Contract of indemnity

1. Definition: section 124

Section 124 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. The promisor is the indemnifier; the person protected is the indemnity holder (or indemnified).

The 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.

The essentials follow from the definition:

• two parties, the indemnifier and the indemnity holder;
• a promise to save the other from loss;
• the loss must be caused by the conduct of the promisor or of some other person;
• all the requirements of a valid contract under section 10: free consent, competent parties, lawful consideration and object. An indemnity against the consequences of a crime the indemnity holder is asked to commit is void under section 23;
• the contract may be express or implied. A principal impliedly indemnifies his agent for lawful acts done in exercise of his authority (section 222).

2. Nature and scope: English and Indian definitions compared

In English law an indemnity is a promise to save a person harmless from the consequences of an act, and the loss may arise from any cause: the conduct of a person, an accident, a fire or a natural event. Contracts of insurance (other than life insurance) are the standard example. Section 124 is narrower. It speaks only of loss caused by the conduct of the promisor or of another person, so it requires human agency. Loss by accident or by an act of nature is outside the words of the section.

This does not mean that a fire or marine insurance contract is unenforceable in India. Courts have treated sections 124 and 125 as not exhaustive. Contracts of indemnity outside the statutory words are enforced on general principles of contract and on the equitable principles the English courts applied. Insurance is in any case governed by its own statutes and by the doctrine of utmost good faith. Life insurance is not a contract of indemnity at all, because a fixed sum is paid on death and there is no measure of loss.

The section also does not cover an implied promise to indemnify that arises by operation of law, though such promises exist elsewhere in the Act: section 69 (a person interested in payment of money which another is bound by law to pay), section 145 (surety's implied right to indemnity from the principal debtor) and section 222 (agent's right to indemnity from the principal).

3. Rights of the indemnity holder: section 125

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor:

• All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies.
• 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 authorised him to bring or defend the suit.
• All sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor and was one which it would have been prudent for him to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise.

The test of prudence matters. The indemnity holder cannot defend a hopeless suit at great cost, or settle a claim for far more than it is worth, and then pass the bill on. He must act as a reasonable man would if he had no indemnity to fall back on.

Section 125 lists the rights of the indemnity holder only. The indemnifier's rights are not stated, but by analogy with section 141 and the equitable rule of subrogation the indemnifier who has paid steps into the shoes of the indemnity holder and may enforce his rights against the third party who caused the loss.

4. When does the indemnifier's liability begin?

The old English common law rule was that an indemnity holder could not recover until he had actually suffered loss, that is, paid the claim. Equity took a more practical view: indemnity means being saved from loss, not being reimbursed after one has been ruined. The Indian courts followed equity.

• Osman Jamal & Sons Ltd. v. Gopal Purshottam (Calcutta High Court, 1929). The plaintiff company, acting as commission agent, bought goods for the defendant on its instructions, and the defendant had agreed to indemnify it against loss. The defendant failed to take the goods, and the company became liable to the sellers. It was held that the company could sue the defendant for indemnity even though it had not yet paid the sellers.
• Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (Bombay High Court, 1942), decided by Chagla J. The plaintiff had executed a mortgage at the request of the defendant, who promised to indemnify him against liability under it. Before the mortgagee had sued the plaintiff, the plaintiff sued the defendant. Chagla J. held that sections 124 and 125 are not exhaustive, and that if the indemnified liability has become absolute, the indemnity holder is entitled to call upon the indemnifier to save him from it by paying it off. He relied on the equitable maxim, from the English cases, that indemnity requires that the party to be indemnified shall never be called upon to pay. He need not wait until he has discharged it out of his own pocket.

5. Problem

A asks B to stand as a witness and sign a document for him, promising to keep B harmless. C sues B on the document and obtains a decree. Before B pays anything, he sues A. Can he succeed?

Issue. Whether an indemnity holder may enforce the indemnity before he has actually paid the amount for which he is liable.

Law. Section 124 defines the contract; section 125 lets the indemnity holder recover damages and costs he is compelled to pay. Osman Jamal and Gajanan Moreshwar hold that once the liability is absolute, the indemnity holder can require the indemnifier to discharge it.

Application. A's promise to keep B harmless against the consequences of signing is a promise to save B from loss caused by the conduct of another person (C), so it is a contract of indemnity under section 124. The decree in C's favour makes B's liability absolute. B defended the suit; if he did so prudently and not against A's orders, the costs are also recoverable.

Conclusion. B can sue A and ask that A pay off the decree, along with the costs of the suit, without B having first paid C.

How this is examined

“Define a contract of indemnity. What are the rights of the indemnity holder?” is a standard 10-mark question and appeared in the January 2026 paper. Structure: section 124 with the illustration, essentials, the human-agency point against the English definition, section 125 in its three limbs with the prudence test, and the commencement of liability with Gajanan Moreshwar and Osman Jamal. The question is often paired with, or followed by, “distinguish indemnity and guarantee”, for which the comparison in the next note is enough.