Contains the provisions of Contract of Indemnity

1. LAW OF CONTRACT- II
Mrs. Amrita Singh
Asst. Prof. (Law)

2. (I) INDEMNITY
 The concept
 Need for indemnity to facilitate
commercial transactions
 Method of creating indemnity obligations
 Definition of Indemnity
 Nature and extent of liability of the
indemnifier

3.  Commencement of liability of the
indemnifier
 Situations of various types of
indemnity creations
 Documents agreements of indemnity
 Nature of Indemnity clauses
 Indemnity in case of International
transactions
 Indemnity by Governments during
interstate transaction

4. Contract of Indemnity defined (S. 124)
Sec. 124 defines a contract of Indemnity
thus:
“A contract of indemnity is a contract
whereby one party promises to save the
other from loss caused to him by the
conduct of the promisor or any other
person.”

5. 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.
If B is not the Principal Debtor, but only A
makes a promise to the shopkeeper to pay,
for instance, B tells the shopkeeper ‘Let him
have the goods, I will be your paymaster’, it
is contract of indemnity.
- Birkmyr v. Darnell, (1704) 1 salk, 27 at 28.

7.  Essentials
 There must be a loss.
 The loss must be caused either by
promisor or by any other person.
 There are two parties –
i. Indemnifier
ii. Indemnity-holder
 Must contain all the essentials of a valid
contract.(Sec.10)
 Contract may be expressed or implied.

8.  It is a contingent agreement to make
good the loss.
 It is enforceable only when the loss
occurs.
 Promisee must have actually suffered a
loss according to the terms & conditions
of the contract.
 Indemnifier is liable only for the loss.

9.  A Contract of Insurance is a contract of
Indemnity (although not clearly mentioned
in sec.124).
- G.Moreshwar v. M.Madan
(1942)44 BOM LR 703.
 Sec. 124 sets out a case of an express
contract of Indemnity but there are implied
contract too.
- Secretary of State v. The Bank of
India Ltd. AIR(1938) PC 191.

10. In an indemnity, the possibility of risk of
any loss happening is only contingent as
against the indemnifier.
-Tarachand Ghanshyamdas v.
Commissioner of Income Tax, (1966) 59
ITR 378

11.  Person who
promises to make
good the loss is
called the
‘indemnifier’ and
the person to whom
the promise is
made, i.e., whose
loss is to be made
good is called the
‘indemnified’ or
‘indemnity-holder’.

12.  Under English Law, the word ‘indemnity’
carries a much wider meaning than
given to it under the Indian Contract Act.
It includes a contract to save the
promisee from a loss, whether it be
caused by human agency or any other
event like an accident and fire. Under
English Law, a contract of insurance
(other than life insurance) is a contract
of indemnity.

13.  In ADAMSON v. JARVIS, [(1827)Bing 66], the
plaintiff, an auctioneer, sold certain cattle on the
instruction of the defendant. It was subsequently
learnt that the livestock did not belong to the
defendant, but to another person, who made the
auctioneer liable and 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 lay down that the plaintiff
having acted on the request of the defendant was
entitled to assume that, if what he did, was found
to be wrongful, he would be indemnified by the
defendant.

14.  Sec.124 is somewhat narrow in its scope. It
refers to the promises which cover situations
where the loss to the promisee may be caused
by the behavior of the promisor or by that of a
third person. This definition in itself will not
include a contract of insurance since the
insurance contracts relate to losses caused by
accidents. It is clear, that the actual scope of
contracts of indemnity is much wider than the
definition of Section 124.

15. English usage of the word ‘Indemnity’ is
much wider than this definition. It includes
promises to save the promisee from harm
or loss caused by events or accidents which
do not, or may not, depend on the conduct
of any person, or by liability arising from
something done by the promisee at the
request of the promisor; in the latter case,
a promise of indemnity may be inferred as
a fact from the nature of the transaction.

16. Unlike contracts of insurance, a contract
of indemnity is not uberrimae fides.
As defined in the Indian Contract Act, a
contract of indemnity would not include
a contract of insurance against loss or
damage to the subject matter of the
insurance, and can be differentiated
from the contracts of insurance which
protect the insured against liability to
third parties.

17.  “The equitable doctrine is that the party to be
indemnified can call upon the party bound to
indemnify him specifically to perform his
obligation, and to pay him the full amount
which creditor is entitled to receive, and that
whether having received it he applies it in
payment of that creditor or not is a matter
with which the party giving the indemnity is
not concerned.” Buckley, L.J. says in cases of
- In re Law Guarantee Trust and Accident
Society Ltd.

18. Rights of Indemnity Holder (Promisee)
when sued (Sec.125)
The rights of the indemnity holder are
dependent on the terms of the contract
of indemnity as a general rule. Sec-125
of the Indian Contract Act, 1872 comes
into play when the indemnity holder is
sued i.e. under specific situation.

19. All Damages – Sec.125 (1)
All Costs – Sec.125 (2)
All Sums – Sec.125 (3)
Note - Limitation Act – 3 years time limit
for recovery

20. The indemnity holder is entitled to
recover:
a) the damages that he may have been
compelled to pay in any suit in respect of
any matter to which the promise of the
indemnifier applies.

21. For example, if A contracts to indemnify
B against the consequences of any
proceedings which C may take against B
in respect of a particular transaction. If C
does institute legal proceeding against B
in that matter and B pay damages to C, A
will be liable to make good all the
damages B had to pay in the case.

22. b) All the costs of the suit that he may
have had to pay to the third party
provided he acted as a man of ordinary
prudence and he did not act in
contravention of the directions of the
indemnifier or if he had acted under the
authority of the indemnifier to contest
such a suit.

23. In the case of ADAMSON v. JARVIS
(1827) 4 BING 66, Adamson was entitled
to recover the money he had to pay to
the true owner of cattle as well as any
expenses incurred by him to get a legal
counsel, etc. Jarvis was ordered to pay
damages to Adamson.

24. c) All the sums that he may have paid
under the terms of any compromise of
any such suit provided such compromise
is not contrary to the indemnifier’s
orders and was a prudent one or if he
acted under authority of the indemnifier
to compromise the suit.

25. Note - The indemnity holder is also
entitled to losses due to change of law
not foreseen by the parties when they
entered into such contract of indemnity.

26. Rights of Indemnifier
 The contract act is silent about the
rights of indemnifier.
Rights under doctrine of Subrogation.
To sue against third party after
indemnifying the indemnity holder.
Not to compensate for losses not
covered under Contract of Indemnity.

27. Indemnity clauses are debated deeply and
focused upon during negotiation of
commercial contracts. Serious consequences
arise due to a poorly negotiated indemnity
clause.
It is important to understand whether
common law principals apply for interpreting
indemnity clauses or is the Contract Act self
sufficient & exhaustive?

28. The Bombay High Court in Gajanan Moreshwar
Parelkar v. Moreshwar Madan Mantri [(1942)
BomLR 704], while interpreting indemnity
provisions clearly held that the Contract Act is not
exhaustive and common law principals are to be
relied upon. Hence, unless there is a conflict with
the Contract Act or any judicial decisions rendered
by the Courts in India, the common law principals
pertaining to interpreting contracts will continue
to be applicable to indemnity provisions.

29. State Government cannot levy the tax on
inter-State Transactions however all such
transaction are administered by the
State Government that’s why provisions
relating to State’s VAT in many situations
are applicable even in such transactions.

30.  As per section 8(1) (b) of CST Act 1956 sales
tax liability on inter-state sales is at the rate of
2 percent or ‘rate of tax for sale within State’
whichever is lower, provided such sale is
affected to a registered dealer and goods
are covered in the registration certificate of
the purchasing dealer. Otherwise the rate of
tax would be the rate which is applicable on
the goods sold within that State.

31. Thus CST rate at the rate of 2 percent
(i.e. concessional rate) can be claimed if:
(i) Sale has been made to registered
dealer; and
(ii) Goods sold are covered in the
registration certificate (RC) of the
buying dealer.

32. Thank You