UNIVERSITY OF LUCKNOW
FACULTY OF LAW
COURSE : LL.B ( Integrated 5 years)
SUBJECT : CONTRACTS
TOPIC - CONTRACT OF INDEMNITY : DEFINITIONS &
ESSENTIALS
a project submitted to
Submitted to: Submitted by:
Dr. Anurag Srivastava Name: Aafiya Khan
Roll No.: 2410013015156
ACKNOWLEDGEMENT
The success and outcome of this project required a lot of guidance and assistance from
many people and I am extremely privileged to have got this all along the completion of
my project. All that I have done is only due to such supervision and assistance and I
would not forget to thank them all. I respect and thank Dr. Anurag sir for providing me an
opportunity to do the project work and giving us all support and guidance, which made
me complete the project duly. I am extremely thankful to him for providing such a nice
support, although he had busy schedule managing the academic affairs. I am thankful to
and fortunate enough to get constant encouragement and guidance from all teaching staff
which helped me in successfully completing our project work. Also, I would like to
extend our sincere esteem to all for their timely support.
INDEX
Introduction..............................................................................................................................3
Meaning of Privity of Contract...............................................................................................3
Essentials of Privity of Contract.............................................................................................4
Role of consideration in Privity of Contract..........................................................................4
Position in India :.......................................................................................................................5
Exceptions to the Doctrine of Privity of Contract.................................................................6
1. Beneficiary/Trust....................................................................................................................6
2. For Family arrangement.........................................................................................................6
3. Acknowledgement or Estoppel..............................................................................................7
4. Laws relating to Negotiable Instruments................................................................................8
5. Contract with an Agent...........................................................................................................8
6. Covenants running with land..................................................................................................8
7. Assignee in insurance policy..................................................................................................9
Conclusion...............................................................................................................................10
Bibliography...........................................................................................................................11
Introduction
A promise, when added with the consideration, becomes an agreement and when the
agreement gets enforceability by law, it is said to be a Contract. 1 The essence of the Law of
Contract lies in the promise which both parties have made towards each other for fulfilling
their part of the contract. There are different types of contract like contingent contract,
wagering contract, contract of guarantee, contract of indemnity etc. A contract of indemnity
basically involves one party promising the other party to make good its losses. These losses
may arise either due to the conduct of the other party or that of somebody else. To indemnify
something basically means to make good a loss. In other words, it means that one party will
compensate the other in case it suffers some losses.
In the old English law, Indemnity was defined as “a promise to save a person harmless from
the consequences of an act. Such a promise can be express or implied from the circumstances
of the case”. This view was illustrated in the case of Adamson vs Jarvis2. In this case, the
plaintiff, an auctioneer, sold certain goods upon the instructions of a person. It turned out that
the goods did not belong to the person and the true owner held the auctioneer liable for the
goods. The auctioneer, in turn, sued the defendant for indemnity for the loss suffered by him
by acting on his instructions. It was held that since the auctioneer acted on the instructions of
the defendant, he was entitled to assume that if, what he did was wrongful, he would be
indemnified by the defendant.
Meaning of Contract of Indemnity
The Contract of indemnity meaning is a special kind of contract. The term indemnity literally
means security or protection against a loss or compensation. According to Section 124 of the
Indian Contract Act, 1872:
“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 called a contract of
indemnity”3.
1
Indian Contract Act, 1872, sec 2(h)
2
Adamson v. Jarvis (1872) 4 BING 66
3
Indian Contract Act, 1872, sec 124
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 Rs 200. This is a contract of indemnity.
There are generally two parties in indemnity contracts:
- The person who promises to indemnify for a loss, i.e Indemnifier, and
- The person whose losses the indemnifier promises to make good, i.e Indemnity Holder or
Indemnified.
Indemnifier is the person who promises to compensate for the loss if any. Indemnifier is also
known as promisor. Indemnity Holder is the person in whose favour indemnifier makes the
promise, and is also known as a promisee or indemnified.
The objective of entering into a contract of indemnity is to protect the promisee against
unanticipated losses.
Essentials of Contract of Indemnity
There are certain essentials of the Contract of Indemnity as listed below:-
1. Parties to a Contract
There must be two parties to the contract essentially, namely, promisor or indemnifier and
the promisee or indemnified or indemnity-holder.
2. Protection of Loss:
A contract of indemnity is entered into for the purpose of protecting the promisee from the
loss. The loss may be caused due to the conduct of the promisor or any other person.
3. Valid Contract
The basic and the first requirement for the doctrine of privity of contract to come into play is
the existence of a valid contract. According to Section 10 of Indian Contract Act 1872, for a
contract to exist between the parties, there must be free consent of parties competent to
contract, bound by a lawful consideration and with a lawful object.
4. Number of Contracts:
In a contract of Indemnity, there is only one contract that is between the Indemnifier and the
Indemnified
Indemnity was restricted only to the loss occured by human agency only. In Gajanan
Moreshwar v. Moreshwar Madan4, it was stated the definition of indemnity covers
indemnity for loss caused by human agency only. It does not deal with those classes of cases
where the indemnity arises from loss caused by events or accidents which do not or may not
depend upon the conduct of the indemnifier or any other person, or by reason of liability
incurred by something done by the indemnified at the request of the indemnifier.
5. Contract of indemnity does not cover accidents:
The contract of indemnity mostly covers the cases of insurance like water or fire insurance
but it does not deal with life insurance of any person.
Role of consideration in Privity of Contract
Section 2(d) of the Indian Contract Act, 1872 explains the meaning of the consideration as an
act done at the desire of the promisor. Consideration is an important element of a legally
binding contract. Consideration refers to exchange of something of value between the parties
to a contract. As a general rule, a person who has not provided consideration for an agreement
cannot sue under contract law to enforce it. Therefore, there must be the existence of valid
consideration for a contract to be made.
The rule of privity of consideration is followed in the English law and states that the
consideration must move from the parties of the contract only. In Indian law, there is scope
that consideration can move from a third party who is stranger to the contract. The rule under
Indian law allows consideration to be provided either by the promisee or any other person.
In the landmark case of Chinnaya v. Ramayya5, The case involves a gift deed wherein a
lady transferred her property, consisting of certain lands, to her daughter (the defendant)
through a registered deed of gift, in exchange of a payment of an annual sum of Rs. 653/- to
the lady’s sister (the plaintiff).The defendant failed to make the payments as agreed, leading
the plaintiff to file a lawsuit for the recovery of the amount.
The court held that in the agreement between the defendant and the plaintiff, the
consideration has already been furnished by the defendant’s mother and that is enough
consideration to enforce the promise between the plaintiff and the defendant.
4
Gajanan Moreshwar v. Moreshwar Madan, (1942) MAD 303
5
Chinnaya v. Ramayya,(1876) 4 MAD 137
Position in India :
Even though under the Indian Contract Act 1872, the definition of consideration is broader
than under English law, still the common law principle of the doctrine of privity of contract is
normally applicable in India. It is significant to note that Indian law expressly negatives the
English doctrine of privity of consideration. Nonetheless, there is no provision in the Indian
Contract Act either for or against the rule of privity of contract
The authority for the application of the rule in India is the decision of the Privy Council in the
case of Jamna Das V Ram Avtar6. In this case, A had mortgaged some property to X. A then
sold this property to B, B having agreed with A to pay off the mortgaged debt to X. X brought
an action against B to recover. It was held by the Court that since there was no contract
between X and B, X could not enforce the contract with the mortgagee and the purchaser is
not personally bound to pay the mortgage debt.
As consideration is an essential element for a contract to come into existence and is often
used to determine the intention and standing of parties, and is in turn used to determine the
parties of contract. This determination of parties through consideration is essential to apply
the doctrine of privity of contract.
In English law, both Privity of contract and privity of consideration is applicable, therefore
the consideration can only from the parties of contract and not a third party and only the
parties to the contract can sue.
On the other hand, in Indian law, only privity of contract is applicable and consideration can
move from a third party who is stranger to a contract, this makes the scope of Indian law
wider than that of English law.
Exceptions to the Doctrine of Privity of Contract
As a general rule, only parties to the contract are entitled to sue each other, but with the
passage of time, some exceptions have been inculcated in this provision, allowing even
strangers/third parties to a contract to sue in certain cases. These exceptions are listed below :
6
Jamna Das v. Ram Avtar, (1911) 30 I.A 7
1. Beneficiary/Trust
If a contract has been entered between two parties for the benefit of third party who is not a
party to a contract, then in the event of failure of performance or breach by any party in
performing their obligation, the third party is entitled to sue the party who is liable for breach.
Here, the third party is entitled to enforce his right against the others. Such right may be
conferred by way of property or under a trust.
Illustration -
In the case of Nawab Khwaja Muhammad Khan v. Nawab Husaini Begum 7, the father
and father in law of the Husaini Begum (plaintiff) got into an agreement that, as consideration
for marrying his son, she would be paid Rs. 500 per month as her betal-leaf expenses and
some immovable property was also charged for payment of these expenses. So when plaintiff
filed suit for recovery of the said consideration, it was held that even though she was not a
party to the contract, she was entitled to enforce her claim as she was the beneficiary of the
same. The contract was made for the benefit of the plaintiff.
2. For Family arrangement
These contracts stand as an exception to the rule of privity of contract where provisions are
made in a partition or other family arrangements, for the maintenance of marriage or
marriage expenses of a female member or minor, such persons acquire an actual beneficial
right and interest so as to place them in the position of beneficiary under the contract, and
with that they are entitled to sue in case of non performance or breach.
This exception was brought into force so as to protect the rights of those family members
who are most likely to not get any specific share of the property.
Illustration - If A has stated in his will that, after his death, his 2 sons i.e B and C will only
receive their share of the property after each of them pay D (his daughter) a sum of Rs. 5
Lakh rupees, then such a condition will be valid and has to be fulfilled. In case of a breach
like non performance of the condition, D, even though she is not a party to the contract,
would be in legal position to sue B or C. Additionally, B and C will not receive their share of
the property.
7
Nawab Khwaja Muhammad Khan v. Nawab Husaini Begum, (1910) 12 BOMLR 638
In the case of Shuppu Ammal v. Subramaniyam & Ors8., two brothers, on a partition of
joint properties, agreed to maintain their mother. In this case, she was held entitled to sue for
failure on the part of her sons.
3. Acknowledgement or Estoppel
Whereby under the terms of a contract, a party is required to make a payment to a third
person and he acknowledges it to that third person (viz. while making a part-payment), a
binding duty is thereby incurred towards him. The acknowledgment can be expressed or
implied. Thus, in the case of Devaraja Urs v Ram Krishniah9, A sold his house to B and left
a part of the sale price in his hands, wanting him to pay this amount to C. Consequently B
made part payments to C, but failed to remit the balance. B while making part payments had
informed C that they were out of the sale price left with him and the balance would be
remitted soon. It was held that though originally there was no privity of contract between B
and C, B having afterward acknowledged his liability, C was entitled to sue him.
In simple terms, sometimes there may be no privity of contract between the two parties, but if
one of them, by his conduct, acknowledgement or admission recognizes the right of the other
to sue him, he may be liable on the Law of Estoppel - When one person has, by his
declaration, act or omission, intentionally caused or permitted another person to believe a
thing to be true and to act upon such belief, neither he nor his representative shall be allowed,
in any suit or proceeding between himself and such person or his representative, to deny the
truth of that thing10.
Law of Estoppel is defined under Section 115 of Indian Evidence Act, 1872 and Section
121-123 of Bhartiya Sakshya Adhiniyam, 2023
4. Laws relating to Negotiable Instruments
Negotiable instrument is a written document that promises to pay a specific amount of money
to a named person or assignee. Its transferable and assignable. For example - Personal
cheque, Money orders, Cashier’s cheque, Promissory notes etc.
8
Shuppu Ammal v. Subramaniyam & ors., (1910) 4 Ind Cas 1083
9
Devaraja Urs v. Ram Krishniah, AIR 1952 Mys 109
10
Indian Evidence Act, 1872, sec 115
Laws relating to Negotiable instruments are an exception to the doctrine of Privity of
Contract where third party is also liable to be sued.
Illustration - A has an account in Central Bank. A draws a cheque of Rs. 10000/- in favour of
B. B goes to the bank to encash the cheque. Although there is no contract between the Bank
and B, yet the Bank will be liable to pay Rs. 10000/- to him.
5. Contract with an Agent
When the contract is made between an agent and another person, and a breach occurs on the
part of agent then the other person can sue either the Agent or his principal, even though the
said principal was not a party to the contract. It is absolutely irrelevant whether the one party
had knowledge of the other party entering through or as an agent.
Illustration - A is an agent of B. During the course of employment, A enters into a contract
with C to sell him 5 kg of apples in exchange of RS. 5000/-. In case any breach occurs on the
part of A, C has the right to sue B (the principal) even though C is not a party to a contract.
6. Covenants running with land
In the case of Tulk v Moxhay11, it was held that a person who buys land with notice that the
owner of the land is tied by certain duties created by an agreement or covenant concerning
the land, shall be bound by them even if he was not a party to the agreement.
7. Assignee in insurance policy
A person who is not a party to a contract can file a suit if he is so authorized by a statute.
Thus, under the Insurance Act, The assignee of an insurance policy (e.g. a wife in case of a
husband or vice versa) is allowed to sue on the contract made between the insured and the
insurer (insurance company).
Illustration - A signs an insurance with ABC insurance company with his wife B as assignee,
Therefore B would be entitled to sue the insurance company in case of breach even though
she is not the party to contract. This is the exception of the Doctrine of Privity of Contract
11
Tulk v. Moxhay [1848] 41 ER 1143
Conclusion
The doctrine of privity of contract underscores that only the parties to a contract can enforce
its terms or bear its obligations. This principle protects the integrity of agreements by
ensuring that external parties cannot intervene or claim rights under a contract they are not
part of. However, this rule is not without exceptions. Over time, the law has evolved to
recognize situations where third parties may have enforceable rights, reflecting practical
needs and fairness.
Examples include cases where the contract benefits a third-party beneficiary, forms part of a
family arrangement, involves negotiable instruments, or creates obligations for land
covenants. Moreover, Indian law diverges from English law by allowing consideration to
flow from third parties, thereby broadening the doctrine's scope. These exceptions ensure that
justice is upheld without rigidly adhering to the original principle of privity.
Thus, while the doctrine remains fundamental, its flexibility allows the legal system to
balance contractual sanctity with equitable considerations.
Bibliography
1. Chaturvedi, A.K., Indian Contract Law: Principles and Precedents. LexisNexis, 2018.
2. Graw, S., An Introduction to the Law of Contract. 9th Edition, Thomson Reuters, 2020.
3. Mulla, D.F., Indian Contract Act & Specific Relief Act. LexisNexis, 2015.
4. Pollock, F., and Mulla, D.F., Indian Contract and Specific Relief Acts. Butterworths, 2019.
5. Singh, Avtar, Law of Contract and Specific Relief. Eastern Book Company, 2021.
