Business Laws and Ethics · Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency

Contract of Indemnity under Section 124 of the Contract Act

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 anyone else's conduct (Section 124). To solve a question, identify the promise, the loss and its cause, then apply the rights in Section 125.

Understand Contract of Indemnity

Think of indemnity as a promise to make good a loss. One person says to another, "If you suffer a loss in this matter, I will cover it." The person who gives the promise is the indemnifier (promisor). The person who is protected is the indemnity-holder (promisee, also called the indemnified).

Section 124 defines it: 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. So the loss can come from two sources: the promisor's own acts, or a third party's acts. The Act's own illustration: A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

A contract of indemnity involves only two parties: the indemnifier and the indemnity-holder. This is the key contrast with a guarantee, which is defined in Section 126 as a contract to perform the promise, or discharge the liability, of a third person in case of his default. A guarantee has three parties (surety, principal debtor, creditor). Indemnity protects against loss; guarantee protects against default of a third person.

It is still a contract. It needs the usual essentials of a valid contract, such as free consent, lawful consideration and lawful object. Section 125 then gives the indemnity-holder specific rights when he is sued. These rights apply only when he acts within the scope of his authority.

In the exam, most questions ask you to define indemnity, list the rights under Section 125, or compare indemnity with guarantee. Practical problems give a short story and ask whether the indemnity-holder can recover damages, costs or compromise money.

Key rules to remember

Definition of indemnity (Section 124): Promise to save the other from loss caused by the promisor's own conduct or the conduct of any other person; Two parties: indemnifier and indemnity-holder. The loss may be caused by the promisor or by a third party.
Right to damages (Section 125(1)): Recover all damages he is compelled to pay in any suit in respect of any matter to which the promise to indemnify applies; The suit must relate to a matter covered by the promise, and the holder must be acting within the scope of his authority.
Right to costs (Section 125(2)): Recover all costs he is compelled to pay in the suit, if (he did not contravene the promisor's orders AND acted as a prudent person would without any indemnity) OR the promisor authorised him to bring or defend the suit; Two alternative routes to recovery. Either route is enough.
Right to compromise sums (Section 125(3)): Recover all sums paid under a compromise, if (the compromise was not contrary to the promisor's orders AND was prudent without any indemnity) OR the promisor authorised the compromise; Same two-route structure as costs.
Indemnity versus guarantee: Indemnity: 2 parties, protects against loss. Guarantee (Section 126): 3 parties, performs the promise or discharges the liability of a third person on his default; Use this as the base of any comparison answer.

How to solve Contract of Indemnity questions

Use this method for any question on contract of indemnity. It keeps your answer in the order examiners look for.

1Identify the parties. Name the indemnifier (who promised to save from loss) and the indemnity-holder (who is protected). Confirm there are only two parties.
2Match the promise to Section 124. State that the promise is to save the other from loss caused by the promisor's conduct or by another person's conduct.
3Identify the loss. Note whether it is damages in a suit, legal costs, or money paid in a compromise.
4Check that the matter falls within the promise to indemnify, and that the holder acted within the scope of his authority.
5Apply the correct limb of Section 125. For damages: recover all, if within the promise. For costs and compromise: test the two alternative conditions (no contravention of orders plus prudence, or authorisation).
6Apply the facts to each condition. Say clearly whether the promisor gave orders, whether the act was prudent, and whether authority was given.
7Conclude in one line: the holder can or cannot recover, and how much.

Quickest way: Three-check shortcut for Section 125 problems

When to use it: Use when a problem states that the indemnity-holder was sued and asks what he can recover, and you have only a few minutes.

Check 1: Is the suit about a matter the indemnity covers? If yes, damages are recoverable in full.
Check 2: For costs, ask: did he disobey the indemnifier and was he imprudent? If no disobedience and he acted prudently, or if the indemnifier authorised the suit, costs are recoverable.
Check 3: For compromise, ask the same two questions about the compromise. Contrary to orders or imprudent, with no authorisation, means no recovery.
Write the conclusion with the section number: Section 125(1), 125(2) or 125(3).

Common mistakes in Contract of Indemnity

Treating indemnity as a three-party contract like guarantee
Both deal with protecting someone from loss, so they get mixed up.
Fix: Remember: indemnity has two parties; guarantee has three (surety, principal debtor, creditor) and is about default of a third person under Section 126.
Saying indemnity covers only loss caused by a third party
Textbook examples often show third-party claims.
Fix: Section 124 covers loss caused by the conduct of the promisor himself or of any other person. Quote both.
Claiming costs and compromise money automatically
Students remember damages are recoverable and assume the same for all three.
Fix: Damages need only that the matter is within the promise. Costs and compromise sums need the conditions in Section 125(2) and (3): no contravention of orders plus prudence, or authorisation.
Writing 'and' where the Act gives alternatives
The sub-sections are long, and the 'or if the promisor authorised' limb gets dropped.
Fix: Write both routes. Authorisation by the promisor is enough on its own for costs and for compromise.
Ignoring the 'scope of authority' condition
Students focus on the three rights and skip the opening words of Section 125.
Fix: Begin the application with: the indemnity-holder was acting within the scope of his authority, so he is entitled to recover.

Worked examples

Example 1

Rohan agrees to indemnify Meera against any proceedings that Sunil may take against Meera for a sum of ₹50,000. Sunil sues Meera, and the court orders Meera to pay ₹50,000 as damages. Can Meera recover this from Rohan?

Show the solution

Parties: Rohan is the indemnifier; Meera is the indemnity-holder. There are two parties.
Section 124: Rohan promised to save Meera from loss caused by the conduct of another person (Sunil's proceedings). This is a contract of indemnity.
The loss is damages of ₹50,000 which Meera was compelled to pay in a suit.
The suit concerns the very matter to which the promise to indemnify applies, and Meera is acting within the scope of her authority.
Under Section 125(1), the indemnity-holder can recover all damages he is compelled to pay in such a suit.

Answer: Yes. Meera can recover the ₹50,000 damages from Rohan under Section 125(1).

Example 2

Anil indemnifies Bhavna against a claim by Chetan. Chetan sues Bhavna. Bhavna defends the suit without telling Anil, spends ₹20,000 on legal costs, and acts as a prudent person would even without an indemnity. Anil had given no orders about the suit. Later Bhavna settles the remaining claim by paying ₹1,00,000, though Anil had expressly told her not to compromise, and Anil had not authorised the settlement. What can Bhavna recover for costs and for the settlement?

Show the solution

Anil is the indemnifier and Bhavna the indemnity-holder. The contract fits Section 124.
Costs, Section 125(2): she must show that she did not contravene the promisor's orders and acted as a prudent person would without any indemnity, or that the promisor authorised the suit.
Anil gave no orders about the suit, so none were contravened. Bhavna acted prudently. The first route is satisfied, so the ₹20,000 costs are recoverable.
Compromise, Section 125(3): the compromise must not be contrary to the promisor's orders and must be prudent, or the promisor must have authorised it.
Anil expressly told her not to compromise, so the compromise was contrary to his orders. He did not authorise it. Neither route is satisfied.
So the ₹1,00,000 paid under the compromise cannot be recovered under Section 125(3).

Answer: Bhavna can recover the ₹20,000 costs under Section 125(2), but not the ₹1,00,000 paid under the compromise, because it was contrary to Anil's orders.

Exam tips

Begin every answer with the Section 124 definition in your own words, then add the Act's illustration if you remember it. It earns the first marks quickly.
For a 'rights of indemnity-holder' question, use three headings: damages, costs, compromise. Add the section number against each.
When asked for difference between indemnity and guarantee, cover number of parties, purpose, liability, and the nature of the promise. Use Section 124 and Section 126 as anchors.
In MCQs, look for the number of parties and the type of promise. Two parties and a promise to make good a loss points to indemnity. A promise to answer for a third person's default points to guarantee.
In problems, state the facts against each condition (orders, prudence, authorisation) in one line each. That is where step marks are awarded.

Practice questions from Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency

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 by 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. The promisor is the indemnifier and the protected party is the indemnity-holder.

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

When acting within the scope of his authority, he can recover damages he is compelled to pay in a suit on the matter covered, costs of the suit, and sums paid under a compromise. Costs and compromise sums are recoverable only if the conditions in Section 125(2) and (3) are met.

What is the difference between indemnity and guarantee?

Indemnity is a promise to save from loss and involves two parties. A guarantee under Section 126 is a contract to perform the promise or discharge the liability of a third person on his default, and involves three parties: surety, principal debtor and creditor.

Can the indemnity-holder recover costs if the indemnifier did not authorise the suit?

Yes, if he did not contravene the indemnifier's orders and acted as a prudent person would have acted without any indemnity. If the indemnifier authorised the suit, that alone is enough.