RIGHTS AND DUTIES OF INDEMNIFIER IN CONTRACT OF INDEMNITY

NATIONAL LAW UNIVERSITY, ODISHA

A PROJECT WORK ON LAW OF CONTRACTS - II

TOPIC: RIGHTS AND DUTIES OF INDEMNIFIER IN A CONTRACT OF INDEMNITY

UNDER THE GUIDANCE OF:

PROF. SONAL SINGH (ASSISTANT PROFESSOR OF LAW)

SUBMITTED BY:
SANIDHYA SOMVANSHEE (2022/BALLB/086)
TANMAYEE SETHY (2022/BALLB/104)

SEMESTER AND COURSE:

3RD SEMESTER – BATCH (2022-2027)

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ACKNOWLEDGEMENT

It is not possible to prepare a project without the assistance and encouragement of other people.
This one is certainly no exception. The unconditional support of many people has made this
project possible. I wish to express my sincere gratitude to Miss Sonal Singh, who helped us to
develop this project into coherent whole through his helpful insight and brilliant know-how I
appreciate his inspiring advice and support. It was only with her help and persistent guidance that
I was able to successfully complete the research project. I would also want to thank NLUO's IT
department for giving us access to valuable subscriptions that enabled us to find the material we
required for the project. At last, but not the least, I would like to thank all those who encouraged
me to complete this research project.

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TABLE OF CONTENTS

ACKNOWLEDGEMENT.......................................................................................................................2

TABLE OF CONTENTS.......................................................................................................................3

INTRODUCTION.................................................................................................................................4

RIGHTS OF INDEMNIFIER..................................................................................................................5

DUTIES OF INDEMNIFIER..................................................................................................................9

CONCLUSION..................................................................................................................................13

BIBLIOGRAPHY...............................................................................................................................15

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INTRODUCTION

A Contract of Indemnity is a contract in which one party guarantees to pay or reimburse another
party for harm or loss brought on by the promisor's or another party's actions. This particular sort
of contract offers security or defence against a loss or liability. A contract of indemnification is
something like an insurance policy.

In India, Section 1241 of the Indian Contract Act, 1872 defines indemnification. According to the
Section, it is a contract where a party promises to protect others against any type of loss resulting
from the promisor's or any other party's conduct.

In a contract of indemnity, the rights of indemnity holders are not absolute, and he also has some
responsibilities. The most significant obligation is that he must uphold the terms of the
indemnification contract2.

The Adamson v. Jarvis (1827)3 case served as the impetus for the idea of indemnification. Jarvis
gave Adamson the go-ahead to sell the cattle at an auction, and when the genuine owner showed
up to claim possession, Adamson was required to make good on his damage obligations. The
Court determined that because Adamson was carrying out the responsibilities as directed by
Jarvis and it was reasonable to assume that all consequences that could emerge during execution
would be handled by Jarvis, Jarvis would have to reimburse Adamson for the losses sustained.

The term "indemnifier" refers to a person who, either directly or via a third party, agrees to pay
for the damage incurred by the indemnity holder as a result of the occurrence of a certain
incident. As soon as the loss to the indemnity holder is caused by the indemnifier's or another
party's acts, the responsibility becomes mature.

A party who has had the indemnifier guarantee them against future costs and damages related to
a certain item is known as an indemnity holder. The occurrence of an incident for which the
indemnifier or any other third party is liable must have caused the harm.

1
The Indian Contract Act 1872, s124.
2
Avtar Singh, CONTRACT & SPECIFIC RELIEF (10th edn, Eastern Book Company 2008).
3
Wayne Courtney, “INDEMNITIES AND THE INDIAN CONTRACT ACT 1872”, (National Law School of India
Review, vol. 27, no. 1, 2015, pp. 66–88) < https://www.jstor.org/stable/44283647?seq=1> accessed on 3rd September
2023.

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RIGHTS OF INDEMNIFIER

The Indian contract Act of 1872 forms the primary piece of legislation controlling contractual
obligations and relationships in India. However, the Act does not specifically lay down or define
the rights and obligation of indemnifier. Because of this, the legal framework governing
indemnity agreements and indemnifier rights has been substantially formed through
judgements by the courts and judicial rulings4.

The case of Jaswant Singh v. The State (1965) 5 plays an important role in this legal evolution
that made a huge impact on the formation of contract of indemnity. This landmark ruling
provided the first detailed explanation of a rights and responsibilities of the indemnifier in the
Indian legal setting. The judiciary's decision in this case had far-reaching repercussions for the
interpretation and execution of contract of indemnity.

The claim that the rights of an indemnifier under a contract of indemnity are nearly comparable
to the rights of a surety under a contract of guarantee served as the case's main argument. By
acknowledging that both parties are involved in providing security and assurance in contractual
relationships, this legal concept aimed to harmonize the treatment of indemnifiers and sureties.

Thus the rights of the indemnifier as laid down in the case of Jaswant Singh v. The State are as
follows:

1. Right of subrogation 6
When a person indemnifies for an indemnity holder, he assumes the role of the indemnity
holder and is granted access to and ownership rights over the person's property as defined
by the indemnity. In some circumstances, the indemnifier has the power to exercise
certain privileges which is otherwise known as "subrogation rights". These rights are very
similar to the rights enjoyed by a guarantor in the context of a contract of guarantee.

4
B Priyanandhin, ‘RIGHTS OF INDEMNIFIERS’(Journal of Legal Research and Judicial Services)
<https://jlrjs.com/rights-of-indemnifiers/> accessed on 2nd September 2023.
5
1966 CriLJ 451
6
B Priyanandhin, ‘RIGHTS OF INDEMNIFIERS’(Journal of Legal Research and Judicial Services)
<https://jlrjs.com/rights-of-indemnifiers/> accessed on 2nd September 2023.

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Once the surety fulfils the obligations imposed on him in a contract of guarantee, by
making payments and settling claims on behalf of the creditor, the surety effectively
assumes the role of the creditor. This change in the legal status enables the surety to get
back the money paid, from the principal debtor, who was originally responsible for the
debt or obligation. The idea of subrogation applies in the same way for an indemnifier.
Under the spectrum of subrogation rights, the indemnifier occupies a role comparable to
that of the creditor, although with a twist. The indemnifier now has the power and
authority to collect the money that they paid as indemnity, which can be done in a variety
of ways. In the beginning, the indemnifier might ask for reimbursement in the form of
monetary values. In addition, as part of the recovery procedure, the indemnifier has the
legal right of assuming rights to property owned by the indemnity holder. These rights
expand beyond ordinary monetary recovery and can include the transfer or acquisition of
intangible assets as well as tangible assets such as intellectual property, or even
contractual entitlements.
Furthermore, the right of subrogation allows for flexibility in the modes of recovery. This
means that the indemnifier may be free to decide how they want to retrieve the indemnity
payments, which could involve bringing legal claims, negotiating settlements, or using
other appropriate measures to recover the disbursed money. The main goal is to make it
easier for the indemnifier to get back the financial resources expended on behalf of the
indemnity holder.

2. Right to sue third party 7

Understanding how the indemnifier may initiate legal action against third parties about
the property he has acquired rights to, depends on the rights and duties of an indemnifier
within the context of an indemnity contract.
This process is dependent on them fulfilling their responsibilities under the contract of
indemnification, which eventually leads to the acquisition of complete ownership over
the property in question. In essence, an indemnifier's capacity to file a lawsuit against a
third party regarding property in question is contingent upon them fulfilling the

7
Ibid.

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indemnity obligations outlined in the contract of indemnity. Until these obligations have
been fulfilled, the indemnifier lacks the legal standing or the capacity to assert rights to
the property.
Once the indemnifier has carried out their obligations according to the indemnity contract
and discharged any claims or liabilities, they get absolute rights of the property. This
means that the indemnifier obtains complete ownership and control of the property,
usually through the subrogation mechanism stipulated in the contract or permitted by law.
At this point, the indemnifier has the legal authority to sue third parties who may have
caused the loss, damage, or liability that gave rise to the indemnity requirement in the
first place. Such legal action can take different forms, such as bringing legal proceedings,
initiating arbitration proceedings, or pursuing alternative remedies to recover losses or
seek compensation from the respective third parties.

3. Compensate losses which are covered in the deed 8

An indemnifier's liability is often limited by the specific conditions and provisions

defined in the indemnity contract. The scope and extent of the indemnifier's responsibility
to compensate the promisee (the party covered by the indemnity) for damages sustained
are defined in this contractual framework. When these claims are resolved in line with the
terms in contract, the indemnifier's role is transformed into that of a creditor. Importantly,
the indemnifier's liability is limited to the specific conditions stipulated in the contract of
indemnity. The maximum amount of indemnification, the kinds of damages covered, the
period of the indemnity, and any other relevant requirements may be specified in these
terms.
The case of V. M. Rv. Ramaswami Chettiar v. R. Muthukrishna Iyer and Ors. (1966) 9,
becomes the fundamental basis that laid down the importance of the terms of the contract
defining the indemnifier's obligation. In this noteworthy decision, the Supreme Court of
India affirmed the idea that an indemnifier is only obligated to make good damages to the
extent stipulated in the contract of indemnity. The court specifically determined that the
liability of the indemnifier was restricted to the sum of Rs. 1236/-, as specified in the
8
Ibid.
9
Ramaswami Chettiar vs Muthukrishna Iyer 1967 AIR 359.

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contract. The decision of the Supreme Court in this case, upheld that the contractual rules
governing the liability of the indemnifier were legally binding and that the indemnifier
could not be compelled to make compensation in excess of the sum agreed in accordance
to the contract.
This legal precedent, which was reaffirmed by the Supreme Court's decision, emphasises
the importance of contractual accuracy and strict adherence to the terms stipulated in the
contract of indemnity. It emphasises the legal concept that the indemnifier's liability is
definite and cannot be extended beyond the terms of the contract. In order to ensure
transparency and fairness in the case of losses or liabilities, all the parties entering into
indemnity agreements must clearly define and talk about the terms and limits of
indemnification. This legal framework establishes an adequate basis for the enforcement
of contracts of indemnity and contributes to the validity of the mutually agreed indemnity
arrangements.

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DUTIES OF INDEMNIFIER

The Indian Contract Act, 1860, does not lay down any provision explicitly stating about the
duties of an indemnifier in the contract of indemnity. Instead, these duties are derived essentially
from the principles and legal provisions enshrined in the Act. The rights of the indemnity holder
as mentioned in the section 125 of the Indian Contract Act, 1872 10 is understood and regarded as
the duties of the indemnifier in a contract of indemnity.

Thus, the duties that the indemnifier has against the indemnity holder, are mentioned below.

1. The duty to Indemnify the indemnity holder of all damages11

The indemnifier has a fundamental duty referring to Section 125(1) of the Indian
Contract Act12. It specifies that the indemnifier becomes obligated to pay to the indemnity
holder all damages as specified under the contract of indemnity.

The duty of the indemnifier is extensive, and it includes paying for all damages that they
explicitly stated to compensate for, in accordance to the contract. This includes any
damages stated in the contract that are related to the subject matter of the indemnity. It is
critical for the indemnifier to discharge this duty in accordance with the terms
and provisions of the contract.

To invoke the indemnifier's duty to pay damages, the indemnity holder must generally
demonstrate that such payments were imposed by law. In circumstances where the law
requires the indemnity holder to pay damages or fulfil a legal obligation, the indemnifier
is required to honour the promise they made under the indemnity contract13.

10
The Indian Contract Act 1872, s125.
11
Kanvi Gupta, “Rights and duties of Indemnfier” (2021) Lawfoyer International Journal.
12
The Indian Contract Act 1872, s125(1).
13
Avtar Singh, CONTRACT & SPECIFIC RELIEF (10th edn, Eastern Book Company 2008).

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In the case of Duffield v. Scott (1789) 14, the judicial precedent underscores the need of
establishing that the indemnity holder was legally obligated to pay the damages. It
establishes that the duty of indemnifier is based on the legal obligation of the indemnity
holder rather than the direct or indirect nature of the loss.

According to the case of Nallappa Reddi vs Vridhachala Reddi And Anr.(1911) 15, The
duty of the indemnifier to give damages comes immediately upon the decision or
judgement being rendered against the indemnity holder. In other words, whenever a court
directs the indemnity holder to pay damages or perform a legal obligation, the duty owed
by the indemnifier to give financial indemnification enters into effect immediately.

The court in the case Gokuldas vs. Gulabrao (1926) 16 ruled that, the indemnifier cannot
escape their duty by claiming that they were not a party to the suit or disagreement that
resulted in the indemnification obligation. Once the indemnification agreement is in force
and the indemnifier commits to indemnifying the promisee, they are legally compelled to
complete their duties regardless of their personal involvement in the underlying dispute.

Furthermore, the court declared in Toplis v. Grane (1839) 17, that the duty and
obligation of the indemnifier additionally extends to indemnifying the promisee for
lawful conduct committed with an intention of lawful objective. Even if such acts violate
another person's rights, the indemnifier is nonetheless bound to indemnify the promisee
for the implications of those conducts.

2. The duty to Indemnify the indemnity holder against all the costs 18

14
Wayne Courtney, “INDEMNITIES AND THE INDIAN CONTRACT ACT 1872”, (National Law School of India
Review, vol. 27, no. 1, 2015, pp. 66–88) < https://www.jstor.org/stable/44283647?seq=1> accessed on 3rd September
2023.
15
Nallappa Reddi v. Vridhachala Reddi, 1911 SCC OnLine.Mad 12 : ILR (1914) 37 Mad 270 : AIR 19Mad36
16
Wayne Courtney (n 14).
17
Ibid.
18
Kanvi Gupta, “Rights and duties of Indemnfier” (2021) Lawfoyer International Journal.

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Referring to section 125(2) of the Indian Contract Act 19, the indemnifier has an essential
duty to pay any costs that the indemnity-holder is obligated to pay in a litigation if he did
not violate the orders of the promisor. This duty is consistent with the primary goal of an
contract of indemnity , which is to minimise and relieve the financial losses sustained by
the indemnity holder. In essence, when costs related with an action involving the subject
matter of the indemnity occur, it is the indemnifier's responsibility to pay for these
costs20.

The indemnifier has an appropriate expectation that the indemnity holder will act in
accordance with the instructions of the indemnifier or in the manner in which they would
have done in the absence of the indemnity. This protects the interests and intentions of
the indemnifier while making it easier for the indemnity holder to execute their rights21.

The indemnifier's responsibility is clearly understood that they must pay all costs that the
indemnity holder is forced to pay in an action when the indemnity holder did not fail to
comply with the indemnifier's directives or instructions. This duty extends to
compensating any reasonably incurred expenditures expended while cutting, determining,
or opposing indemnification claims. The court case of Adamson v. Jarvis 22 provides as a
prime instance. Jarvis gave his cattle to Adamson for auction in this instance, without
being aware of the fact that Jarvis was not the actual owner of the cattle. When the
true owner claimed the animals, Adamson was forced to pay the real owner's damages.

3. The duty to indemnify for the amount payable by the indemnity holder in case of
compromise.23

19
The Indian Contract Act 1872, s125(2).
20
Pollock & Mulla, The Indian Contract Act, 1872 (16 ed. LexisNexis 2021).
21
Ibid.
22
Wayne Courtney, “INDEMNITIES AND THE INDIAN CONTRACT ACT 1872”, (National Law School of India
Review, vol. 27, no. 1, 2015, pp. 66–88) < https://www.jstor.org/stable/44283647?seq=1> accessed on 3rd September
2023.
23
Kanvi Gupta, “Rights and duties of Indemnfier” (2021) Lawfoyer International Journal.

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When the indemnity holder pays a certain sum of money to resolve or compromise a
legal dispute, referring to Section 125(3) of the Indian Contract Act 24, it imposes an
important duty on the indemnifier. In such cases, it is the indemnifier's solemn
responsibility for compensating the indemnity holder for the total amount of money paid
under the conditions of the compromise or arrangement. This duty of the
indemnifier stems from the basic idea of indemnity contracts, which is to give financial
security to the indemnity holder25.

A fundamental prerequisite for this duty of indemnifier for having an effect is that the
indemnity holder should act in the same way they would have acted if the indemnity had
not been in place. This condition emphasises the significance of the indemnity holder's
behaviour fitting with their usual course of action and interests, as if the indemnity did
not exist. Furthermore, the promisor, who is the indemnifier in this case, must explicitly
grant the permission to compromise the complaint26.

If the indemnity holder followed the directions indemnifier and paid all of the money that
was required under the conditions of the compromise in a litigation, they are clearly
entitled to compensation from the indemnifier. This entitlement represents the legal
notion that the indemnifier's responsibility is activated when the indemnity holder fulfils
certain circumstances, such as following the promisor's instructions.

27
In the legal dispute of Kali Charan vs. Durga Kunwar And Others (1913) , the court
issued an order requiring the indemnified party to repay the amount paid as a
compromise. This decision shows the court's acknowledgment of the indemnifier's
obligation to compensate the indemnity holder for amounts paid under a compromise.

The court emphasised in Venkatarangayya Appa Rao vs. Varaprasada Rao Naidu
(1920)28 that the indemnity holder has the right to all money that is paid as part of a
24
The Indian Contract Act 1872, s125(3).
25
Pollock & Mulla, The Indian Contract Act, 1872 (16 ed. LexisNexis 2021).
26
Ibid.
27
Wayne Courtney (n 14).
28
Ibid.

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compromise if certain conditions are met. These prerequisites include ensuring that the
compromise was made in good faith and without being considered an immoral
acceptance. This decision emphasises the importance of the indemnifier's obligation to
compensate the indemnity holder when settlements are reached in conformity with legal
as well as moral norms.

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CONCLUSION

Though not directly stated in the Indian Contract Act of 1872, the rights of an indemnifier in
India have been extensively moulded and clarified via judicial judgements and legal precedents.
The case of Jaswant Singh v. State was crucial in establishing indemnifiers' rights and
responsibilities, drawing analogies between their rights and those of sureties in contract of
guarantee situations.

In summary, the key rights of an indemnifier, as evolved through legal precedents, are as
follows:

 Subrogation Right : Similar to a guarantor, the indemnifier has the right to access
the property protected by the indemnity and to pursue various methods of
payment recovery.
 Right to Sue Third Parties: After fulfilling the indemnity contract's requirements,
the indemnifier acquires legal authority to sue accountable third parties.
 Compensate losses which are covered in the deed: The indemnifier's liability is
specifically established in the contract, limiting it to particular criteria such as the
maximum indemnification amount, covered damages, and indemnity period.

The Indian Contract Act, 1860, does not lay down any provision explicitly stating about the
duties of an indemnifier in the contract of indemnity. The rights of the indemnity holder as
mentioned in the section 125 of the Indian Contract Act is understood and regarded as the duties
of the indemnifier in a contract of indemnity.

Thus, the duties of the indemnifier are mentioned below:

 Duty to Cover Damages: According to Section 125(1) of the Act, the indemnifier
is has the legal duty to compensate for damages explicitly listed in the contract,
specifically those relating to the subject matter of the indemnity. The provisions
of the contract must be followed in order to fulfil this duty.

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 Duty to Cover Legal Costs: Pursuant to Section 125(2) of the Act, the indemnifier
is bound to pay for any legal expenses that the indemnity holder is obligated to
pay in litigation, providing the indemnity holder follows the promisor's
instructions.
 Duty to cover compromises : According to Section 125(3) of the Act, the
indemnifier is obligated to repay the indemnity holder for the full sum paid in the
case of a compromise or arrangement to settle a legal matter, provided that the
indemnity holder's conduct is same as they would without the indemnity

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BIBLIOGRAPHY

CASES

Venkatarangayya Appa Rao vs. Varaprasada Rao Naidu [1920] SCC OnLine Mad 129.......11

V. M. Rv. Ramaswami Chettiar v. R. Muthukrishna Iyer and Ors [1967] AIR 359.................6

Jaswant Singh v. The State 1966 CriLJ 451..............................................................................4

Kali Charan vs. Durga Kunwar and Others (1913)..................................................................11

Nallappa Reddi v. Vridhachala Reddi, 1911 SCC OnLine........................................................8

STATUTES

The Indian Contract Act 1872, s124..........................................................................................3

The Indian Contract Act 1872, s125..........................................................................................8

The Indian Contract Act 1872, s125(2)......................................................................................9

The Indian Contract Act 1872, s125(3)....................................................................................10

The Indian Contract Act s125(1)................................................................................................8

JOURNALS

B Priyanandhin, ‘RIGHTS OF INDEMNIFIERS’(Journal of Legal Research and Judicial

Services) <https://jlrjs.com/rights-of-indemnifiers/> accessed on 2nd September 2023........4

Kanvi Gupta, “Rights and duties of Indemnfier” (2021) Lawfoyer International Journal8, 9, 10

Wayne Courtney, “INDEMNITIES AND THE INDIAN CONTRACT ACT 1872”, (National
Law School of India Review, vol. 27, no. 1, 2015, pp. 66–88)
<https://www.jstor.org/stable/44283647?seq=1> accessed on 3rd September 2023.....passim

BOOKS REFERRED

Avtar Singh, CONTRACT & SPECIFIC RELIEF (10th edn, Eastern Book Company 2008)3, 8

Pollock & Mulla, The Indian Contract Act, 1872 (16 ed. LexisNexis 2021)......................9, 10

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