Drafting, Pleadings and Appearances · Commercial Contract Management

Contract of Indemnity under Section 124 of the Indian Contract Act

Updated 11 October 2026 · Fact-checked

A contract of indemnity under Section 124 is a contract in which one party promises to save the other from loss caused by the promisor's own conduct or by anyone else's conduct. To answer a question, identify the promisor and promisee, the loss, the cause, and the rights under Section 125. Then conclude.

Understand Contract of Indemnity (Section 124)

Start with the idea. In an indemnity, one person agrees to make good another person's loss. The person who promises is the indemnifier (promisor). The person protected is the indemnity-holder (promisee, also called indemnified). The loss can arise from the indemnifier's own conduct or from the conduct of any other person. Section 124 says exactly this.

The Section 124 illustration is the standard one. 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. Here the loss may come from C, a third party, and A promises to cover it.

It is still a contract. So the essentials in Section 10 must be present: free consent, competent parties, lawful consideration, lawful object, and it must not be expressly declared void. An indemnity to cover an unlawful act fails on the lawful object test. An exam answer should check this before moving on.

Section 125 gives the rights of the indemnity-holder when sued. Acting within the scope of his authority, he can recover from the promisor three things: (1) all damages he is compelled to pay in any suit on a matter covered by the indemnity; (2) all costs he is compelled to pay in such a suit, if he did not contravene the promisor's orders and acted as prudently as he would without any indemnity, or if the promisor authorised him to bring or defend the suit; (3) all sums paid under a compromise of such a suit, if the compromise was not contrary to the promisor's orders and was one a prudent person would make without any indemnity, or if the promisor authorised it.

In commercial practice, indemnity appears as a clause in share purchase agreements, supply contracts, service agreements and leases. Drafting is about defining what is covered, what is excluded, how claims are notified and who controls the defence. Do not confuse indemnity with guarantee. A guarantee is a three-party arrangement under Section 126 to perform the promise or discharge the liability of a third person in case of his default. An indemnity is typically between two parties.

Key rules to remember

Contract of indemnity (Section 124): Promise to save the other from loss caused by the promisor's own conduct or by the conduct of any other person; Two parties: indemnifier (promisor) and indemnity-holder (promisee). The loss source can be the promisor or any other person.
Rights of indemnity-holder (Section 125): Recover: (1) damages paid in suit + (2) costs paid in suit + (3) sums paid under compromise; The promisee must act within the scope of his authority. Damages need the matter to be covered by the indemnity.
Condition for costs (Section 125(2)): No contravention of promisor's orders AND acted prudently as without indemnity, OR promisor authorised the suit; Read as: either the prudence route or the authorisation route.
Condition for compromise sums (Section 125(3)): Compromise not contrary to promisor's orders AND prudent without indemnity, OR promisor authorised it; Same two-route test as costs.
Contract of guarantee (Section 126): Contract to perform the promise, or discharge the liability, of a third person in case of his default; Involves surety, principal debtor and creditor. May be oral or written.

How to solve Contract of Indemnity (Section 124) questions

Use this order for any problem or drafting question on indemnity. It keeps your answer in the provision, analysis, conclusion format.

1Identify the parties: who promises to save whom from loss, and who else is involved.
2State the Section 124 definition in one line and match it to the facts: promise to save from loss, caused by promisor or any other person.
3Check the Section 10 essentials: free consent, competent parties, lawful consideration, lawful object.
4Identify what the indemnity-holder has paid or been compelled to pay: damages, costs, or compromise sums.
5Apply Section 125 to each item. For costs and compromise, test prudence and promisor's orders or authorisation.
6If the question mixes guarantee and indemnity, separate them using Section 126: is there a principal debtor and a default?
7For drafting questions, set out the clause: scope, exclusions, notice, defence control, settlement consent, cap and survival.
8Conclude clearly: what the indemnity-holder can recover and what he cannot.

Quickest way: Four-line indemnity check

When to use it: Use when time is short and the question asks whether a claim succeeds or what the indemnity-holder can recover.

Line 1: Quote Section 124 and name the indemnifier and indemnity-holder.
Line 2: List each amount claimed as damages, costs or compromise.
Line 3: Test each under Section 125, noting the prudence and authorisation conditions.
Line 4: Give the final recoverable amount with a one-line reason for each item allowed or refused.

Common mistakes in Contract of Indemnity (Section 124)

Treating every indemnity as a guarantee, or the reverse.
Both protect against loss, so they look alike.
Fix: Use Section 126: a guarantee involves a third person's default and three parties. An indemnity is a promise to save from loss, usually between two parties.
Saying indemnity covers only loss caused by the promisor.
Students read the definition partially.
Fix: Section 124 covers loss caused by the conduct of the promisor himself or by the conduct of any other person.
Allowing all costs and compromise sums automatically.
Students remember the heads but forget the conditions in Section 125(2) and (3).
Fix: Always test whether the promisee acted prudently and without contravening the promisor's orders, or whether the promisor authorised the step.
Ignoring the requirement that the promisee acts within the scope of his authority.
The opening words of Section 125 are skipped.
Fix: Begin the analysis with the words acting within the scope of his authority and check the facts against it.
Drafting a vague indemnity clause such as 'seller will indemnify buyer for all losses'.
Students copy generic wording without thinking about scope.
Fix: Define covered losses, link them to specific breaches or events, add exclusions, a notice procedure, defence control and a cap where agreed.
Forgetting that an indemnity is a contract needing a lawful object.
Students focus on the special rules and skip the basics.
Fix: State the Section 10 essentials in one line and note that an indemnity for an unlawful object cannot be enforced.

Worked examples

Example 1

Asha Traders agrees in writing to indemnify Bharat Logistics against any claim that Chandra Pvt Ltd may bring against Bharat Logistics for non-delivery of goods that Asha Traders failed to supply. Chandra Pvt Ltd sues Bharat Logistics and obtains a decree for damages. Can Bharat Logistics recover the decree amount from Asha Traders?

Show the solution

Provision: Section 124 defines a contract of indemnity as a promise to save the other from loss caused by the promisor's own conduct or by the conduct of any other person.
Facts: Asha Traders (promisor) promised to save Bharat Logistics (promisee) from consequences of proceedings by Chandra Pvt Ltd. This matches the Section 124 illustration pattern.
Validity: assume consent, competence, consideration and lawful object under Section 10 are present on these facts.
Section 125(1): the indemnity-holder, acting within the scope of his authority, can recover all damages he is compelled to pay in any suit in respect of a matter to which the promise to indemnify applies.
Application: the suit concerns non-delivery of goods, which is the matter covered by the promise. The decree for damages was compelled, not voluntary.
Conclusion: Bharat Logistics can recover the decree damages from Asha Traders.

Answer: Yes. This is a contract of indemnity under Section 124, and under Section 125(1) Bharat Logistics can recover from Asha Traders the damages it was compelled to pay in the suit.

Example 2

Under an indemnity given by Dev Industries, Eka Finance defends a suit by a third party without informing Dev Industries, and incurs legal costs of ₹4,00,000. Eka Finance acted as a prudent person would have acted even without any indemnity, and did not disobey any order of Dev Industries. Can Eka Finance recover the costs?

Show the solution

Provision: Section 125(2) allows recovery of all costs the promisee was compelled to pay in such a suit.
Condition: either the promisee did not contravene the promisor's orders and acted as it would have been prudent to act without any indemnity, or the promisor authorised the suit.
Facts: there was no authorisation, so the first route is needed. The facts say Eka Finance acted prudently and did not contravene any orders.
Notice: Section 125 as given does not state prior intimation as a condition, so lack of information alone does not bar recovery. In a real contract, a notice clause could add such a condition.
Also confirm the suit concerns a matter to which the promise to indemnify applies and that Eka Finance acted within the scope of its authority. Assume yes on these facts.
Conclusion: the conditions of Section 125(2) are met.

Answer: Yes. Eka Finance can recover the ₹4,00,000 costs under Section 125(2), because it acted prudently and did not contravene Dev Industries' orders. Any contractual notice requirement would be a separate matter for the agreement's terms.

Exam tips

Quote Section 124 and Section 125 in your own words early. Examiners reward correct provisions before analysis.
In case-based questions, tabulate each amount as damages, costs or compromise and test each one separately.
For difference between indemnity and guarantee, anchor on Section 126: third person's default, surety, principal debtor and creditor.
For drafting questions, give a ready clause with scope, exclusions, notice, defence control, settlement consent and survival, then explain each element briefly.
Close every answer with a clear conclusion stating what can be recovered and why.

Practice questions from Commercial Contract Management

Contract of Indemnity (Section 124) 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 (Section 124): 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 person protected is the indemnity-holder.

What are the rights of the indemnity-holder?

Under Section 125, acting within the scope of his authority, he can recover damages he is compelled to pay in a suit, costs he is compelled to pay, and sums paid under a compromise. Costs and compromise sums are subject to the prudence and authorisation conditions.

What is the difference between indemnity and guarantee?

A guarantee under Section 126 is a contract to perform the promise or discharge the liability of a third person in case of his default, and involves a surety, principal debtor and creditor. An indemnity is a promise to save the other from loss, typically between two parties.

How should an indemnity clause be drafted in a commercial contract?

Define the losses covered and link them to specific breaches or events. Add exclusions, a claim notice process, who controls the defence, the need for consent before settlement, any agreed cap, and whether the clause survives termination.