Understanding the Concept of Indemnity
In every business or legal relationship, risks and losses are unavoidable. To protect one party from such losses, the law recognizes the concept of indemnity, which means compensation for loss or damage caused by another. The idea is rooted in fairness — no one should suffer loss due to the actions of another if an agreement exists to protect them.
Under the Indian Contract Act, 1872, indemnity has been given a specific legal definition. It ensures that if a party incurs loss due to another’s conduct or the conduct of a third person, the party responsible must compensate for that loss. Indemnity plays a major role in insurance contracts, commercial transactions, and employment contracts where financial risk is anticipated.
This essay explains the definition of a Contract of Indemnity, its scope under Indian law, and the key differences between Indian and English law on the subject, supported by real-life examples and a mnemonic for easy recollection.
Definition under Indian Contract Act, 1872
Section 124 of the Indian 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 conduct of the promisor himself, or by the conduct of any other person.”
In simple terms, indemnity means a promise to protect another from loss. The person who promises to indemnify is called the Indemnifier, and the person whose loss is covered is the Indemnified or Indemnity-holder.
A contract of indemnity may be express (clearly stated in words) or implied (arising from the nature of the relationship). For example, if an insurance company promises to pay damages to the insured for a fire loss, it is an express indemnity. But if an agent acts under his principal’s instructions and incurs loss, the principal must indemnify him — that is implied indemnity under Section 222 of the Indian Contract Act.
Thus, the purpose of indemnity is to restore the injured party to the same financial position as before the loss occurred. It is not meant to provide profit, but only compensation for actual loss.
Rights of the Indemnified (Section 125)
Section 125 of the Indian Contract Act** enumerates the rights of the indemnified person. When the indemnifier’s promise is invoked, the indemnified has the right to recover from the indemnifier:
- All damages he is compelled to pay in any suit concerning the matter of indemnity;
- All costs reasonably incurred in defending or settling such a suit; and
- All sums paid under any compromise, if such compromise was made with the consent of the indemnifier.
However, the right to recover arises only when the indemnified has suffered an actual loss or has made payment. This is a critical distinction from English law, as explained below.
Essentials of a Contract of Indemnity
To constitute a valid contract of indemnity, the following essentials must be present:
- Promise to save from loss: There must be an agreement where one party undertakes to protect the other.
- Loss caused by human conduct: The loss must result from human acts (either of the promisor or third persons).
- Applicability of general contract principles: Offer, acceptance, consideration, and intention to create legal relations must be present.
- Indemnity may be express or implied: It can arise from explicit terms or the relationship between the parties.
For instance, when a principal instructs an agent to act on his behalf, the law implies that the principal will indemnify the agent for losses caused while performing lawful acts in good faith.
Indian Law on Contract of Indemnity
The Indian law on indemnity, as codified in Sections 124 and 125 of the Indian Contract Act, 1872, is narrower in scope than its English counterpart. Indian law restricts indemnity to losses caused by human conduct, either of the promisor or another person. It does not explicitly include losses caused by natural events or accidents, though courts have interpreted it broadly in modern times.
Another important feature of Indian law is that the indemnified can claim reimbursement only after actual loss. In other words, until a loss has been incurred, the indemnifier’s liability does not arise. However, judicial decisions have evolved to make the law more practical.
Judicial Interpretation:
In Gajanan Moreshwar v. Moreshwar Madan (1942 Bom), the Bombay High Court held that the indemnified can compel the indemnifier to save him from liability even before actual loss occurs, especially when liability becomes absolute. This case expanded the Indian understanding closer to the English approach.
English Law on Contract of Indemnity
Under English Law, the scope of indemnity is much wider and is not confined to losses caused by human conduct. It includes losses caused by any event, accident, or act of God. Moreover, English law recognizes indemnity as both a separate contract and a clause that can exist within other agreements, such as insurance or agency contracts.
In English law, an indemnity holder can demand payment as soon as his liability becomes certain, even if he has not yet made an actual payment. The emphasis is on preventing financial hardship rather than waiting for actual loss.
Example:
If a person guarantees another’s performance of a contract, and it becomes evident that the other party will default, the indemnified can immediately demand security or payment under English law — a more flexible approach than Indian law.
Key Differences Between Indian and English Law
| Aspect | Indian Law (Contract Act, 1872) | English Law |
|---|---|---|
| Source | Sections 124–125 of the Indian Contract Act | Common Law principles |
| Cause of Loss | Only by human conduct (promisor or third person) | Can arise from any cause, including accidents or acts of God |
| When liability arises | After actual loss or payment | As soon as liability becomes absolute |
| Scope | Narrow and limited to human conduct | Broad and includes all forms of loss |
| Judicial Expansion | Through cases like Gajanan Moreshwar v. Moreshwar Madan | Inherently broad from inception |
Thus, English law is more practical and protective of the indemnified, while Indian law started with a narrower statutory definition but has evolved through judicial interpretation.
Real-Life Example
Let’s consider a real-world scenario.
Suppose ABC Ltd., an event management company, enters into a contract with XYZ Insurers. The insurer promises to compensate ABC Ltd. for any loss suffered due to third-party property damage during an event. During the event, a guest’s car is damaged by falling equipment, and ABC Ltd. compensates the guest ₹1,00,000.
Here, XYZ Insurers (indemnifier) must reimburse ABC Ltd. (indemnified) under the contract of indemnity. If this case were governed by Indian law, ABC Ltd. could claim reimbursement after paying the amount. Under English law, ABC Ltd. could have sought payment as soon as liability became certain.
Mnemonic to Remember the Answer – “I.N.D.E.M.N.I.T.Y.”
Use the mnemonic I.N.D.E.M.N.I.T.Y. to recall the key aspects of indemnity and the distinction between Indian and English law:
- I – Indian Law (Sec. 124-125)
- N – Narrow scope (limited to human acts)
- D – Defined promise to save from loss
- E – English Law broader in nature
- M – Monetary protection against loss
- N – No claim before actual loss (Indian rule)
- I – Implied indemnity in agency (Sec. 222)
- T – Timely expansion by judiciary
- Y – You pay after you lose (Indian law); you secure before loss (English law)
Mnemonic Sentence:
“In Narrow Deals, English Makes New Interpretations Timely, Yearly.”
This simple phrase helps recall that Indian indemnity law is narrower, while English law offers wider and earlier protection.
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