Contract of Indemnity - Meaning, Types, Example, Contract of Guarantee

Contract of Indemnity

Updated on Jul 02, 2025 05:38 PM IST

In a contract of indemnity, protection is provided to the party who has suffered a loss or injury because of the non-performance or breach of contract in Contract Law. The term contract of indemnity is derived from the Latin term, ’indemnis’ which means free from injury or loss. Mostly the contract of indemnity is used for business purposes for loss incurred. Businesses depend on the contacts of indemnity to play it safe and to avoid loss and damages from non-performance of any party or refusal to perform.

This Story also Contains

What is Contract of Indemnity?
Parties involved in a Contract of Indemnity
Essentials of Contract of Indemnity
Different Types of Indemnity
Rights Of The Indemnity Holder
Rights of the Indemnifier
When Can an Indemnifier be made liable to pay damages?
The Indian view of Contract of Indemnity
The English view of Contract of Indemnity
Contract of Guarantee
Features of the Contract of Guarantee
The difference between a Contract of Indemnity and a Contract of Guarantee
Case laws on Contract of Indemnity
Conclusion

Contract of Indemnity

What is Contract of Indemnity?

According to section 124 of the Indian Contract Act 1872 contract of indemnity is used by a party to save themselves from loss incurred due to non-performance by another party to a contract. This indemnity clause acts as a remedy or security against damages and injury.

Illustration-

X comes into a contract with Y to indemnify Y from the loss that Y is going to face because of the consequences of any court proceeding which amounts to Rs. 1000. In this case it can be said that the contract of indemnity.

In a contract of indemnity, one party promises to save the other party from loss caused due to firstly, by the misconduct of the promisor himself and secondly, by the misconduct of any other person to the contract.

Parties involved in a Contract of Indemnity

The contract of indemnity consists of two parties the one party who promises to compensate the other party for the loss incurred is known as indemnifier and the other party who is indemnified or has sustained the loss is called indemnity holder. The indemnifier takes the responsibility to protect the rights of the indemnity holder and compensates for the loss incurred.

Essentials of Contract of Indemnity

In a contract of indemnity, the indemnifier who is the one who compensates the party who has sustained loss is called the indemnity holder. A contract of indemnity occurs when a party suffers a loss due to the non-performance of either party to a contract. Here, are the essential conditions required to constitute a contract of indemnity-

There should be two parties involved in a contract to constitute the contract of indemnity.
There should be a valid offer that should be made by the offerer and a valid acceptance to constitute a contract of indemnity.
To constitute a contract of indemnity the contract should be expressed or implied in nature.
The contract should be on a legal object and should be according to the law.
To constitute a contract of indemnity the parties involved in the contract should be competent enough to enter into a contract.
The purpose of a contract of indemnity is to protect the party who has sustained loss or damages.
One of the important elements of a contract of indemnity is that the other party is only liable when another party sustains a loss.
The indemnity holder has all the right to compel the indemnifier to pay for the loss that he has sustained.

Different Types of Indemnity

1. Express indemnity

Express indemnity also known as written indemnity. As the name goes is a written contract, not an oral one. In an express indemnity, all the rules and conditions are mentioned in a contract. The contract of express indemnity consists of all the rights obligations and duties of the parties. An indemnity Attorney needs to be present while drafting a contract of expressed indemnity.

2. Implied Indemnity

Implied indemnity is opposite to that of expressed authority as in an expressed authority all the terms and conditions are written down in a contract whereas in an implied indemnity contract the terms and conditions are not written down. The facts, actions and conduct of the parties lead to obligation in an implied indemnity contract. The master-servant relationship is one example of an implied indemnity contract.

Rights Of The Indemnity Holder

The indemnity holder is the one who has sustained the loss due to the non-performance of the other party to a contract. Section 125 of the Indian Contract Act 1872 deals with the right of the indemnity holder. The rights of the indemnity holder are mentioned below-

He may be compelled to pay all the damages as promised in the contract.
The cost and damages which he has to pay in a suit if it is filed against him while defending it. He cannot contravene his duties.
The damages he has to pay under the terms and conditions if a suit is filed against him or if there is any provision of compromise in the contract. And if the compromise does not match the orders laid down by the promisor he has to pay if there were no provision of contract of indemnity.

Rights of the Indemnifier

Indminifer is the one who pays for the damages or loss sustained due to breach of contract to the indemnifier who has sustained the loss. The indemnifier is liable to pay the damages to the indemnity holder for the loss that he has sustained. Here, are the rights of the indemnifier-

After the indemnifier has done with his duties which means once he has paid for the damages to the aggrieved party that is the indemnity holder then the indemnifier has all the right to protect the indemnity holder’s rights. Once the indemnifier pays the damages to the indemnity holder the compensator has all the rights that can save the indemnity holder from damages
The contract of indemnity will only work if the indemnity holder has sustained any loss or injury.
The indemnifier is bound to indemnify the indemnity holder within a period.
The Bombay High Court In the case of Gajanan Moreshwar v. Moreshwar Madan (1942) it was held that the liability is on the indemnifier to indemnify the indemnity holder within a certain period. And the indemnity holder can compel the indemnifier to pay the damages.

When Can an Indemnifier be made liable to pay damages?

As given in the English common law an indemnifier cannot be made liable unless and until the indemnity holder suffered any loss or damages. In many cases, such a situation arrived when the indemnity holder was not in a position where the indemnity holder couldn't pay the damages. This makes it clear that it is the responsibility of an indemnifier to compensate the indemnity holder only when the indemnity holder has sustained a loss or damage due to a breach of contract.

According to a decision of the Lahore and Nagpur High Court, an indemnity holder can only be indemnified if he has sustained a loss.

In the case of State Bank of India v. Mula Shakari Sakhar Karkhana Ltd.

In this case, the respondent a cooperative society entered into a contract with M/s Pentagon Engineering Pvt. Ltd for the establishment of a paper plant. As per the conditions of the agreement the Pentagon Engineering Company set a bank for the release of the indemnity. The operative section of the bank guarantee documents is written as ‘to indemnify the Mula Shakari Sakhar Karkhana Ltd. from the losses and damages sustained and the supplier will be liable for the damages incurred.

Disputes arose between the party and as the dispute arose the respondent as a result terminated the contract made to establish a paper plant and invoked the guarantee provided by the bank against the Pentagon Engineering Company. Saying that it was the contract of indemnity not a contract of guarantee.

The apex court in this case held that the claim made in exchange for the termination of the contract needed to be paid by the bank without any loss occurring or not.

The Indian view of Contract of Indemnity

Section 124 of the Contract Act 1872 that the sole objective of the contract of indemnity is to indemnify the indemnity holder against the loss or damage sustained by the the indemnity holder. According to Indian law, a contract of guarantee is not included in the contract of indemnity. Thus the contract of insurance does not come under the purview of section 124 of the Indian Contract Act 1872 which is a contract of indemnity.

The Indian view of the contract of Indemnity is narrower compared to the English view of the contract of indemnity. Thus under Indian law, the indemnifier is liable to pay compensation to the indemnity holder for the damages and the loss incurred due to breach of contract.

The English view of Contract of Indemnity

The English view of the contract of indemnity is broader than the Indian view of the contract of indemnity. Under English law, the contract of indemnity can be implied or expressed. Under English law, a person who is in a contract of indemnity or is about to enter into a contract of indemnity will be saved from any loss or damages that occur. Thus, according to English law contract of indemnity means saving the indemnity holder from all harmful consequences of a breach of a contract.

Under English law, the indemnity clause has been given a wider meaning, in which an indemnifier will be liable to indemnify the indemnity holder from loss or damages incurred due to an act by human agency which is not in the case of Indian law. Also under English law, a contract of insurance comes under the contract of indemnity.

Contract of Guarantee

Section 126 of the Indian Contract Act deals with the contract of Guarantee. The contract of guarantee might be different from the contract of indemnity but both are governed by the Indian Contract Act 1872.

According to the definition of contract of guarantee incorporated under section 126 of the Indian Contract Act 1872 a contract of guarantee is a contract where a promise is performed to discharge the liability of a third person in case the third person does any default.

Illustration-

X takes a loan from a bank. And X promises the bank to repay the loan amount. Y is a friend of X and he promises to the bank that if X fails to repay the loan Y will repay the loan on X’s behalf. According to this X is the principal debtor, who takes the loan, and Y is the surety who does not have any primary liability his liability is secondary. Later if X fails to repay the loan amount to bank Y the surety will repay the loan on X’s behalf hence protecting the right of X. In this case, the bank is the creditor.

In a contract of guarantee, there are three parties involved, at first, comes the principal debtor who makes a promise to the creditor to perform the promise he has made. Secondly, comes the surety who undertakes the liability to perform the promise if the principal debtor fails to do so. Thirdly, the surety discharges the promise and the principal debtor has to indemnify the surety for the same.

Features of the Contract of Guarantee

1. A contract of guarantee might be written or oral-

Section 126 of the Indian Contract Act 1872 says that a contract of guarantee can be a written contract or an oral contract. According to English law, a contract of guarantee will only be considered valid if it is in writing and signed by both the party on the other hand in India a contract of guarantee can be written or oral.

2. Presence of a principal debtor is necessary-

In a contract of guarantee a principal debtor is essential to be present. The surety will be liable if the principal debtor fails or refuses to discharge the obligation. In cases where there is no such principal debtor, one party promises to compensate the other party in a situation where the other party cannot pay it.

3. The Benefit to the principal debtor is of sufficient consideration

Consideration is an important essential in any contract formed, consideration is also essential in a contract of guarantee. In a contract of guarantee, there must be a direct consideration between the surety and the creditor. To constitute a sufficient consideration the creditor must benefit the principal debtor.

4. The surety’s consent shouldn't be obtained by misrepresentation

In a contract of Guarantee, the creditor should not obtain a guarantee with the help of misinformation or misorientation of documents or facts related to the transaction. A guarantee which is obtained through unfair means is invalid.

The difference between a Contract of Indemnity and a Contract of Guarantee

No.	Contract of Guarantee	Contract of Indemnity
1	The contract of guarantee consists of three parties to a contract. The principal, the creditor and the debtor.	There are only two parties involved in a contract of indemnity. The indemnifier and the indemnity holder.
2	There are a total of three contracts in the case of a contract guarantee. That is firstly, between the principal debtor and the creditor. Secondly, between the creditor and the surety and lastly, between the principal debtor and the surety.	There is only one contract in the case of a contract of indemnity. That is between the indemnifier and the indemnity holder.
3	The liability of the surety is secondary and the primary liability falls on the debtor.	The liability of the indemnifier is primary.
4	The liability of the surety depends on the default of the principal debtor.	The liability of the identifier is not dependent on anyone's default.
5	In a contract of guarantee, the surety after he pays the amount can recover it from the debtor.	In a contract of indemnity, the identifier has no way of recovering the compensation or the damages paid.

Case laws on Contract of Indemnity

In the case of United India Insurance Co. v. Ms Annan Singh Munshilal (1994)

In the following case, there was a consignment that was to be stored at a godown which was the route to the final destination. As the goods were stored in the godown a fire took place at the godown and the fire destroyed the goods. The goods said that it was lost in transit, and the insurance company on which the insurance of the goods was made was held liable to pay compensation for the loss.
The Supreme Court in this case held that the remedy of the contract of indemnity would not apply in this situation as the goods got destroyed due to fire and this comes under the provisions of the contingent contract.

In the case of Chand Bibi v. Santosh Kumar Pal.

In the following case, the father of the defendants while acquiring rights of a property had made a promise to indemnify the plaintiff if the plaintiff is proven to be accountable for the debt. Later on, the plaintiff filed a suit against the father of the defendant as the father failed to pay the obligation of a mortgage. However, the suit was only against the non-perfromance of the obligations as the plaintiff did not sustained any loss.
The court in this case held that as the plaintiff did not sustain any loss the contract of indemnity is not applicable here.

Conclusion

In a contract of indemnity, protection is provided to the party who has suffered a loss or injury because of the non-performance or breach of contract. The term indemnity is derived from the Latin term,’indemnis’ which means free from injury or loss. Mostly the contract of indemnity is used for business purposes for loss incurred. Businesses depend on the contacts of indemnity to play it safe and to avoid loss and damages from non-performance of any party or refusal to perform. To conclude this it can be said that the contract of indemnity acts as a remedy for the loss incurred by the indemnity holder.

Frequently Asked Questions (FAQs)

1. What is an indemnity contract?

2. What are the types of indemnity contracts?

There are two types of indemnity contracts they are:

Express indemnity
Implied indemnity

3. What is a contract of Guarantee?

4. Why is implied indemnity?

5. Who are the two parties involved in a contract of indemnity?

6. Can a contract of indemnity cover past losses?

Generally, a contract of indemnity is forward-looking and covers future losses. However, parties can agree to indemnify for past losses if explicitly stated in the contract.

7. Are there any limitations on what can be indemnified?

Yes, there are limitations. Contracts cannot indemnify against illegal acts, criminal penalties, or losses arising from the indemnity holder's own fraud or willful misconduct. Public policy also restricts certain types of indemnification.

8. What is the "contra proferentem" rule in interpreting indemnity clauses?

The "contra proferentem" rule states that ambiguous terms in a contract should be interpreted against the party who drafted the contract. This is particularly relevant in indemnity clauses to ensure fairness.

9. How does the "but for" test apply to contracts of indemnity?

The "but for" test is used to determine causation in indemnity claims. It asks: "But for the actions of the indemnifier, would the loss have occurred?" If the answer is no, the indemnifier may be liable.

10. Can an indemnity clause be enforced if it's not in writing?

While it's always best to have indemnity agreements in writing, oral indemnity agreements can be enforceable in some jurisdictions. However, proving the terms of an oral agreement can be challenging.

11. What is the difference between "narrow" and "broad" form indemnity?

Narrow form indemnity covers losses caused solely by the indemnifier's negligence. Broad form indemnity covers all losses, including those partially caused by the indemnity holder's negligence.

12. What is a "hold harmless" clause, and how does it relate to indemnity?

A "hold harmless" clause is a specific type of indemnity provision that protects one party from liability for damages or losses. It's often used in conjunction with indemnity clauses to provide broader protection.

13. What is a "knock-for-knock" indemnity agreement?

A "knock-for-knock" indemnity is common in oil and gas industries where each party agrees to indemnify the other for any claims brought by their own employees, regardless of fault.

14. Can an indemnity clause be unilateral?

Yes, an indemnity clause can be unilateral, where only one party agrees to indemnify the other. However, many commercial contracts include mutual indemnity provisions.

15. Can an indemnity clause cover intellectual property infringement?

Yes, indemnity clauses can cover intellectual property infringement. This is common in software licenses and technology contracts to protect against third-party IP claims.

16. What are the essential elements of a valid contract of indemnity?

The essential elements include: (1) a promise to compensate for loss, (2) the loss must be one that the promisee may suffer, (3) the contract must be valid under general contract law principles, and (4) the indemnity must not be against public policy.

17. What is a "carve-out" in indemnity agreements?

A carve-out is an exception to the indemnity obligation. It specifies certain types of losses or circumstances that are not covered by the indemnity, even if they would otherwise fall within its scope.

18. What is the role of "severability" clauses in indemnity agreements?

Severability clauses state that if one part of the indemnity agreement is found to be unenforceable, the rest of the agreement remains valid. This helps preserve the overall intent of the indemnity provision.

19. What is the significance of "consequential damages" in indemnity clauses?

Consequential damages are indirect losses resulting from a breach. Indemnity clauses often specify whether these are included or excluded from coverage, as they can significantly increase potential liability.

20. How does the doctrine of "unconscionability" apply to indemnity clauses?

Courts may refuse to enforce indemnity clauses that are deemed unconscionable, meaning they are so one-sided or unfair as to be against public policy. This is particularly relevant in contracts with unequal bargaining power.

21. What is a "back-to-back" indemnity arrangement?

A back-to-back indemnity arrangement is where a party passes on its indemnity obligations to another party, often a subcontractor. This ensures that the ultimate risk-bearer is the party best placed to manage that risk.

22. How does the principle of "unjust enrichment" relate to indemnity agreements?

The principle of unjust enrichment may prevent an indemnity holder from recovering more than their actual loss, even if the indemnity agreement seems to allow it. This ensures that indemnity doesn't become a source of profit.

23. What is the significance of "notice requirements" in indemnity agreements?

Notice requirements specify when and how an indemnity holder must inform the indemnifier of a potential claim. Failure to comply with these requirements may limit or void the indemnity obligation.

24. How does the concept of "privity of contract" affect third-party rights in indemnity agreements?

Privity of contract generally means that only parties to a contract can enforce its terms. This can limit third-party rights under indemnity agreements unless specific provisions are made for third-party beneficiaries.

25. How does the principle of "good faith" apply to indemnity agreements?

The principle of good faith requires parties to act honestly and fairly in exercising their rights under the indemnity agreement. This can affect how courts interpret and enforce indemnity provisions.

26. What is a "blanket indemnity" clause?

A blanket indemnity clause provides broad, general protection against all losses or liabilities, rather than specifying particular risks. While comprehensive, these clauses may be more likely to face challenges in court.

27. What is the "principle of subrogation" in relation to indemnity contracts?

Subrogation is the right of the indemnifier to stand in the place of the indemnity holder and claim any rights or remedies the indemnity holder may have against third parties related to the loss.

28. What is a "step-in right" in relation to indemnity agreements?

A step-in right allows the indemnifier to take over the performance of the indemnity holder's obligations to mitigate potential losses. This is often seen in construction and project finance contracts.

29. How does the "duty to defend" relate to indemnity agreements?

The duty to defend is often included in indemnity agreements. It requires the indemnifier to take over the defense of any claims covered by the indemnity, in addition to paying any resulting damages.

30. How does the "prevention principle" apply to indemnity agreements?

The prevention principle states that a party cannot benefit from its own breach. In indemnity contexts, this means an indemnifier cannot rely on the indemnity if their actions prevented the indemnity holder from complying with the contract.

31. How does the concept of "novation" affect indemnity agreements?

Novation involves replacing an original contract with a new one. If an indemnity agreement is novated, the original indemnifier's obligations may be transferred to a new party, potentially affecting the indemnity holder's rights.

32. Can a contract of indemnity be implied?

Yes, a contract of indemnity can be either express or implied. An implied contract of indemnity arises from the relationship between the parties or the circumstances of the case.

33. Can an indemnity clause cover legal costs?

Yes, an indemnity clause can cover legal costs, including attorney fees and court expenses. However, this should be explicitly stated in the contract to avoid ambiguity.

34. What is a "time limit" clause in an indemnity contract?

A time limit clause specifies a period within which the indemnity holder must notify the indemnifier of a claim. Failure to do so within the specified time may void the indemnity.

35. How does bankruptcy affect indemnity agreements?

Bankruptcy can complicate indemnity agreements. The bankruptcy court may treat the indemnity obligation as an unsecured claim, potentially limiting or voiding the indemnity.

36. How does the statute of limitations apply to indemnity claims?

The statute of limitations for indemnity claims often begins when the indemnity holder suffers the loss, not when the indemnity agreement was made. However, this can vary by jurisdiction.

37. What is a "survival clause" in relation to indemnity provisions?

A survival clause specifies that the indemnity obligation continues even after the contract terminates. This ensures protection for losses that may arise after the contract ends but relate to events during the contract period.

38. How does "comparative fault" affect indemnity agreements?

In jurisdictions with comparative fault laws, the indemnity obligation may be reduced proportionally to the indemnity holder's degree of fault, unless the contract explicitly states otherwise.

39. How does the concept of "gross negligence" affect indemnity clauses?

Many jurisdictions do not allow indemnification for gross negligence or willful misconduct. Attempts to indemnify against such actions may be deemed unenforceable as against public policy.

40. How does the principle of "proximate cause" apply to indemnity claims?

Proximate cause is used to determine if a loss is sufficiently related to the indemnified risk. The indemnifier is typically only responsible for losses that are a foreseeable result of the indemnified event.

41. What is a "reciprocal" indemnity clause?

A reciprocal indemnity clause is one where both parties agree to indemnify each other, often for similar types of losses or risks. This is common in commercial contracts between parties of equal bargaining power.

42. How does a contract of indemnity differ from a contract of guarantee?

In a contract of indemnity, there are two parties (indemnifier and indemnity holder), and the liability is primary. In a contract of guarantee, there are three parties (creditor, principal debtor, and surety), and the liability is secondary.

43. What is the difference between "indemnity" and "insurance"?

While both involve protection against loss, insurance is a formal contract where the insurer agrees to compensate for specified losses in exchange for premiums. Indemnity is broader and can exist without regular payments or a formal insurance policy.

44. What is the difference between "indemnify" and "hold harmless"?

While often used together, "indemnify" typically means to compensate for a loss, while "hold harmless" means to protect from liability. Together, they provide comprehensive protection.

45. How does the concept of "joint and several liability" interact with indemnity clauses?

In cases of joint and several liability, each party can be held fully responsible for the entire obligation. Indemnity clauses may address how this liability is allocated between parties in multi-party agreements.

46. What is the difference between "first-party" and "third-party" indemnity?

First-party indemnity covers losses suffered directly by the indemnity holder. Third-party indemnity covers losses the indemnity holder becomes liable to pay to a third party.

47. What is a contract of indemnity?

A contract of indemnity is an agreement where one party promises to compensate the other for loss or damage that may occur in the future. It's essentially a promise to protect someone from financial harm.

48. What is the concept of "mitigation of loss" in indemnity contracts?

Mitigation of loss requires the indemnity holder to take reasonable steps to minimize the loss or damage. Failure to mitigate may reduce the amount recoverable under the indemnity.

49. Can an indemnity clause cover punitive damages?

In many jurisdictions, indemnification for punitive damages is against public policy and therefore unenforceable. However, some jurisdictions may allow it if explicitly stated in the contract.

50. What is a "cap" in indemnity agreements?

A cap is a maximum limit on the amount of indemnification. It's often used to provide certainty and limit potential liability for the indemnifier.

51. What is a "basket" in indemnity agreements?

A "basket" is a threshold amount of losses that must be incurred before the indemnification obligation is triggered. It's used to avoid disputes over minor losses.

52. What is the "express negligence" doctrine?

The express negligence doctrine requires that an intent to indemnify a party for its own negligence must be specifically and conspicuously stated in the contract. It's used in some jurisdictions to protect against unfair indemnity provisions.

53. What is a "follow-form" indemnity agreement?

A follow-form indemnity agreement is one that follows the terms and conditions of another agreement, typically an insurance policy. It's often used in reinsurance contracts.

54. What is the significance of "choice of law" clauses in indemnity agreements?

Choice of law clauses specify which jurisdiction's laws will govern the interpretation and enforcement of the indemnity agreement. This can be crucial as indemnity laws vary significantly between jurisdictions.

55. How does the concept of "materiality" apply to breaches of indemnity agreements?

Materiality thresholds in indemnity agreements specify that only breaches that have a significant impact will trigger the indemnity obligation. This helps prevent disputes over minor or technical breaches.