Indemnity Contract II

1. Indemnity
The basic rule that whoever harms or causes injury to another person has to pay the
damages or costs to the injured person. The contract of indemnity works on the same
principle. Have you ever thought about what would happen if someone under a
contract promised to do something but failed? Similarly, if a person suffers a loss as a
result of the actions of another, is he entitled to compensation?
All these questions are dealt with under the concept of indemnity. Indemnity is a kind
of compensation that protects you from any potential losses. In its broadest sense,
indemnity refers to the payment of money to a person who has lost money, goods, or
other property due to the error of a third party. This concept of indemnity is also
incorporated in English law and is considered a commitment to protect a person from
losses due to his actions, which might be directly or indirectly caused.
Contract of indemnity : an overview
The word indemnity has been derived from the Latin term “indemnis” which means
unhurt or free from loss. As we all know, the fundamental idea behind an indemnity or
indemnification is to transfer some or all of the liability from one party to another. This
means that one party to the contract, referred to as the “indemnifier” or “indemnifying
party”, promises to protect another party, referred to as the “indemnity holder” or
“indemnified party”, from not only loss, cost, expense, and damage but also from any
legal consequences resulting from an act or omission by either the indemnifier or a
third party or any other event. Section

2. 124 of the Indian Contract Act, 1872.
As per the Oxford dictionary, “Security from damage, loss, or penalty.” The definition of
the word “indemnify” is to compensate someone for harm, loss, or damage.
As per Section 124 of the Indian Contract Act, an agreement by which one party
promises to save the other from loss caused to him by the conduct of the promisor
himself or by the lead of someone else is classified as “Contract of Indemnity”. The
term (Indemnity) means to make good the loss or to compensate for the losses.
Aim - To protect the promisee from unanticipated losses, parties enter into the
contract of Indemnity or it is a promise to save a person without any harm from the
consequences of an act.
Note- All insurances except personal accident insurance come in the scope of
Indemnity.
•X contracts to indemnify Y against the consequences of any legal proceedings that Q
may bring against Y for a certain sum of money. This contract or promise is known as a
contract of indemnity.
•A promises to indemnify B if his car is damaged in an accident. B met with a minor
accident in which he did not suffer any injury, but his car was damaged completely.
Here, A is obliged to indemnify B for the damage.
•A asks B to invest money in C’s business and contract to indemnify him if he suffers
any loss. B suffered a loss

3. •of Rs 1,00,000/-. According to the contract of indemnity entered into by A and B, A
must indemnify the damages and other costs to B.
Parties to Indemnity Contract
There are two parties involved in the Contract of Indemnity. The two parties are:
•Indemnifier: Someone who protects against or compensates for the loss of the
damage received.
•Indemnified/Indemnity-holder: The other party who is compensated against the loss
suffered.
Illustration 1
There is a contract between A and B in which A promises to deliver certain goods to B
for Rs. 7,000 every month. C comes and makes a promise to indemnify B’s losses if A
fails to deliver the goods.
Here,
•C is the indemnifier or promises as he promises to bear the loss; and
•B is the indemnity-holder or promisee or indemnified as his losses are compensated
for.
ILLUSTRATION 2

4. 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.
In the case of Mangladha Ram v. Ganda Mal, the vendor’s promise to the vendee to be
liable if title to the land was disturbed was held to be one of indemnity.
Essentials to a contract of indemnity
For the purpose of a contract of indemnity, the following conditions must be satisfied:
•There must be two parties.
•The contract may be expressed or implied.
•It must satisfy the essentials of a valid contract.
•There must be a loss
•The loss must be caused euther by the Promisor or any other person (In Indian
context, loss is to be caused only by a human agency)
•Indemnifier is liable only for the loss.
Thus, Indemnity Contracts is continent in nature (read Section 31 of ICA) and
enforceable only when the loss occurs.
INDIA AND ENGLAND POSITION
The major difference between the two is as follows-
English law

5. In England, all the matters are looked upon whether they are related to human beings
or any event or accident.
Under English law in the landmark judgment of Adamson v/s Jarvis.
•Adamson v/s Jarvis
Facts
In this case, Adamson was plaintiff and Jarvis was defendant. The plaintiff by profession
was an auctioneer to whom Jarvis, who was not the real owner of the cattle, gave the
cattle and this was sold at an auction. The plaintiff followed the respective instructions
which was given by Jarvis and sold the cattle. The real owner of the cattle sued
Adamson for conversion, and he was successful in it and Adamson had to pay the
damages for the same, subsequently Adamson sued Jarvis to be indemnified for the
loss that he incurred to pay the damages to the owner.
Held
The court held that the plaintiff followed the instructions of the defendant, so this is
presumed that anything went wrong as per the instructions, so the defendant will be
liable to pay the damages so at the end Jarvis had to pay the damages to Adamson.
After reading this case I analyzed that there is a promise to save the person from the
loss but the party has to follow all

6. the instructions of the other party that is indemnified in order to claim indemnity. After
this case, the law further changed by the case Dugdale vs. Lowering. This is the case it
was shown that the promise may be expressed and implied.
•Dugdale vs. Lowering
Facts
In this case, the K.P CO and defendant were claimed for certain trucks which were in
the possession of the plaintiff. The communication was held between the plaintiff and
defendant in which the plaintiff’s concern for asking indemnity if they delivered the
trucks to the defendant. The defendant without giving an answer and told him that
sent all the trucks back to him. The K. P Co brought a lawsuit against the plaintiff for
the conversion, and the plaintiff has to pay the damages. Subsequently, the plaintiff
sued the defendant for indemnity.
Held
In this case, the court held that the plaintiff is entitled to recover indemnity because
there is no intention of the plaintiff to send the trucks without indemnity. So, in this
case, there is an implied promise which is agreed by the defendant when he told that
sent all the trucks back to him, then it is automatically presumed that he agreed for the
indemnity.

7. After studying this case the new provision regarding the contract of indemnity it has
come that the implied promise is also enforced.
Note: Contract of indemnity is a wider concept in English law as compared to Indian
law, because in English law all the matters are looked upon which are related not only
because of the acts of some individual but also arises from some event or accident in
case of fire or act of God.
India law
In Indian law, only those matters are concerned where the human agencies are
involved.
In India, the contract of indemnity originated in the case Osman Jamal & Sons Ltd v/s
Gopal Purshotam. These are the facts of the case:
•Osman Jamal & Sons Ltd v/s Gopal Purshotam
Facts
In this case, the plaintiff is a company which is working as a commission agent for a
defendant firm. The defendant firm was engaged in buying and selling of Hessian and
Gummies, where the defendant firm promised with the plaintiff firm that in case of any
loss the defendant firm will be indemnified. The plaintiff firm bought Hessian from
Maliram Ramjets, but the defendant company is not able to make payment and take
delivery of Hessians. So Maliram Ramjets sold the same

8. to other people at a lower price. Maliram Ramjets sued the plaintiff for the loss, but
the plaintiff company was winding up and asked the defendant to indemnified for the
same. But the defendant refused to pay the damages and claimed that because of the
plaintiff he was not able to do the payment.
Held
The court held that the defendant is liable to indemnify the plaintiff because he
promised for the same.
As we discussed above there is the case of an express contract of indemnity which was
introduced in the year1929, after this a new case was introduced in the year1938,
which was the case of an implied contract of indemnity, Secretary of State vs. Bank of
India Ltd.
•Secretary of State vs. Bank of India Ltd
Fact
In this case, an agent was in possession of a government promissory note which was
endorsed by the agent to the bank with forged endorsement. The agent presented the
promissory note to the bank with the malafide intention but the bank within good faith
uses that promissory note for a redeveloped and issued from” public debt office. In
the meantime, the real owner of the promissory note sued the secretary of state for
the conversion of the promissory note. Subsequently, the secretary of state sued the
bank on the

9. basis of implied indemnity.
Held
The court held that when a person does any act on the request of any third person and
such act violates the right of the third person then the person who commits an act
entitled to claim indemnity from that person who is requested to do that act.
This was the case where we saw the implied contract of indemnity. The law was further
amended where the original rule under English law was that if the indemnity holder
suffers any kind of loss then he will be able to claim indemnity from the indemnifier.
But this principle was also changed in England which was discussed above with the
reference of some cases. Exactly in India Justice Chagla explained the process of
transformation in the landmark judgment of Gajanan Moreshwar vs. Moreshwar
Madan Mantri.
•Gajanan Moreshwar vs. Moreshwar Madan Mantri
Facts
In this case, Gajanan Mores was having land in Bombay but at a lease for a long period.
Gajanan Moreshwar was transferred to Moreshwar Madan Mantri but for a limited
period. M Madan started construction over the plot and ordered some material from K
D Mohandass, when K D

10. Mohandass asked for the payment of the material, M Madan refused to pay the
amount and requested G Moreshwar to prepare a mortgage deed in favour of K D
Mohandass. The interest rate was decided and G Moreshwar put a charge over his
possession. According to the deed, a date was decided for the return of the principal
amount. But M Madan decides that he will pay the principal amount along with the
interest in order to release from a mortgage deed, and decides a particular date for the
same. On the predefined date M Madan did not pay anything to K D Mohandas, and G
Mores war had to pay some amount of interest to K D Mohandas. After many requests,
M Madan did not pay anything, so G Moreshwar decided to sue M Madan for the
same.
Held
In this matter, the court held that if indemnity holder has raised any responsibility and
the nature of that responsibility is absolute then indemnity holder can ask the
indemnifier to fulfil that responsibility or pay the amount. It is not necessary that a
promise should pay the loss incurred.
Indian Position as per this case- definition of contract of indemis only limited to the
losses caused by the action of humans and DOES NOT INCLUDE LOSSES THAT ARE
CAUSED DUE TO EVENTS THAT CANNOT BE CONTROLLED OR FORESEEN BY ANY
PERSON.
United India Insurance Co. v. M/S Aman Sinfh Munshilal (1994)
Facts

11. In this case, the cover note had the consignee’s address. Additionally, before being
carried to the destination, the products had to be dropped off at a godown on the
route there. When the products were in the godown, they were destroyed by fire. The
items were seen as having been lost in transit, and the insurance policy’s provisions
held the insurer accountable.
Judgment
It was decided that an indemnification agreement would not apply in the event of a fire
or other disaster. This case held that in cases of fires, etc., it is called a contingent
contract and not a contract of indemnity.
Or in layman language, goods were stored in godown, from where they had to be
carried to their destination after some time while in storage the goods were destroyed
by fire. The court, in this case, held that the goods were destroyed during tranist and
the insurer must pay as the contract of insurance.
Difference between a contract of indemnity and guarantee
Basis of difference Contract of Indemnity Contract of Guarantee
Provisions
It is given under Section 124 of the Indian Contract Act, 1872.
It is defined under Section 126 of the Act

12. Number of parties
In a contract of indemnity, there are two parties, namely, the indemnifier (who
promises to pay for the losses) and the indemnity holder (in whose favour such a
promise is made).
There are three parties. These are: Principal debtor, Surety, Creditor.
Number of contracts
There is only one contract in the case of indemnity, which is between the indemnifier
and the indemnity holder.
There are three contracts between the parties: The first contract is between the
principal debtor and the creditor, which makes it obligatory for the principal debtor to
perform his duties; Original Contract. The second contract is between the surety and
the creditor, which binds the surety to act on behalf of the principal debtor; Contract of
Guarantee. The third contract is between the principal debtor and surety, by which the
principal debtor is bound to pay the surety the amount that he paid on his behalf;
Implied contract of indemnity between surety and Principal Debtor.
Aim
The aim is to protect a person from potential loss by humans or agencies.
This contract aims to provide the creditor with the security that in the absence of the
principal debtor or if he fails to perform the obligations, the same will be done by a
surety.
Liability

13. The indemnifier has primary liability because he promised to pay for the loss incurred
by the indemnity holder. The liability of the surety is secondary, as it is the principal
debtor who is initially responsible for performing the obligations. The surety’s liability
arises when the principal debtor fails to do so.
Recovery of money/loss paid
The indemnifier cannot recover the amount that he paid for the loss from any person.
If surety pays money on behalf of the principal debtor, he/she is liable to recover from
him.
Undertaking
The Undertaking in Indemnity is original
The Undertaking in a guarantee is collateral to the original contract between the
creditor and principal debtor.
Example
A promises B that he will pay for losses incurred by him due to his actions or those of a
third party.
C takes out a loan from B and promises to return the money within 3 years. A promises
to be a surety in this case. If C is unable to pay the money within the stipulated time, it
is the duty of A to do so.
Rights of Indemnifier
Contract Act is silent about the rights of Indemnifier. In Jaswant Singh vs The State on
15 July 1965, it was held

14. that the rights of indemnifier are the same as the rights of surety. After paying all
damages the indemnifier takes the position of indemnity holder and has right over the
property. He is required to indemnify promisee up to the amount of losses as
mentioned in terms and conditions of the contract. He takes the position of the
creditor after settling all his claims.
•Right to sue the third party.
As soon as the indemnifier has indemnified the indemnity-holder against the damages
and amount of the property, he is entitled to have full rights over the property and has
the right to sue the third party for that property too. Before paying damages to the
indemnity holder, he cannot sue the third party.
For example- A has promised B to indemnify him in case he suffers damage to his car
because of C. Afterwards when B suffers the damage because of C and asks for money
from A, A indemnifies him and gets the right over the car. Now A has a right to sue C
and claim damage.
•Compensate losses which are covered in the deed.
The indemnifier has a right to pay for only those losses which are covered in the
contract of indemnity. In Ramaswami Vs Muthukrishna High Court ordered the
indemnifier to pay the plaintiffs only for a sum of Rs. 1236/- which was the actual loss
suffered by him. The further appeal filed in Supreme Court to recover more amount
from the defendant was dismissed.

15. •Right under Doctrine of Subrogation.
According to surety’s subrogation rights, after settling the claims of the former creditor,
the surety steps into the shoes of the creditor and in certain cases is entitled to receive
the whole amount from the debtor. Similarly, indemnifier also has rights in some cases
to recover the money or possession.
Duties of Indemnifier
The duties of indemnifier are the rights of indemnity-holder. Section 125, states the
rights of indemnifier when sued by the third party to recover the damages, cost and all
the sums as payable by him in any suit of any matter in which indemnifier promised
him to indemnify him and he acted same as he was expected to act in case of absence
of a contract of indemnity. The indemnifier has duties against indemnity holder to:
•Indemnify promisee for all damages.
It is the duty of indemnifier to pay for all damages which he has promised to indemnify
in any suit in respect of any of the matter. The promisee should prove that he was
compelled by law to pay damages (Duffield v. Scott). There is no need to prove that the
loss incurred is direct or indirect in nature.
In Nallappa Reddi vs Vridhachala Reddi And Anr. the court ordered that it’s the duty of
the indemnifier to provide the damages to the promisee. The duty arises as soon as the
decree is passed against the promisee.

16. In Gokuldas vs. Gulabrao, the court said that the indemnifier cannot request that he
was not the party to the suit and has the liability to indemnify the promisee.
In Toplis v. Grane, the court observed that when the act is done with the lawful
objective by the promisee and the act violates the rights of any other person, the
indemnifier has to indemnify the plaintiff against the consequences of the act thereof.
•Indemnify promisee against all the costs.
It is the duty of the Indemnifier to pay all the costs which indemnity-holder is
compelled to pay in a suit where he did not have breached the orders of the promisor.
The indemnity-holder is entitled to recover reasonably incurred costs that arise while
reducing or ascertaining or resisting the claims. The promisee is entitled to receive all
expenditure which he has incurred during the case proceedings.
In Adamson V. Jarvis, Jarvis gave his cattle to Adamson for auction. Adamson didn’t
know that Jarvis was not the real owner of cattle. As soon as the owner came to know
about the auction, he claimed his cattle and Adamson had to pay the amount of money
to the real owner. Adamson suffered damage and sued Jarvis. Court-ordered latter to
pay Adamson the amount of damage he suffered and also the cost as he was unaware
of the fact that Jarvis was not the real owner of cattle and thought that Jarvis had an
implied authority.
•Indemnify for the amount payable by the promisee in case of compromise.

17. If the promisee did not act contrary to the orders of the promisor and has paid all sums
under the terms of compromise in a suit, he is entitled to receive the money from the
indemnifier.
In Kali Charan vs Durga Kunwar And Ors. Court ordered to recover the amount paid as a
compromise from the indemnified. In Venkatarangayya Appa Rao Vs Varaprasada Rao
Naidu court said that the indemnity holder is entitled to receive all of the sums in case
of compromise if certain conditions are being fulfilled that is the compromise should
have been done in a bona fide manner, there should be no collusion in the process of
settlement and it should not have been charged as an immoral bargain.
Conclusion
It is the duty of indemnifier to indemnify promisee against damages, cost and all sums
in any suit of a matter where the former promised the latter to indemnify him.