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Fundamentals of Business Laws and Business Communication · Meaning of Indemnity, Guarantee, Pledge, Agent

Contract of Indemnity under Sections 124 and 125

Updated 10 October 2026 · Fact-checked

A contract of indemnity is a contract in which one party (the indemnifier) promises to save the other (the indemnity-holder) from loss caused by the promisor's own conduct or by any other person's conduct. It is defined in Section 124. Section 125 lists the rights of the indemnity-holder. In MCQs, identify the parties, the loss and the right.

Understand Contract of Indemnity

Indemnity means protection against loss. In a contract of indemnity, one person promises to make good a loss that the other person may suffer. The key idea is simple: the loss is shifted from one person to another by a promise.

Section 124 of the Indian Contract Act, 1872 says that 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, is a contract of indemnity. So the loss can come from the promisor's own act or from a third person's act.

There are two parties. The indemnifier (promisor) is the person who promises to make good the loss. The indemnity-holder (indemnified or promisee) is the person who is protected. Example: Rohan asks Meera to deliver goods to a buyer he names and promises to cover any loss she suffers from doing so. Rohan is the indemnifier and Meera is the indemnity-holder. There is no debtor in this arrangement, so it is not a guarantee.

An indemnity is a contract, so all essentials of a valid contract must be present: offer, acceptance, free consent, lawful consideration and so on. It may be express or implied. An example of implied indemnity is an agent who acts on the principal's instructions and the principal must cover the agent's loss from those lawful acts.

The Section 124 definition is limited to loss caused by human conduct, that is, the conduct of the promisor or of any other person. In English law, indemnity has a wider sense that also covers losses from events or accidents, such as fire or marine perils. The Indian Contract Act does not adopt that wider sense. Insurance contracts are not covered by Sections 124-125 as per the Act; they are governed by the Insurance Act and by special principles.

Key formulas to remember

Definition of indemnity (Section 124)
Promise to save the other from loss caused by the promisor's conduct or by the conduct of any other person
This is the test. If there is a promise to make good a loss caused by human conduct, it is indemnity.
Parties
Indemnifier = promisor (gives the promise); Indemnity-holder = promisee (is protected)
Questions often ask who is who. The one who promises to compensate is the indemnifier.
Rights of indemnity-holder (Section 125)
Can recover from the promisor: (1) all damages he is compelled to pay in any suit in respect of any matter to which the promise to indemnify applies; (2) all costs he is compelled to pay in any such suit, if in bringing or defending it he did not contravene the promisor's orders and acted as he would have done if there had been no contract of indemnity, or if the promisor authorised him to bring or defend the suit; (3) all sums paid under a compromise of the suit, if the compromise was not contrary to the promisor's orders and was prudent, or was authorised by the promisor
The right arises when he is acting within the scope of the indemnity. Remember the three heads: damages, costs, compromise sums. Damages need the suit to be on a matter covered by the promise; costs and compromise sums carry extra conditions.
Nature of the contract
Indemnity = a contract with two parties; the promise is to compensate for loss
Guarantee has three parties. Keep the two-party versus three-party contrast ready.

How to solve Contract of Indemnity questions

Use this method for any question on indemnity, whether it is a definition, a parties question or a rights question.

  1. 1Read the facts and look for a promise to make good or compensate a loss.
  2. 2Name the promisor. This is the indemnifier.
  3. 3Name the person who is protected. This is the indemnity-holder.
  4. 4Check the source of the loss: the promisor's conduct or someone else's conduct. Both are covered by Section 124.
  5. 5If the question is about rights, match the claim to Section 125: damages paid in a suit, costs of the suit, or compromise sums.
  6. 6Check the conditions: was the suit or compromise within the scope of the indemnity, prudent, and not against the promisor's orders?
  7. 7Pick the option that fits your reasoning and eliminate the others.

Quickest way: Promise, loss, claim in three checks

When to use it: Use this when you have under a minute per MCQ and the options look similar.

  1. Find the words 'promises to make good' or 'save from loss'. If found, it is indemnity.
  2. Count the parties. Two means indemnity. Three, with a creditor, means guarantee.
  3. For a rights question, ask: damages, costs or compromise? Choose the option that names one of these, with the condition of prudence or authority.

Common mistakes in Contract of Indemnity

  • Confusing indemnity with guarantee.

    Both involve a promise about someone's loss or default.

    Fix: Indemnity has two parties and the promise is to cover loss. Guarantee has three parties: creditor, principal debtor and surety.

  • Swapping indemnifier and indemnity-holder.

    Students pick the person who suffers the loss as the indemnifier.

    Fix: The indemnifier is the one who promises. The indemnity-holder is the one who is protected and receives compensation.

  • Thinking loss must be caused only by the promisor.

    The words 'conduct of the promisor' are remembered but the rest is forgotten.

    Fix: Section 124 also covers loss caused by the conduct of any other person.

  • Saying the indemnity-holder can recover costs of any suit.

    The conditions in Section 125 are skipped.

    Fix: The suit must relate to a matter covered by the indemnity. Costs are recoverable if in bringing or defending the suit he did not contravene the promisor's orders and acted as he would have done if there had been no contract of indemnity, or if the promisor authorised him to bring or defend it.

  • Treating a compromise payment as always recoverable.

    Students overlook the limit on compromise.

    Fix: Compromise sums are recoverable only if the compromise was not contrary to the promisor's orders and was prudent, or was authorised by the promisor.

Worked examples

Example 1

Anil asks Bina to deliver goods to a buyer named by him and promises, 'If you suffer any loss by doing so, I will make good that loss.' Who is the indemnifier and who is the indemnity-holder? Choose: (a) Anil indemnifier, Bina indemnity-holder (b) Bina indemnifier, Anil indemnity-holder (c) Both are indemnifiers (d) Neither, as it is a guarantee

Show the solution
  1. Find the promise to make good the loss: Anil makes it.
  2. The promisor is the indemnifier, so Anil is the indemnifier.
  3. The person protected from loss is Bina, so she is the indemnity-holder.
  4. There are only two parties and no debtor-creditor-surety structure, so it is indemnity and not guarantee.

Answer: (a) Anil is the indemnifier and Bina is the indemnity-holder.

Example 2

Ravi asks Sunita to sell goods that he claims to own and promises to indemnify her against any loss. The true owner sues Sunita. She defends the suit prudently, as she would in her own affairs, and is made to pay ₹20,000 as damages and ₹3,000 as costs. What can she claim from Ravi under Section 125?

Show the solution
  1. Identify the matter: the suit arises from an act done at Ravi's request, which is within the indemnity.
  2. Damages Sunita was compelled to pay: ₹20,000, recoverable.
  3. Costs of the suit: recoverable because she acted prudently, as in her own affairs.
  4. Total claim = ₹20,000 + ₹3,000 = ₹23,000.

Answer: Sunita can recover ₹23,000 from Ravi: ₹20,000 damages and ₹3,000 costs.

Exam tips

  • Learn the two-party versus three-party contrast between indemnity and guarantee. It is a regular MCQ pivot.
  • Memorise the three heads of Section 125: damages, costs, compromise sums. Watch for the conditions in each.
  • If an option says loss is caused only by the promisor, treat it as wrong because Section 124 covers other persons as well.
  • Read the party names carefully. Many MCQs just ask who is the indemnifier.
  • With no negative marking, attempt every question. Eliminate the options that mention a surety or creditor and you are likely left with indemnity.

Practice questions from Meaning of Indemnity, Guarantee, Pledge, Agent

Contract of Indemnity in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Contract of Indemnity: frequently asked questions

What is a contract of indemnity under Section 124?

It is a contract in which one party promises to save the other from loss caused by the promisor's own conduct or by the conduct of any other person. It has two parties, the indemnifier and the indemnity-holder.

What are the rights of the indemnity-holder under Section 125?

Acting within the scope of the indemnity, he can recover damages he is compelled to pay in a suit on a matter covered by the promise, the costs of that suit, and sums paid under a compromise. Costs need that he did not contravene the promisor's orders and acted as he would have done without the indemnity, or that the promisor authorised the suit. Compromise sums need that the compromise was not contrary to the promisor's orders and was prudent, or was authorised.

How is indemnity different from guarantee?

Indemnity involves two parties and a promise to make good a loss. Guarantee involves three parties: creditor, principal debtor and surety, and the surety promises to answer for the debtor's default.

Is a contract of indemnity valid if it is oral?

Yes. Indemnity can be express or implied, and the Indian Contract Act does not require it to be in writing. All the essentials of a valid contract still need to be present.