Why India must overhaul its indemnity Jurisprudence

Indemnity clauses today sit at the very heart of commercial contracting in India. They are negotiated with extraordinary intensity in infrastructure projects, energy and mining concessions, mergers and acquisitions, shareholder arrangements, EPC contracts, ESG-linked transactions and cross-border investments.

Despite this centrality, the law governing indemnity in India remains one of the most uncertain and under-theorised areas of contract law. This uncertainty does not arise from a lack of statutory recognition, for indemnity is expressly codified in the Indian Contract Act, 1872, but from the widening gap between what the statute says and how courts have actually applied the concept over the last eight decades.

The Indian Contract Act defines indemnity narrowly in Section 124 as a contract by which one party promises to save the other from loss caused by the conduct of the promisor or the conduct of any other person. Section 125, in turn, limits the rights of the indemnified to recovery of damages paid, litigation costs and compromise amounts. On a plain reading, indemnity under the Act appears confined to loss arising from human conduct and enforceable only after actual loss has been suffered. Modern commercial practice, however, bears little resemblance to this conception. Indemnities today routinely cover losses arising from regulatory action, tax demands, environmental penalties, third-party claims, statutory liabilities and even future or contingent exposures, often long before any payment is made.

This divergence between codified law and commercial reality did not occur accidentally. It is the product of sustained judicial intervention, beginning well before Independence. Indian courts have consciously expanded the scope of indemnity by importing equitable principles from English common law. One of the earliest recognitions of this approach can be found in Secretary of State v. Bank of India (1938), where the Bombay High Court accepted that indemnity obligations could arise by implication from the nature of the transaction, particularly in agency relationships, even where no express indemnity existed. This already marked a departure from a literal reading of Section 124.

The decisive doctrinal shift came a few years later in Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942), a decision that remains the cornerstone of Indian indemnity jurisprudence even today. The Bombay High Court held that an indemnity holder is not required to wait until he has actually suffered loss or made payment before enforcing an indemnity. Once liability becomes absolute or imminent, the indemnifier can be compelled to place the indemnified in a position to meet that liability. In arriving at this conclusion, the Court explicitly relied on English equitable principles, observing that indemnity is fundamentally protection against liability, not merely reimbursement after damage.

This reasoning was subsequently reinforced by the Privy Council in Osman Jamal & Sons Ltd v. Gopal Purushottam, which recognised that an indemnity-holder may call upon the indemnifier to save him from the consequences of liability even before actual loss occurs. Together, these decisions effectively rewrote the law of indemnity in India, transforming it from a narrow statutory concept into a broad, commercially responsive obligation. The irony, however, is that this transformation occurred almost entirely outside the text of the Contract Act.

Over time, courts have continued to apply this expanded understanding without formally reconciling it with the statute. Indemnity has been enforced for statutory liabilities, regulatory penalties and third-party claims in circumstances where recovery would almost certainly fail if tested against Section 73 of the Contract Act, which governs damages for breach of contract. Section 73 incorporates the familiar principles of remoteness, foreseeability and mitigation, derived from Hadley v Baxendale. Yet indemnity claims, when properly framed, have been treated as primary contractual obligations rather than secondary compensatory remedies, thereby escaping the constraints of Section 73 altogether.

This judicial approach has undoubtedly served commercial convenience, but it has also produced doctrinal confusion. Parties and practitioners remain uncertain whether indemnity claims are subject to the same limitations as damages, whether liability caps apply equally to indemnities, whether indemnity and damages can coexist for the same breach and when limitation periods begin to run. These questions are negotiated extensively at the drafting stage, often at great cost and complexity. Yet, they remain inadequately addressed by authoritative judicial pronouncement.

What is particularly striking is that despite indemnity being one of the most heavily negotiated clauses in modern contracts, there is a conspicuous absence of reported Indian decisions dealing with complex commercial indemnities. Most of the law continues to rest on a handful of pre-Independence and early post-Independence cases, many of which arose in contexts far removed from today’s sophisticated commercial transactions.

Apart from insurance-related disputes, where indemnity operates as a foundational principle, there is little contemporary jurisprudence examining indemnity clauses in large infrastructure or cross-border contracts. As a result, the business community operates in a paradoxical space where indemnity is both critically important and legally opaque.

The statutory landscape further complicates matters. Indemnity appears in several other Indian statutes including the Companies Act, 2013, which permits indemnification of directors and officers; the Sale of Goods Act, 1930, which recognises a buyer’s right to indemnity in certain circumstances; and various tax, customs and environmental laws that impose indemnity-like obligations. Courts generally treat these as self-contained statutory regimes, largely independent of Sections 124 and 125 of the Contract Act. This reinforces the impression that indemnity in Indian law is not a single coherent doctrine, but a collection of loosely connected concepts operating under different legal logics.

Comparative experience offers useful perspective. English law, from which Indian indemnity jurisprudence has drawn so heavily, does not attempt codification at all. Indemnity remains a common law and equitable concept, flexible and responsive, but also supported by a deep body of precedent that provides guidance on its application. In the United States, indemnity is closely linked with tort and contribution principles, with many states providing statutory clarity on its scope and limits. Singapore, whose contract law is often cited as a model for commercial certainty, places heavy emphasis on the precise wording of indemnity clauses, with courts consistently respecting express carve-outs from damages caps and limitation provisions. Civil law jurisdictions such as Germany and France, while not recognising indemnity in the common law sense, achieve functional clarity through codified reimbursement and guarantee doctrines.

India’s position is unusual. It has a codified law of indemnity that is too narrow for modern commerce, alongside a body of judge-made law that is expansive but insufficiently consolidated. The result is legal uncertainty that increases transaction costs, encourages over-drafting and creates unpredictability in dispute resolution. From the perspective of arbitration, this uncertainty is particularly problematic. Tribunals are often required to decide whether indemnity claims should be treated as contractual debt, damages, or something in between, with little guidance beyond a handful of ageing authorities.

Legal certainty must be recognised as a form of economic infrastructure. Predictable and coherent contract law is essential for attracting investment, facilitating large-scale projects and reducing dispute volumes. Clarifying the law of indemnity would be a modest but meaningful step in this direction. Such clarification could take several forms: legislative amendment to Sections 124 and 125 to reflect contemporary commercial practice; authoritative restatement by the Supreme Court reconciling indemnity with Section 73; or even model contractual guidance issued through institutional mechanisms.

What is no longer tenable is the current state of affairs, where indemnity operates in a twilight zone between statute and equity - negotiated fiercely but understood imperfectly; enforced broadly but explained narrowly. The evolution of indemnity law in India is a testament to judicial ingenuity, but it also highlights the limits of judicial adaptation in the absence of legislative engagement. If India’s contract law is to support its economic ambitions, indemnity can no longer remain an area governed by implication, assumption and inherited doctrine. It must be brought into the light, clarified and aligned with the realities of modern commerce.

In the end, indemnity is not merely a contractual clause. It is a mechanism for allocating risk, pricing capital and enabling trust in complex transactions. In a developing economy aspiring to global leadership, such mechanisms deserve clarity, not confusion.

Dr Sanjeev Gemawat is the Managing Director and Group General Counsel at Essar Group.