CONTRACT LAW ASSIGNMENT

CONTRACT OF INDEMNITY

Indemnity as a concept can be expressed as [a] duty to make good of any loss, liability and
damage incurred by other, or alternatively the right of an injured party to ask for
reimbursement for its loss, liability or damage from a person who has such a duty.
The literal meaning of Indemnity is Security from loss. Its legal usage comes at a time when a
person promises to other to save him/her from the loss incurring from his performance of
duty.
Indemnity was first established in the case of Adamson v. Jarvis1.
The plaintiff, an auctioneer, sold certain cattle on the instruction of the defendant. It turned
out that the livestock didnt belong to the defendant, but to another person, who made the
auctioneer liable and the auctioneer in turn sued the defendant for the loss he had thus
suffered by acting on the defendants direction. The court held that the plaintiff having acted
on the request of the defendant and was entitled to assume that, if, what he did, turned out to
be wrongful, he would be indemnified by the defendant.
Section 124 of the Contract Act, 1872 defines a contract of Indemnity as "a contract by
which one party promises to save the other from loss caused to him by the contract of the
promisor himself, or by the conduct of any other person."
In the case of Richardson Re, ex parte The Governors of St. Thomas Hospital2, Buckley LJ
observed that, Indemnity is not necessarily given by repayment after payment. Indemnity
requires that the party to be indemnify in the first instanced shall never be call upon to pay.

1 546 U.S. 1127, 126 S. Ct. 1112, L Ed.

2 (1911)2KB 705, 715 (CA).

INDRAVEER SINGH

CONTRACT LAW ASSIGNMENT

Similarly in the case of Liverpool Mortgage Insurance Co.s Re,3 Kennedy LJ observed, that
indemnity does not merely mean to reimburse in respect of the moneys paid, but to save from
the loss in respect of the liability against which the indemnity has been given because
otherwise indemnity may be worth very little if the indemnity-holder is not able to pay in the
first instance
POSITION IN INDIA

The process of definition in India is restricted to cases where there is promise to indemnify
for the loss caused by
(i)
(ii)

by the promiser himself, or

by any other person.

In the case of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri4, It was discussed
that the indemnity might be of little worth 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 the rigor of the common law and held that where
the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon
the indemnifier to save him from that liability and to pay it off.
In the case of The New India Assurance Company Ltd. v. The State Trading Corporation of
India Ltd. and Anr, The Honble Gujarat High Court relied on the view taken in the case of
3 (1914) 2 Ch 617, 638: (1914-1915) All ER Rep 1158 (CA).
4 (1942) 44 BOMLR 703

INDRAVEER SINGH

CONTRACT LAW ASSIGNMENT

Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri and held that, in view of S.124 of
the Indian Contract Act, where the defendant promises to indemnify is an absolute one. In
the judgment the Law Commission of India accepted the view that, to indemnify, does not
mean to reimburse in respect of the money paid, but, in accordance with its derivation, to
save from loss in respect of the liability against which the indemnity has been given.
Indian Contract Act does not specifically provide that there can be an implied contract of
indemnity. The Privy Council has, however, recognized an implied contract of indemnity
also.5 The Law Commission of India in its 13th Report, 1958 on the Indian Contract Act,
1872, has recommended the amendment of Section 124. According to its recommendation,
The definition of the Contract of Indemnity in Section 124 he expanded to include cases of
loss caused by events which may or may not depend upon the conduct of any person. It
should also provide clearly that the promise may also be implied.
VALIDITY

The principles applicable to contracts in general are also applicable to such contracts so much
so that the rules such as free consent, legality of object, etc., are equally applicable. Where
the consent to an agreement is caused by coercion, fraud, misrepresentation, the agreement is
voidable at the option of the party whose consent was so caused. As per the requirement of
the Contract Act, the object of the agreement must be lawful. An agreement, the object of
which is opposed to the law or against the public policy, is either unlawful or void depending
upon the provision of the law to which it is subject.
RIGHT OF THE INDEMNITY HOLDER (SECTION 125)

An indemnity holder who is acting within the scope of his authority is entitled to the
following rights
5 Secretary of State v. The Bank of India Ltd. AIR 1938 P.C 191

INDRAVEER SINGH

CONTRACT LAW ASSIGNMENT

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.
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.

INDRAVEER SINGH