are you agreeing to pay
the counter party if there is a problem or is the counter
party agreeing to pay you? Don't go out of your way to
offer indemnifications; it increases your potential risk.
 What kinds of losses will be covered - Will the
indemnifier pay the attorneys' fees, Court costs and
actual damages?
 Which party gets to control the legal strategy - Who is
picking the attorney? Who gets to decide whether to settle
the case?

19. Indemnification clause - Things to
remember
 What kind of event triggers the obligation to indemnify -
Breach of contract or negligence by the other party? Third-
party claims?
 Limitation of liability – It is advisable to exclude
consequential and remote damages from the scope of
indemnity.
 Indemnity holder’s duty to co-operate with the
indemnifier – The indemnifier’s obligation can be made
conditional to the indemnity holder promptly notifying the
indemnifier of any claim in writing and cooperating with
the indemnifier in the defense of the claim.

20. Stamp Duty
 Indemnity Bond is listed at no. 34 of the
Indian Stamp Act 1899
 When an agreement includes an indemnity clause,
the stamp duty payable shall be:
 stamp duty payable on the agreement + stamp duty
payable on an indemnity bond
 It differs in different states.
 Example: Duty payable in Delhi:
 When the amount secured does not exceed Rs. 1000/- :
2%
 In other case: Rs.100/-

21. Thank You