Suppose you hire a contractor for your office renovation. In the middle of work, a worker hurts the store that’s mistakenly next to. The neighbour sues you because the property is in your name. You never touched the wall. But legally, you’re on the hook. Now imagine that before the project began, the contractor signed a clause promising to cover any loss you suffer because of their work. That clause is your safety net. That is indemnity in action.
In Indian law, this safety net has a specific legal shape. This is included in Section 124 and 125 of the Indian Contract Act, 1872—these are two brief provisions that have been holding judicial interpretations for decades. This article describes in detail what the actual meaning of ‘contract of indemnity’, how much its scope is, what is its purpose, and what is the status of law in this regard in 2026.
What Is a Contract of Indemnity?
The Section 124 Definition:
Section 124 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”.
Break that down, and you get three moving parts:
The indemnifier (promisor): The party who makes the promise to cover the loss.
The indemnity holder (promisee): The party protected against the loss.
The trigger: Loss caused by human conduct—either the indemnifier’s own actions or someone else’s.
A simple illustration makes it concrete. Party A agrees to indemnify Party B against any claims a third party brings against B because of A’s actions. If that third party sues and B has to pay, A must make B whole.
This definition is narrow. Deliberately so. And that narrowness is the source of both its clarity and its complications.
The Scope of Indemnity
What It Covers and What It Doesn’t
Express Indemnity
Most indemnity arrangements you encounter in practice are express—written into a contract. Agreements related to infrastructure, share purchase contracts, loan documents and insurance policies—all have provisions of indemnity. Their scope completely depends on how these provisions are prepared. The well-prepared provision can cover third party claims, regulatory penalty, tax demands and legal proceedings expenses.
Implied Indemnity
The Indian Contract Act says nothing about implied indemnity. But courts have stepped in. In Secretary of State v. Bank of India (1938) , the court recognised that an indemnity obligation could arise from the nature of a relationship—particularly agency—even without an express clause. If you act at someone’s request and that act lands you in legal trouble, the law may imply a promise that they will protect you.
The Human Conduct Limitation
Here’s where Section 124 gets awkward. On a strict reading, a promise to cover losses from fire, flood, or a storm at sea is not a contract of indemnity under the Act—because those losses don’t flow from human conduct. English law treats almost every insurance contract except life insurance as indemnity. Indian law splits non-human risks into a different category altogether.
In practice, courts and insurers work around this. But the gap remains.
The Timing Question
When Can You Actually Claim?
For decades, the rule was simple: you had to suffer actual loss before enforcing an indemnity. That made little commercial sense. Why should a protected party have to empty their bank account before calling on the protection they bargained for?
Gajanan Moreshwar v. Moreshwar Madan (1942) changed this. The court assumed that once the liability is completely fixed or its coming, a person who is convicted can force the compensated, to take action—even if not paid right now. The Supreme Court reiterated this theory in the ‘VPS Healthcare vs Prabhat Kumar Srivastava (2026)’ case. The court ruled that the liability of compensation immediately applies when forced to deposit sums in court, and that it does not need to wait for the final appellate confirmation.
That shift—from post-loss reimbursement to anticipatory protection—is one of the most important developments in Indian indemnity law.
Rights of the Indemnity Holder Under Section 125
Section 125 gives the indemnity holder three specific rights when sued:
Damages: Recover all damages they are compelled to pay in a suit.
Costs: Recover litigation costs, provided they acted within their authority.
Compromise sums: Recover amounts paid to settle a suit, as long as the settlement was prudent and not contrary to the indemnifier’s instructions.
Notice what’s missing. The Act gives the indemnifier no corresponding rights—no right to take over the defence, no right to approve settlements. Courts have filled this gap through equitable principles, but the statutory silence creates uncertainty.
Objectives
Why Contracts of Indemnity Exist
1. Risk Allocation
Indemnity is, at its core, a risk-transfer tool. It moves a defined financial exposure from the party least equipped to bear it to the party best positioned to manage it. In a construction contract, the contractor indemnifies the owner against third-party injury claims. In an M&A deal, the seller indemnifies the buyer against pre-closing tax liabilities. The goal isn’t punishment. It’s predictable allocation.
2. Protection Against Contingent Liability
Indemnity protects against something that might happen. A lawsuit may never come. A tax demand may never arrive. But if it does, the indemnity holder shouldn’t have to bear it alone. This is why indemnity clauses often sit alongside warranties and exclusions—each tool handles a different slice of uncertainty.
3. Commercial Certainty
When parties know who bears which risk, they can price the deal accurately. An indemnity clause reduces the need for excessive due diligence or conservative pricing. It builds trust into complex transactions.
4. The Insurance Principle
Insurance is the most known form of indemnity. Its theory is simple: the insured person should be brought back to the economic situation before damage—not in a better situation than that, nor in a worse situation than that. The Supreme Court again clarified in the ‘United India Insurance Company Limited vs Hyundai Engineering and Construction Company Limited (2024)’ case that insurance is a contract for indemnification compensation. Therefore, the insurance company cannot be asked to compensate for any loss that has not been mentioned in the policy.
Indemnity vs Guarantee: A Distinction That Matters
People confuse indemnity with guarantee all the time. The difference is liability.
In an indemnity, the indemnifier’s liability is primary. They step into the shoes of the loss-bearer directly. In a guarantee, the surety’s liability is secondary—it arises only when the principal debtor defaults.
The Supreme Court clarified the difference in the case ‘State Bank of India vs Mohammad Sakhar factory’, saying that the bank guarantee works differently from indemnity; as the bank’s responsibility is not primary, but dependent on the default of the borrower.
This matters in insolvency, litigation strategy, and contractual drafting. Get the characterisation wrong, and you may be enforcing the wrong obligation against the wrong party.
What Courts Are Saying in 2024–2026
Strict Construction of Insurance Indemnity
In the United India Insurance vs Hyundai (2024), the Supreme Court said that the ‘Exclusion Clause’ (implification terms) should be read very strictly in insurance contracts and means to be taken against the insurance company. The responsibility to prove that a completely insurance company is of the company that any ‘exclusion clauses’ applies. The court also clarified that the surveyor’s report is a reliable evidence, until any better evidence is presented in contrast.
Immediate Trigger for Indemnity
The VPS Healthcare decision (2026) is the most significant recent ruling. The Court set aside a Delhi High Court judgment that had deferred indemnity enforcement until the underlying liability was confirmed by the highest appellate court. The Supreme Court held that when the indemnity holder incurs an absolute liability—like a compelled deposit to stay execution—the indemnifier’s obligation kicks in immediately.
The lesson for drafters: courts will read the plain words of your clause. If you want to defer liability, say so explicitly.
The Statutory Gap Is Getting Harder to Ignore
Despite these judicial developments, the statutory framework remains thin. The Law Commission of India, in its 13th Report, recommended expanding Section 124 to cover losses from “any event whatsoever,” including acts of God, and adding a provision for anticipatory indemnity. Those recommendations have never been implemented.
Now commentators argue that the codified law of compensation in India is very limited to modern commerce, as well as a comprehensive framework of laws made by judges that are not properly consolidated. The parties make fierce conversations on compensation segments, but they don’t get any solid official guidance for legal proceedings on them. Due to this uncertainty the money is wasted and deals are slow.
Practical Takeaways
Draft clearly. If you want indemnity to cover regulatory action, tax demands, or indirect losses, write it down. Courts will not stretch Section 124 beyond what it says.
Know the trigger. Under current judicial interpretation, absolute liability—not actual payment—can activate the indemnity. Do not assume you must pay first.
Separate indemnity from guarantee. The liability structure differs. Mischaracterising the clause can affect enforcement and insolvency claims.
Watch the insurance gap. Non-human perils sit awkwardly within Section 124. If your indemnity covers fire or flood, frame it carefully to avoid classification disputes.
Final Word
A contract of indemnity is not a minor boilerplate clause. It is a risk-management instrument that decides who absorbs the financial shock when things go wrong. India’s statutory definition is old and narrow. The courts have extended it to a considerable extent to conform to modern trade, and so many times very impressively. But the difference between what’s written in law and the needs of the market is still quite big. Unless the legislature intervenes in this, the law of indemnity in India will remain in the case between written provisions and court interpretations.
