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Section 124: 'Contract of indemnity' defined

Indian Contract Act • Official Statutory Text & Practice Guide

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Act 1872
Section 123 All 266 Sections of Indian Contract Act Section 125

Legal Commentary & Landmark Judgments: Section 124

A contract of indemnity is an autonomous undertaking whereby one party promises to save the other from financial loss caused by the conduct of the promisor or any third party. In commercial transactions, corporate M&A share purchase agreements, tax covenants, and environmental liabilities, indemnity clauses provide absolute protection against third-party claims, liabilities, and statutory penalties, functioning independently of ordinary damages under breach of contract.

  • Contract of Indemnity Definition: Section 124 defines a contract of indemnity as an agreement whereby 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.
  • Judicial Expansion & Equitable Relief: While the strict statutory text covers losses caused by human conduct, courts have expanded indemnity to cover losses arising from accidents and contingencies, granting equitable relief before actual payment (Gajanan Moreshwar v. Moreshwar Madan).
Key Landmark Precedents:
  • Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (AIR 1942 Bom 302): Chagla, J. delivered the landmark ruling establishing that an indemnity holder is entitled to equitable protection even before actual loss is suffered. The indemnity holder can compel the indemnifier to place him in a position to meet the liability as soon as that liability becomes absolute and clear.
  • State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd (2006) 6 SCC 293: The Supreme Court analyzed the difference between a contract of indemnity and a contract of guarantee, holding that an indemnity involves only two parties and creates primary, independent liability.
Legal Commentary:

Under the Gajanan Moreshwar doctrine, modern Indian courts hold that an indemnity-holder does not have to pay out of pocket before claiming relief ('you must be damnified before you can claim to be indemnified' is obsolete). Once an absolute liability is incurred, the indemnity-holder can file a suit compelling the indemnifier to pay the debt directly to the creditor.

Section 123 All 266 Sections of Indian Contract Act Section 125