1. Facts of the Case
- A enters into an agreement with B.
- Under this agreement, A undertakes to save B from any liability which may arise if C initiates proceedings against B regarding a sum of Rs. 2000.
- Essentially, B is under potential financial or legal risk from C, and A promises to protect or indemnify B against that loss or liability.
- The issue is to determine the legal nature of this promise — whether it amounts to a contract of indemnity, guarantee, or any other form of contract under the Indian Contract Act, 1872.
2. Issues in the Case
- What is the legal character of A’s promise to save B from loss caused by C’s actions?
- Does this agreement constitute a contract of indemnity under Section 124 of the Indian Contract Act, 1872?
- What are the rights and liabilities of A and B under this contract?
- Whether A is legally bound to compensate B if C sues B for the said amount?
3. Legal Principles Covered
a) Section 124, Indian Contract Act, 1872 – Contract of Indemnity
“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, is called a contract of indemnity.”
Explanation:
- The person who gives the promise to protect another from loss is called the indemnifier.
- The person who is protected from loss is called the indemnified or indemnity-holder.
In this case:
- A is the indemnifier.
- B is the indemnity-holder.
- The loss or liability may arise due to the conduct of C, a third party.
Hence, the contract between A and B clearly falls within the definition of a contract of indemnity.
b) Nature of Contract
- The main object of the contract is to protect B from loss or legal liability arising due to a third party’s act (C’s claim).
- The promise by A is not to pay the debt of B, but to compensate him if he suffers a loss.
- Therefore, it is not a contract of guarantee (which involves three parties – principal debtor, surety, and creditor).
- Here, there are only two parties — the indemnifier (A) and the indemnified (B).
c) Difference Between Contract of Indemnity and Guarantee
| Particulars | Contract of Indemnity | Contract of Guarantee |
|---|---|---|
| Number of Parties | Two (Indemnifier and Indemnified) | Three (Principal Debtor, Surety, Creditor) |
| Object | To save from loss | To ensure performance of another’s promise |
| Liability | Primary liability of indemnifier | Secondary liability of surety |
| Example | A promises to save B from loss caused by C’s conduct | A promises to pay B if C fails to pay |
Thus, in the present case, A’s liability is primary, confirming it is a contract of indemnity.
d) Section 125 – Rights of Indemnity Holder
When sued, the indemnity-holder (B) is entitled to recover from the indemnifier (A):
- All damages which he may be compelled to pay in any suit related to the matter,
- All costs incurred in defending such suit, provided he acted prudently or with the promisor’s consent, and
- All sums paid under a reasonable compromise of any such suit.
Hence, if C sues B and B suffers a financial loss, A must compensate B under Section 125.
e) Relevant Case Law
- Gajanan Moreshwar v. Moreshwar Madan (1942) Bom 302
The Bombay High Court held that the indemnity-holder can compel the indemnifier to place him in a position to meet the liability once it becomes absolute. - Osman Jamal & Sons Ltd. v. Gopal Purshottam (1928) Cal 372
The court clarified that contracts of indemnity include promises to save a person from loss arising from the conduct of third parties.
These cases support that A’s promise to protect B from C’s proceedings is a valid and enforceable contract of indemnity.
4. Possible Judgement
Based on the facts and legal principles:
- The agreement between A and B is a Contract of Indemnity as defined under Section 124 of the Indian Contract Act, 1872.
- A, being the indemnifier, is legally bound to save B from any loss or liability that arises due to C’s legal proceedings.
- If C sues B and B incurs damages, A must compensate or reimburse B for those losses.
- The liability of A is primary, and it arises as soon as B suffers or is about to suffer actual loss from C’s claim.
Judgement:
The contract is a Contract of Indemnity under Section 124 of the Indian Contract Act, 1872.
A is bound to indemnify B against any liability or loss arising from C’s proceedings relating to the sum of Rs. 2000.
Hence, A’s promise is valid, lawful, and enforceable.
About lawgnan:
Explore the concept of Contract of Indemnity in depth at Lawgnan.in, where we simplify complex legal doctrines under the Indian Contract Act, 1872. Learn how Section 124 defines indemnity, understand the distinction between indemnity and guarantee, and review landmark judgments like Gajanan Moreshwar v. Moreshwar Madan and Osman Jamal & Sons Ltd. v. Gopal Purshottam. Perfect for law students and exam preparation, Lawgnan.in offers concise notes, case analyses, and judgment summaries to strengthen your understanding of contracts and liabilities. Visit now to master indemnity law in a clear and structured manner.
