Contract of Indemnity

Contract of Indemnity is a legal agreement in which one party promises to compensate or reimburse the other for any loss or damage suffered due to the actions of the promisor or any third party. Defined under Section 124 of the Indian Contract Act, 1872, it refers to a contract where one party agrees to save the other from loss caused by the conduct of the promisor himself or by another person.

The primary objective of such a contract is to offer protection against possible financial risks. It is most commonly used in insurance contracts, business agreements, and employment arrangements where one party seeks to shield the other from legal or financial consequences.

The two parties involved are:

• The indemnifier, who makes the promise.

• The indemnified, who is protected from loss.

While Section 124 recognizes express indemnity, Indian courts have also upheld implied indemnity, especially in relationships like master-servant or agent-principal. The indemnified party is entitled to recover damages, legal costs, and any sum paid under a legal obligation.

“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.”

For example, a construction company may enter into a contract of indemnity with a subcontractor to protect itself from any claims or damages that may arise due to the subcontractor’s work. In this case, the subcontractor agrees to indemnify the construction company for any loss or damage that may occur as a result of the subcontractor’s work.

Essentials Elements of a Contract of Indemnity:

• Two Parties: Indemnifier and Indemnified

A Contract of Indemnity must involve two legally competent parties: the indemnifier, who promises to compensate for the loss, and the indemnified, who is protected from the consequences of that loss. The roles of each party must be clearly defined in the contract. This bilateral arrangement creates a legal obligation where the indemnifier agrees to safeguard the indemnified against specific risks or damages. Without the presence of these two distinct roles, the contract cannot be termed as one of indemnity. Their legal identities and capacities must comply with general rules of contract law.

• Loss Must Be Caused by Promisor or Third Party

As per Section 124 of the Indian Contract Act, 1872, a valid indemnity contract requires that the loss must be caused to the indemnified due to the conduct of the indemnifier or a third party. This clause emphasizes that indemnity is not for speculative protection but for actual or foreseeable damage. It means the promise to compensate must relate to a genuine potential loss or damage, whether due to wrongful acts, negligence, or contractual failure. The connection between the act and the resulting loss is essential for the enforceability of the contract.

• Express or Implied Agreement

A contract of indemnity can be either express or implied. An express indemnity occurs when the terms are clearly stated in writing or orally. On the other hand, an implied indemnity is inferred from the conduct of the parties or the nature of their relationship, such as between a principal and agent. Although Section 124 only mentions express indemnity, Indian courts have recognized and enforced implied indemnity in various cases. The existence of a clear understanding—whether written, spoken, or implied—is essential to establish legal intent and enforceability of the indemnity agreement.

• Lawful Consideration and Object

As with any valid contract under the Indian Contract Act, a contract of indemnity must be supported by lawful consideration and entered into for a lawful object. This means the purpose of the indemnity must not be illegal, immoral, or against public policy. For instance, a promise to compensate someone for losses incurred in smuggling or fraud would not be enforceable. The consideration may be monetary or non-monetary, but it must meet legal standards. The presence of lawful consideration ensures the contract’s validity and makes the promise legally binding and enforceable in a court of law.

• Intention to Create Legal Relationship

A valid contract of indemnity must show a clear intention of both parties to create legal obligations. This distinguishes legal contracts from mere social or moral promises. Both the indemnifier and indemnified must understand that the agreement carries enforceable legal consequences. This intention can be inferred from the language of the contract, conduct of the parties, and the context in which the agreement was made. Courts evaluate this factor to determine whether the contract was created with genuine commercial or protective intent. Without this intention, the contract may be considered non-binding and unenforceable.

• Free Consent of the Parties

The free consent of both parties is an essential element of a contract of indemnity, as per Section 14 of the Indian Contract Act. Consent must be given without coercion, undue influence, fraud, misrepresentation, or mistake. If any of these factors affect the formation of the contract, it may be declared void or voidable. A legally enforceable indemnity contract arises only when the parties have willingly and knowingly agreed to the terms. Free consent ensures that both the indemnifier and indemnified understand their rights and responsibilities without external pressure or misinformation.

• Possibility of Risk or Contingent Event

Indemnity contracts are created to protect against future or contingent risks. The loss or damage to be covered must be uncertain or based on a probable event. A valid indemnity cannot be formed for an event that has already occurred or is certain to occur. For example, one cannot indemnify another against loss from a past accident. The element of risk or uncertainty is vital because indemnity is a preventive and protective arrangement. The indemnifier agrees to bear the consequences of such events, should they occur, thus offering financial and legal security to the indemnified.

• Compliance with Section 124 of the Indian Contract Act, 1872

To be recognized legally, a contract of indemnity must fulfill the criteria outlined in Section 124 of the Indian Contract Act. This section defines indemnity specifically as a promise to make good the loss caused by the promisor’s act or another person’s act. While the statutory scope is narrow compared to English law, Indian courts have interpreted it broadly to include implied indemnity and broader indemnity arrangements in commercial contracts. Thus, proper reference to and compliance with this legal framework is essential to ensure the enforceability and validity of any indemnity contract under Indian law.

• Contracts of Indemnity Legality

Contracts of indemnity are legal agreements that are enforceable in a court of law. However, the legality of such contracts may depend on various factors, including the specific terms of the agreement, the jurisdiction in which it was executed, and the nature of the indemnification.

Key Legal Requirements for Legality:

• Lawful Object: The purpose of the indemnity must be legal. An indemnity contract for unlawful activities (e.g., gambling losses, smuggling-related damages) is void and unenforceable.

• Lawful Consideration: As with any contract, the indemnity promise must be supported by lawful consideration—whether monetary or non-monetary.

• Free Consent: Both parties must freely consent to the contract without coercion, undue influence, fraud, or misrepresentation. This ensures fairness and validity.

• Certainty of Terms: The terms of the contract must be clear and definite, especially regarding the scope of indemnity, duration, and conditions for invoking the indemnity clause.

• Contractual Capacity: Both parties must be legally competent to contract, i.e., they must be of sound mind and of the age of majority.

Judicial Support and Case Law

• Gajanan Moreshwar v. Moreshwar Madan (1942): The Bombay High Court ruled that indemnity can be claimed even before actual loss, if the liability is certain and absolute.

• Osman Jamal & Sons Ltd. v. Gopal Purshottam (1928): Held that a third-party act can also be the basis for indemnity under Indian law, expanding the scope of indemnity beyond the promisor’s conduct.