Law of Contracts
Contract of Indemnity
- When Contract of indemnity is enforceable? or
- When does the liability of indemnifier commence? Explain
According to section 124 of the Indian Contract Act, a contract of indemnity
means,” 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
In a contract of indemnity, the person who promises to indemnify is known as
“indemnifier” and the person in whose favour such a promise is made is called
“indemnified” or “indemnity holder”.
Section 125 of the Act defines the rights of an indemnity holder which are as
under, the promisee is entitled to recover from the promisor (in a contract of
indemnity, acting within the scope of his authority):
- Right of recovering Damages: All the damages that he is compelled to pay
in a suit in respect of any mater to which the promise of indemnity applies.
- Right of recovering Costs: All the costs that he is compelled to pay in
such suit if in bringing or defending it he did not contravene the orders of
the promisor and has acted as it would have been prudent for him to act in the
absence of the contract of indemnity or if the promisor authorised him in
bringing or defending the suit.
- Right of recovering sums: All the sums which he may have paid under the
terms of a compromise in any such suite if the compromise was not contrary
to the orders of the promisor and was one which would have been prudent for the
promisee to make in the absence of the contract of indemnity.
Sections 124 and 125 of the Indian Contract Act are not exhaustive, as such they
have not specified the time from which the liability of the indemnifier starts.
There is a conflict of opinion among the various Courts.
Some have held that the liability of the indemnifier commences only after the
indemnified had discharge his liability. However, others have held that the
indemnity-holder is entitled to be indemnified even before he has actually
discharged his liability.
In Osman Jamal & Sons v. Gopal [(1728) ILR 56 Cal 262], the plaintiff was
held entitled to recover from the Indemnifier before actually discharging his
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 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. [Osman Jamal & Sons Ltd. v
The Court observed:
"Indemnity is not necessarily given by repayment after payment. Indemnity
requires that the party to be indemnified shall never be called upon to pay."
Again, similar observations were made in the case of Gajanan Moreshwar v.
Moreshwar Madan 1942 BOM 302
Plaintiff (P) got a plot of land on lease from Municipal Corporation of Mumbai
.At the request of the defendant the plaintiff agreed to transfer the benefit of
the agreement for lease with the Municipal Corporation to the defendant.
Thereupon the defendant entered into possession of the plot of land and
commenced to erect a building thereon.
The materials for the construction of the building were supplied by one
Keshavdas Mohandas (K.P). The defendant incurred debt of Rs.5ooo from building
material supplier (K.P), twice. On both the occasions, at the request of the
defendant, plaintiff mortgaged part of the land to K.P, twice. The defendant
gave in writing to the plaintiff stating that in case the building is
transferred by the plaintiff to the defendant's name, the defendant would be
responsible for discharging the mortgages on the same.
Accordingly, the plaintiff, at the request of the defendant, wrote a letter to
the Bombay Municipality asking them to transfer the plot of land to the name of
the defendant. The transfer was duly sanctioned. The plaintiff thereafter, on
several occasions called upon the defendant to release the plaintiff of the
liability under the mortgage and the deed of further charge from Keshavdas
Mohandas, but the defendant failed to do so. The plaintiff alleged in the plaint
that the defendant is liable to indemnify the plaintiff in respect of all
liability under the mortgage and the amount thereof exceeded Rs. 5,000.
The court observed -Therefore, if the indemnified had incurred a
liability and that liability is absolute, he is entitled to call upon the
indemnifier to save him from that liability and pay it off.
From the above discussion, it would be realized that the latter view viz.
indemnified or indemnity holder can compel the indemnifier to indemnify before
he has actually discharged his liability is more logical and correct. This is
also the view of English Courts as observed by Kennedy L.J. in the case of
Liverpool Mortgage Insurance Co.
"To indemnify does not merely mean to reimburse in respect of money paid, but to
save from loss in respect of liability against which the indemnity has been
given. If it be held that payment is a condition precedent to recovery, the
contract may be of little value to the person to be indemnified, who may be
unable to meet the claim in the first instance."
However, the view that the liability of indemnifier commences only when the
indemnified has actually suffered loss was held in cases like – Shankar
Nimbaji v Laxman Sapdu / Chand Bibi v Santosh Kumar Pal.
The plaintiff filed a suit to recover Rs. 5,000/- and interest from defendant by
the sale of a mortgaged property and, in case of deficit, for a decree against
the estate of defendant 2 which was in the hands of his sons, the defendant 2
died during the pendency of the suit. It was held that plaintiff cannot sue the
defendant in anticipation that the proceeds realized by the sale of the
mortgaged property would be insufficient and there would be some deficit. [Shankar
Nimbaji v Laxman Sapdu]
The defendant’s father while purchasing certain property covenanted to pay off
mortgage debt incurred by the plaintiff and also promised to indemnify him if
they were made liable for the mortgage debt. The defendant’s father failed to
pay off the mortgage debt and plaintiff filed an action to enforce the covenant.
It was held as the plaintiff had not yet suffered any damage, the suit was
premature so far as the cause of action on indemnity was concerned. [Chand
Bibi v Santosh Kumar Pal]
Thus, based on court’s decisions, either views are possible, viz
Indemnifier is not liable until the indemnified has suffered the loss.
Indemnified can compel the indemnifier to make good his loss although he has not
discharged his liability.