I.

INTRODUCTION

This is an effort and research to explore the Different provisions in different countries of
India, U.K which share a common law background.

The literal meaning of the term “Indemnity” means “Security against loss”. The contractual
obligation over one party to compensate the loss or damages occurred to the other party or
may occur in the future, caused by the act himself or any other party, is said to be
indemnified. It can also be defining as “a duty to make good any loss damage or liability
incurred by another”, or alternatively “the right of an injured party to claim reimbursement
for its loss, damage or liability from a person who has such duty” . A contract of indemnity is
an express promise or is a voluntary obligation done or taken to ensure that a contracting
party suffering the loss or damage defined, has an express remedy under the contract to
rectify the defects in the goods or services

II. CONTRACT OF INDEMNITY

 Definition and Nature

“Indemnity” is a widespread expression used not only in a contractual context. It can be

defined as “[a] duty to make good any loss, damage or liability incurred by another,” or
alternatively “[t]he right of an injured party to claim reimbursement for its loss, damage or
liability from a person who has such duty.”1

If we see the literal meaning Indemnity means “Security from the loss”. This term was
generally used for insurance contracts. But it may be noted here that Life insurances is not a
contract of indemnity.

Its legal connotation is when one person promises to another to save him from the loss
incurring from his performing any duty.

An agreement of indemnity, as a concept developed under common law, is an agreement

wherein the promisor, promises to save the promisee harmless from loss caused by events or

1
Black’s Law Dictionary
accidents which do not or may not depend on the conduct of any person or from liability for
something done by the promisee at the request of the promisor.

In common law Indemnity was established in the case of Adamson v Jarvis2.

The plaintiff an auctioneer, sold certain cattle on the instruction of the defendant. It
subsequently turned out that the livestock didn’t 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 defendant’s direction. The court laid down that the
plaintiff having acted on the request of the defendant was entitled to assume that, if, what he
did turned out to be wrongful, he would be indemnified by the defendant.

Thus Indemnity in English Law means a promise to save a person harmless from the
consequences of an act. The promise may be express or it may be implied from the
circumstances of the case.3

Whereas 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 simple words, an indemnity is a
promise to compensate for another's loss.

 Provisions in U.K.

Provisions of the common law on the contract of indemnity are different as to the provisions
in the Indian law. Earlier there was a maxim used in English law for the contract of indemnity
i.e. “YOU MUST BE DAMNIFIED BEFORE YOU CAN CLAIM TO BE INDEMNIFIED”.

The original English rule was that indemnity was payable only after the indemnity-holder has
suffered actual loss by paying off the claims. I.e. no action could be brought against the
indemnifier until the indemnity-holder had suffered actual loss. Only after a loss has been
suffered by the indemnity holder by acting on the instructions of the promisor or indemnifier
and all damages beard by him in defending the suit or to prevent it or while compromising on
it are paid, then only afterward he can sue the indemnifier for the payments of all the costs
beard by him. These were the earlier provisions. This situation created a great hardship in
those cases where the indemnity-holder was not in a position to meet the claim out of his
pocket. Relief was provided to indemnity-holder in such cases by the Court of Equity.
2

3
Avtar singh pg 571
According to the rules evolved by the Court of Equity, it was no more necessary for the
indemnity-holder to be damnified before he could be indemnified. In other words, the
indemnity-holder can now compel the indemnifier to save him from the loss in respect of
liability against which indemnity has been promised, in the case of:

Richardson Re, ex parte The Governors of St. Thomas Hospital.4

Where Buckley LJ observed: “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”5

In Liverpool Mortgage Insurance Co.’s Re,6 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”

Under English law, the word ‘indemnity’ carries a much wider connotation 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.

Oriental fire and general insurance co. v Savoy Solvent Oil Extractions Ltd

Life insurance contract is, however not a contract of indemnity because in such a contract
different considerations apply. A contract of life insurance, for instance, may provide the
payment of a certain sum of money either on the death of a person, or on the expiry of a
stipulated period of time (even if the assured is still alive). In such a case, the question of
amount of loss suffered by the assured, or indemnity for the same does not arise. Moreover,
even if a certain sum is payable in the event of death, since, unlike property, the life of a
person cannot be valued, the whole of the amount assured becomes payable. For that reason
also, it is not a contract of indemnity.

 Provision in INDIA

4
(1911)2KB 705, 715 (CA)
5
Supra at p.715
6
(1914) 2 Ch 617, 638: (1914-1915) All ER Rep 1158 (CA)
As such the scope of “Indemnity”, as a concept developed under the common law, is much
wider in its scope and application than the scope of “Indemnity” as defined under Section 124
of the Indian Contract Act 1872 (“Act”). “Indemnity”, as developed in common law,
includes losses caused by events or accidents which may not depend on the conduct of any
person and therefore includes losses due to accident or events which have not been caused by
the indemnifier or any other person. Section 124 of the Act, in contrast, limits itself to losses
caused by the indemnifier or any other person. It does not, within its scope, include indemnity
to losses arising out of any natural event or any accident not caused by any person.

Thus the very process of definition is restricted to cases where there is a promise to
indemnify against loss caused by (i) by the promiser himself, or (ii) by any other person, so
the definition excludes from its purview cases of loss arising from acidents like fire or perils
of the sea. i.e. the loss must be covered by some Human Agency.

In the case of Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri:

Section 124 of the Act, deals only with one particular kind of indemnity which arises from a
promise made by the indemnifier to save the indemnified from the loss caused to him by the
conduct of the indemnifier himself or by the conduct of any other person, but 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 upon the conduct of the indemnifier or any other
person, or by reason of liability incurred by something done by the indemnified at the request
of the indemnifier. Section 125 of the Act, deals only with the rights of the indemnity-holder
in the event of his being sued. It is by no means exhaustive of the rights of the indemnity-
holder, who has other rights besides those mentioned in the section. It was further discussed
that 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 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. vs. The State Trading Corporation of
India Ltd. and Anr.

The Gujarat High Court relied upon the view taken in Gajanan Moreshwar Parelkar vs.
Moreshwar Madan Mantri and held that in view of Section 124 of the Contract Act, where
the defendants promise to indemnify is an absolute one; a suit can be filed immediately upon
failure of performance, irrespective of actual loss. In this 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.

The Law Commission of India in its 13th Report, 1958, has expressed the opinion that “the
view expressed by Chagla J., is correct and should be adopted by the legislature.” The Law
Commission recommended that as in English Law, “the right of the indemnity-holder should
be more fully defined and the remedies of an indemnity-holder should be indicated even in
cases where he has not been sued.”

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.7 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.”

Osman Jamal And Sons Ltd. vs Gopal Purshottam8

Plaintiff Company agreed to act as commission agent for the defendant firm for purchase and
sale of “Hessian” and “Gunnies” and charge commission on all such purchases and the
defendant firm agreed to indemnify the plaintiff against all losses in respect of such
transactions. The plaintiff company purchased certain Hessian from one Maliram Ramjidas.
The defendant firm failed to pay for or take delivery of the Hessian. Then Maliram Ramjidas
resoled it at lesser price and claimed the difference as damages from the plaintiff company.
The plaintiff company went into liquidation and the liquidator filed a suit to recover the
amount claimed by Maliram from the defendant firm under the indemnity. The defendant
7
Secretary of State v. The Bank of India Ltd. AIR 1938 P.C 191
8
argued that in as much as the plaintiff had not yet paid any amount to Maliram in respect of
their liability they were not entitled to maintain the suit under indemnity. It was held negative
and decided in plaintiff’s favour with a direction that the amount when recovered from the
defendant firm should be paid to Maliram Ramjidas.

Thus we find out that the basic difference between the indemnity in English law and Indian
law is that, the English law is wide enough to cover the losses by fire and sea peril whereas
the Indian law doesn’t approve this. Moreover in the Indian law the loss should be caused by
some human agency i.e. the promisor himself or by the conduct of any other person. Whereas
in English law loss caused by a natural calamity and the promisor are considered but not by
any third party

 VALIDITY OF INDEMNITY AGREEMENT

A contract of indemnity is one of the species of contracts. 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 (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.
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. 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 authorized 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

III. CONCLUSION

we can see here that though the concept of indemnity prevalent in India was introduced by
the government of the crown, when India was a colony under the British empire then also
significant differences between the concept of indemnity in common law of U.K vis-a-vis
India can be seen, through various case laws and the judgements held by the courts so far.
Thus in the end the basic difference that I found in the provisions, as to contract of indemnity
were: that the indemnity in English law and Indian law is that, the English law is wide
enough to cover the losses by fire and sea peril whereas the Indian law doesn’t approve this.
Moreover in the Indian law the loss should be caused by some human agency i.e. the
promisor himself or by the conduct of any other person. Whereas in English law loss caused
by a natural calamity and the promisor are considered but not by any third party.