Contract of Indemnity: Definition, Essentials & Case Laws (Indian Contract Act, 1872)

What is a Contract of Indemnity?

A Contract of Indemnity is a legal agreement where one party (the indemnifier) promises to compensate another party (the indemnity holder) for losses caused by:

• The indemnifier’s actions,
• A third party’s conduct, or
• A specific event (e.g., accident, lawsuit).

Ex: A car owner (indemnifier) agrees to cover repair costs if their friend (indemnity holder) damages the vehicle in an accident.

Legal Definition Under Indian Contract Act

Section 124

Defines indemnity as:

“A contract by which one party promises to save the other from loss caused by the promisor’s conduct or any other person’s actions.”

Key Difference:

• Indian Law: Covers only losses from human actions (not accidents).
• English Law: Broader – includes accidental losses (e.g., natural disasters).

Essentials of a Valid Indemnity Contract

1. Valid Contract Elements: Offer, acceptance, consideration, legal enforceability.
2. Loss Protection: Indemnifier must cover specific losses (e.g., legal damages, repair costs).
3. Two Parties: Indemnifier (promisor) + Indemnity holder (promisee).
4. Contingency-Based: Triggered by an event (e.g., lawsuit, accident).

Illustration:

Company X indemnifies Employee Y against client lawsuits arising from Y’s work.

Rights of Indemnity Holder (Section 125)

The indemnity holder can claim:

1. Damages: Compensation for losses (e.g., court-awarded sums).
2. Legal Costs: Lawyer fees for defending/prosecuting a suit.
3. Settlement Amounts: Payments made under a compromise.

Exception: Claims must arise within the contract’s scope.

Rights of the Indemnifier

Though the Act is silent, courts (e.g., Jaswant Singh v. State, 1965) recognize that after compensating the holder, the indemnifier gains:

• Subrogation Rights: Can “step into the shoes” of the holder to recover costs.
• Property Rights: May claim collateral if specified in the contract.

5 Landmark Case Laws on Indemnity

1. Keppel v. Wheeler (1927)

Issue: Car dealer indemnified buyer against accident claims.
Holding: Indemnifier liable for third-party damages.

2. Union of India v. Raman Iron Foundry (1974)

Issue: Supplier indemnified buyer for defective goods.
Holding: Indemnity clause valid; supplier must cover losses.

3. National Insurance Co. v. Harish Chandra (1969)

Issue: Truck insurer sought indemnity from the insured.
Holding: Insured liable for accident compensation paid by insurer.

4. Adamson v. Jarvis

Issue: Auctioneer indemnified for selling disputed cattle.
Holding: Indemnifier must cover auctioneer’s losses to the true owner.

5. Secretary of State v. Bank of India (1938)

Issue: Bank indemnified government for forged promissory notes.
Holding: Implied indemnity exists even without an express clause.

Indemnity vs. Guarantee

Aspect	Indemnity	Guarantee
Parties	2 (indemnifier + holder)	3 (creditor, debtor, surety)
Liability	Primary	Secondary
Trigger	Actual loss	Debt default

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