Assignment on Contract of Indemnity

Subject: Business Law

Submitted by: [Your Name]

Class: B.Com 2nd Year

1. Introduction

In today's era of complex commercial transactions, legal protection against unforeseen risks and losses is

essential. One of the most important legal instruments that serves this purpose is a contract of indemnity. A

contract of indemnity is widely used in areas such as insurance, agency relationships, and financial guarantees.

Its main purpose is to safeguard a party against losses or damages caused by certain defined events or actions.

In India, contracts of indemnity are governed by the Indian Contract Act, 1872, particularly under Section 124.

This assignment provides a detailed overview of the nature, essentials, rights, and liabilities related to

indemnity contracts, supported with relevant case laws and legal interpretations.

2. Definition under the Indian Contract Act, 1872

Section 124 of the Indian Contract Act, 1872 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."

called the "indemnity-holder" or "indemnified."

3. Nature of Contract of Indemnity

The nature of indemnity contracts can be understood through the following features:

- It is a special kind of contract created for protection against losses.

- It creates legal obligations for one party to compensate another.

- The contract can be express or implied.

- It is based on good faith and trust between parties.

- It is enforceable only if actual loss occurs.

For example, in insurance contracts, the insurer indemnifies the insured for losses arising from events like fire,

theft, or accident.

4. Essentials of a Valid Contract of Indemnity

Just like other contracts, an indemnity contract must satisfy the general conditions of a valid contract under the

Indian Contract Act:

1. There must be two parties - the indemnifier and the indemnity-holder.

2. The promise must relate to saving the other from a specific kind of loss.

3. The contract must be lawful and made with free consent.

4. There must be consideration (something in return).

5. The contract may be written, oral, express, or implied.

In the case of Gajanan Moreshwar v. Moreshwar Madan, the Bombay High Court held that an indemnity
contract can be enforced even before actual loss occurs if liability has become certain.

5. Rights of the Indemnity-Holder

Section 125 of the Indian Contract Act provides the indemnity-holder with certain rights:

1. The right to recover all damages which he may be compelled to pay in a suit.

2. The right to recover all costs lawfully incurred in defending the suit.

3. The right to recover all sums paid under a compromise, if made in good faith.

6. Duties and Liabilities of the Indemnifier

The indemnifier must compensate the indemnity-holder when loss is incurred under the terms of the contract.

He must:

- Pay the damages or loss as agreed.

- Reimburse legal costs or settlements.

- Act in good faith and not withhold payment if liability arises.

In Adamson v. Jarvis, the court held that when an agent acted on the instructions of the principal and suffered

a loss, the principal (indemnifier) was liable to compensate.

7. Types of Indemnity Contracts

Contracts of indemnity may be of various kinds, such as:

- Contract of Insurance

- Contract of Agency

- Contracts between employer and employee

- Contracts related to security or guarantee

8. Distinction between Contract of Indemnity and Contract of Guarantee

Basis of Difference | Indemnity | Guarantee

---------------------|----------|-----------

Number of Parties | Two (Indemnifier and Indemnified) | Three (Creditor, Principal Debtor, Surety)

Nature of Liability | Primary | Secondary

Purpose | To protect from loss | To ensure performance of a promise

Example | Insurance contract | Loan surety contract

9. Case Laws Related to Contract of Indemnity

1. Gajanan Moreshwar v. Moreshwar Madan (AIR 1942 Bom 302) - held that indemnity can be enforced even

before actual payment.

2. Adamson v. Jarvis (1827) 4 Bing. 66 - agent entitled to indemnity for losses suffered while acting on

principal's instructions.

3. Osman Jamal & Sons Ltd. v. Gopal Purshottam - clarified that indemnity can be implied through conduct.

10. Conclusion

The contract of indemnity plays a vital role in commercial transactions by ensuring protection against

unforeseen losses. It builds confidence between parties by shifting the burden of risk. Indian courts have

contributed significantly in interpreting the provisions of indemnity to suit modern commercial needs.

Understanding its nature, rights and duties, and differences from other contracts like guarantee is essential for

legal and business professionals. The flexibility and enforceability of indemnity contracts make them
indispensable in today's legal and financial system.

11. Footnotes

1. Indian Contract Act, 1872

2. Ibid., Section 124

3. R.K. Bangia, Indian Contract Act, Allahabad Law Agency

4. Avtar Singh, Law of Contract and Specific Relief, Eastern Book Company

5. Gajanan Moreshwar v. Moreshwar Madan, AIR 1942 Bom 302

6. Indian Contract Act, Section 125

7. Adamson v. Jarvis (1827) 4 Bing. 66

8. Pollock & Mulla, Indian Contract Act, LexisNexis

9. Osman Jamal & Sons Ltd. v. Gopal Purshottam (1928) ILR 56 Cal 262

12. Bibliography

- Indian Contract Act, 1872 (Bare Act)

- R.K. Bangia, Indian Contract Act

- Avtar Singh, Law of Contract and Specific Relief

- Pollock & Mulla, Indian Contract Act

- www.indiankanoon.org

- Relevant Case Laws from AIR and SCC journals