Contracts & Practice Notes
This article has been written by Adv. Saumya Bhasin, Bhasin Legal Solutions, Kanpur.
Introduction
Indemnity clauses appear in almost every commercial contract — vendor agreements, service contracts, leases, even simple NDAs — yet they’re routinely the least-read, least-negotiated part of the document. Most people register it as boilerplate. In reality, an indemnity clause can shift financial exposure entirely onto one party, sometimes far beyond what the contract’s main obligations would suggest. This piece breaks down what indemnity actually means in Indian contract law, the leading judicial authority on it, how it differs from a simple damages claim, and what to check before signing.
1. What an Indemnity Clause Actually Does
An indemnity clause is a promise by one party to compensate the other for a specified loss, liability, or damage — regardless of whether that loss arises from a breach of the contract itself. This is the key distinction from ordinary damages: a damages claim requires proving breach and resulting loss; an indemnity, once triggered, can obligate payment even without any breach by the indemnifying party, depending on how it’s drafted.
2. The Statutory Basis: Section 124, Indian Contract Act, 1872
Indemnity contracts are addressed under Section 124 of the Indian Contract Act, 1872, which defines a contract of indemnity as one where one party promises to save the other from loss caused by the conduct of the promisor, or by the conduct of any other person. Indian courts have generally read this definition narrowly compared to English common law, which recognises a broader category of indemnity beyond Section 124’s specific wording — meaning the exact drafting of the clause matters more in India than a generic “indemnity” heading might suggest.
3. The Leading Authority: Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri
The foundational Indian authority on indemnity remains Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, AIR 1942 Bom 302 (Bombay High Court, decided 1 April 1942, per M.C. Chagla, J.). Although a High Court decision, it has been consistently followed and cited with approval in Indian indemnity law ever since, and remains the starting point for understanding how far Section 124 actually protects an indemnity-holder.
The case arose from a dispute where the plaintiff had mortgaged his own property at the defendant’s request to secure the defendant’s debts, and later sought to be released from that liability before actually paying anything out of pocket. The defendant argued the claim was premature since no actual loss had yet occurred.
The Court rejected this, holding that an indemnity-holder need not wait until they have actually suffered and discharged a loss before enforcing the indemnity. Where the indemnity-holder has incurred a liability that is absolute and certain, they can call upon the indemnifier to save them from that liability by paying it off directly — rather than being forced to pay first and seek reimbursement afterward. This significantly strengthens the practical value of an indemnity clause for the party holding its benefit.
4. The Scope Problem: “Any and All Losses”
The most common issue isn’t the existence of an indemnity clause — it’s its scope. Broad language like “any and all losses, damages, costs, and expenses whatsoever” can capture indirect and consequential losses that a party never intended to accept. A well-negotiated clause specifies: direct losses only, a cap on total liability, and carve-outs for losses caused by the other party’s own negligence or misconduct.
5. Indemnity vs. Limitation of Liability
These two clauses interact, and often conflict. A limitation of liability clause caps total exposure under the contract; an indemnity clause, if drafted broadly and without reference to that cap, can sometimes be read as an exception to it — effectively creating unlimited liability through the back door. Any contract with both clauses needs them cross-referenced explicitly, or one will likely undermine the other in a dispute.
6. Common Red Flags
- Indemnity that isn’t capped at all, anywhere in the contract
- No mutual indemnity — only one party indemnifies the other, with no reciprocal protection
- Indemnity triggered by “any breach,” however minor, rather than material breach
- No exclusion for losses caused by the indemnified party’s own negligence
Frequently Asked Questions
Is an indemnity clause always enforceable in India?
Not automatically. Courts examine whether the clause is unconscionable, against public policy, or so one-sided as to be unreasonable, particularly in consumer or employment contexts.
Can an indemnity clause cover something illegal?
No. An indemnity promising to cover losses arising from an unlawful act is generally unenforceable, since a contract cannot indemnify against the consequences of illegality.
Do I have to actually pay a loss before I can enforce an indemnity?
Not necessarily. As established in Gajanan Moreshwar Parelkar, if the liability is absolute and certain, the indemnity-holder can call upon the indemnifier to discharge it directly, rather than paying out of pocket first and seeking reimbursement later.
Should every contract have an indemnity clause?
Not necessarily. Its inclusion should match the actual risk allocation intended by both parties — a blanket indemnity added “just in case” often does more harm than good to the party accepting it.
Our View
In our experience reviewing commercial contracts, the indemnity clause is where the real risk allocation of a deal actually lives — far more than the headline payment or termination terms. Parties routinely accept broad, uncapped indemnity language because it “looks standard,” without appreciating that it can be the single largest financial exposure in the entire agreement. Before signing anything with an indemnity clause, get it read against the rest of the contract specifically for scope, caps, and interaction with any limitation-of-liability provision.
— Adv. Saumya Bhasin, Bhasin Legal Solutions
Conclusion
Indemnity clauses are not boilerplate — they are often the true risk-allocation mechanism of a contract, and their exact wording determines whether that risk is bounded or effectively unlimited. Understanding the distinction between indemnity and damages, the practical strength an indemnity-holder has under Gajanan Moreshwar Parelkar, and checking scope, caps, and interaction with any limitation-of-liability clause is essential before signing any commercial agreement.
References: Indian Contract Act, 1872 (Section 124); Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, AIR 1942 Bom 302.
Disclaimer: This article has been published for general informational and educational purposes only. It does not constitute legal advice, and should not be relied upon as such. Nothing on this page is intended to solicit work or advertise the professional services of Bhasin Legal Solutions or any of its advocates, in accordance with the Bar Council of India Rules governing advertising and solicitation by legal practitioners in India. Readers seeking advice on a specific legal matter are encouraged to consult a qualified advocate directly.
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