| Authored by R & D Law Chambers LLP | Practice led by Ravish Bhatt, Dual-qualified lawyer (India and England & Wales) | Bar Council of Gujarat, Enrolment G/504/2008 | SRA (non-practising) Registration No. 492 477 | ADIT, Chartered Institute of Taxation, London Published: 12 September 2026 | Last reviewed: 12 September 2026 |
| Written against the Indian Contract Act, 1872, including section 28 as amended by the Indian Contract (Amendment) Act, 1997, and the Foreign Exchange Management (Guarantees) Regulations, 2026, notified by the Reserve Bank of India under Notification No. FEMA 8(R)/2026-RB dated 6 January 2026 in supersession of Notification No. FEMA 8/2000-RB dated 3 May 2000. R & D Law Chambers LLP advises on Indian law only, for businesses anywhere, wherever a matter has an India connection. English and United States drafting practice is described factually where it explains how a clause came to be written as it is, and is never analysed as advice. |
| Answer. An indemnity drafted to an English or American precedent arrives in India with three working parts unsupported. Section 124 does not reach loss caused by events rather than conduct. Section 28(b) can void the survival period. And the Foreign Exchange Management (Guarantees) Regulations, 2026 catch an indemnity by substance, whatever the heading says. |
Index of Topics
- What section 124 actually covers, and what it leaves out
- Sections 124 and 125 are not exhaustive: Gajanan Moreshwar
- The consequence: the clause is the whole of the protection
- Define the loss, because the statute will not
- Third-party claims: notice, conduct of defence and settlement
- The cap, and the carve-outs that swallow it
- The survival period and section 28(b): the clause that voids itself
- Exchange control: when your indemnity is a guarantee
- Governing law, and the place the indemnity is actually paid
- What each side should test before signing
- What section 124 actually covers, and what it leaves out
| Answer. Section 124 of the Indian Contract Act, 1872 defines a contract of indemnity as one 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. Conduct is the operative word, and most commercial indemnities are not about conduct at all. |
Take the risks a cross-border indemnity is usually written to allocate. A tax demand raised on the buyer for a period before completion. A regulatory penalty arising from a state of affairs that predates the contract. An intellectual property claim founded on the state of a register. A change in law that imposes a cost on one party. A shortfall in a warranted figure. None of these is naturally described as loss caused by the conduct of the indemnifier or of any other person. They are losses caused by events, by circumstances, or by the operation of law.
That is not an academic observation. It is the observation on which the leading Indian authority turns, and it is the reason the drafting has to carry weight the statute will not.
- Sections 124 and 125 are not exhaustive: Gajanan Moreshwar
| Answer. The Bombay High Court held in Gajanan Moreshwar that sections 124 and 125 are not exhaustive of the law of indemnity in India, that section 124 deals only with one particular kind of indemnity, and that Indian courts apply the same equitable principles as the English courts to the classes of case the sections do not reach. |
Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri, AIR 1942 Bom 302, decided by Chagla J on 1 April 1942, remains the reference point. The Court held that the Indian Contract Act is both an amending and a consolidating Act and is not exhaustive of the law of contract to be applied in India; that section 124 deals only with the indemnity arising from a promise to save the indemnified from loss caused by the conduct of the indemnifier himself or of any other person, and does not deal with the classes of case where the indemnity arises from loss caused by events or accidents which do not or may not depend upon the conduct of any person, or by reason of liability incurred by something done by the indemnified at the request of the indemnifier; and that section 125 deals only with the rights of the indemnity-holder in the event of his being sued, and is by no means exhaustive of those rights.
The Court went further on the practical question that matters most to an indemnified party. Where the indemnity-holder has incurred an absolute liability, it may call upon the indemnifier to pay off the claim or to place sufficient money in court to meet it, and need not first pay out of its own pocket and then sue. An indemnity in India is therefore preventive as well as compensatory, subject to the liability having become absolute.
- The consequence: the clause is the whole of the protection
| Answer. Because the statutory definition covers only part of the field and the remainder is governed by equitable principle rather than by codified rule, the Indian indemnity clause carries more weight than its English equivalent. What the clause does not say, the Act will usually not supply. |
English drafting can afford a degree of compression because a substantial body of construction rules sits behind the words. Indian drafting cannot rely on the same compression, because section 124 does not describe the transaction and section 125 describes only the position of an indemnity-holder who has been sued. Everything outside those two narrow descriptions is decided on the contract and on equity.
The practical instruction is therefore the opposite of the usual advice to keep indemnities short. The clause has to define the trigger, the loss, the procedure and the limits, because there is no default position to fall back on.
- Define the loss, because the statute will not
| Answer. A clause that indemnifies against all losses arising from any breach has defined nothing. Loss has to be enumerated: whether it includes legal costs, taxes, regulatory penalties, amounts paid in settlement, loss of profit, business interruption, and whether indirect and consequential loss is in or out. |
Four points deserve express treatment. The first is legal and investigation costs, which in a regulatory indemnity are often larger than the eventual liability and which are frequently left to implication. The second is amounts paid in settlement, which without an express provision produce an argument that the indemnified party gave the money away. The third is the indirect and consequential loss exclusion imported wholesale from English precedents: the phrase carries a body of English construction that an Indian tribunal is not bound to adopt, so the parties should say what they mean by listing the heads in or out rather than relying on the label.
The fourth is regulatory fines and penalties. An indemnity against a penalty imposed on a party for its own unlawful act raises a question under section 23 of the Indian Contract Act, 1872, which renders an agreement void where the object or consideration is unlawful or is regarded by the court as opposed to public policy. Whether a particular penalty indemnity offends section 23 turns on the nature of the penalty and the facts, and we do not state a general answer. The drafting response is to separate penalties imposed on the indemnified party for the indemnifier’s acts from penalties imposed for the indemnified party’s own, and to price the second differently or leave it out.
- Third-party claims: notice, conduct of defence and settlement
| Answer. Third-party claim mechanics are where cross-border indemnities are actually fought. Four questions decide the clause: how quickly notice must be given and with what consequence for delay, who conducts the defence, who chooses counsel, and whether either party can settle without the other’s consent. |
Conduct of defence is the term most often conceded without thought and most often regretted. An indemnifier who controls the defence controls the admissions made in it, the witnesses put forward, and the record that will exist afterwards. Where the indemnified party has a continuing commercial relationship with the claimant, or a regulatory relationship that a contested defence would damage, ceding control is a material concession and should be priced.
Notice provisions in an indemnity attract the same Indian analysis as notice provisions anywhere else in a contract, and the same caution applies: a clause that purports to extinguish the indemnity on failure to notify within a stated period is vulnerable for the reason given in section 7 below. Draft the consequence of late notice as a reduction in the recoverable amount to the extent the indemnifier is prejudiced, rather than as forfeiture, which is both more likely to hold and more likely to be accepted in negotiation.
- The cap, and the carve-outs that swallow it
| Answer. A liability cap works only if the exceptions are closed. The common formulation excludes fraud, wilful misconduct, gross negligence and breach of confidentiality from the cap. Gross negligence has no settled meaning in Indian law and is the opening through which most capped claims are argued to be uncapped. |
Three drafting points follow. First, prefer defined conduct to labels: describe the conduct that lifts the cap rather than naming a category whose content is contested. Second, state whether the cap is per claim or aggregate, and whether it is shared with the general limitation of liability clause or sits separately, because a clause that does neither produces the argument that the indemnity is uncapped altogether. Third, state whether the cap includes or excludes the costs of defending third-party claims, which on a long regulatory claim can exhaust a cap before any liability is established.
A deductible or basket, common in share purchase agreements, should be expressed as either a tipping basket or a true excess. Silence on that point converts a negotiated threshold into a dispute about arithmetic.
- The survival period and section 28(b): the clause that voids itself
| Answer. Section 28 of the Indian Contract Act, 1872, as amended in 1997, renders void an agreement which extinguishes the rights of any party under or in respect of any contract on the expiry of a specified period so as to restrict that party from enforcing its rights. A survival clause drafted to extinguish the indemnity is aimed squarely at that provision. |
The amendment was made because of a distinction the courts had drawn between a clause that barred the remedy, which was void, and a clause that extinguished the right, which was not. The Indian Contract (Amendment) Act, 1997 equated the two by inserting the extinguishment limb into section 28, so that both are now void to that extent. An exception preserves arbitration agreements, and a further exception inserted in 2013 preserves certain bank and financial institution guarantees of not less than one year.
The drafting consequence is precise and is routinely missed on Indian legs of cross-border deals. A twenty-four month survival period imported from a foreign share purchase agreement, expressed so that the indemnity ceases to exist and all claims are extinguished on expiry, is drafted in the language section 28(b) was amended to catch. The safer formulation is procedural rather than extinguishing: require a claim to be notified within the period, and provide that a notified claim is then pursued under the general law of limitation. That gives the indemnifier the commercial certainty it wants without writing the clause in the words the section names.
We are not aware of a decision applying section 28(b) to a commercial survival clause of this kind, and we do not assert one. The provision is in these terms, the argument follows from them, and the drafting cost of avoiding the argument is nil.
- Exchange control: when your indemnity is a guarantee
| Answer. The Foreign Exchange Management (Guarantees) Regulations, 2026 define a guarantee as a contract, by whatever name called, to perform the promise or discharge a debt, obligation or other liability in case of default by the principal debtor. An indemnity that responds to a third party’s default can be caught by that definition whatever the clause is headed. |
The Reserve Bank of India notified the Regulations under Notification No. FEMA 8(R)/2026-RB dated 6 January 2026, in exercise of the powers under sub-section (2) of section 6 and sub-section (2) of section 47 of the Foreign Exchange Management Act, 1999, superseding the Foreign Exchange Management (Guarantees) Regulations, 2000. Regulation 2(1)(d) contains the definition set out above, and includes a counter-guarantee. Regulation 2(1)(f) defines the principal debtor as the person in respect of whose default the guarantee is given.
The operative provisions follow. Regulation 3 prohibits a person resident in India from being a party to a guarantee, as principal debtor, surety or creditor, where any other party is a person resident outside India, save as otherwise provided under the Act, the rules, the regulations or directions, or with the general or special permission of the Reserve Bank. Regulation 5 permits a resident to act as surety or principal debtor where the underlying transaction is not prohibited under the Act and the surety and principal debtor are eligible to lend to and borrow from each other under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, with three stated exceptions. Regulation 6 permits a resident creditor to obtain a guarantee in its favour subject to the underlying transaction not being prohibited.
Regulation 7 then imposes a reporting obligation that did not exist under the 2000 Regulations. Issuance, any change in the guarantee amount, extension of period or pre-closure, and any invocation, are reported in Form GRN to an authorised dealer bank on a quarterly basis within fifteen calendar days from the end of the quarter, by the surety where the surety is resident, by the principal debtor where the surety is non-resident, and by the creditor where both are non-resident or where the creditor arranged the guarantee. Regulation 8 prescribes a late submission fee of seven thousand five hundred rupees plus 0.025 per cent of the amount involved multiplied by the years of delay, rounded up to the nearest hundred.
The distinction that decides whether any of this applies to a given clause is structural, not linguistic. A true indemnity is a primary obligation: the indemnifier owes its own promise, there is no principal debtor, and there is no default by anyone else on which the obligation depends. That sits outside the definition. An arrangement under which an Indian party agrees to answer for a third person’s failure to perform is within it, because the definition applies by whatever name the contract is called. Contrast section 126 of the Indian Contract Act, 1872, which defines a contract of guarantee as a contract to perform the promise, or discharge the liability, of a third person in case of his default. The regulatory definition tracks that concept and extends it expressly to contracts called something else.
- Governing law, and the place the indemnity is actually paid
| Answer. An indemnity is worth the assets it can reach. Choosing a foreign governing law and a foreign court, where the indemnifier’s assets are in India, buys a judgment that may have no direct route to execution. The dispute clause, not the indemnity clause, decides whether the money moves. |
Where the indemnifying party is Indian and its assets are in India, the relevant question at drafting stage is what instrument an Indian court will execute. An arbitral award made in a territory notified under Part II of the Arbitration and Conciliation Act, 1996 travels through a defined statutory route. A foreign court judgment travels through section 44A of the Code of Civil Procedure, 1908 only where the country is a notified reciprocating territory, and otherwise requires a fresh suit in which section 13 defences are available. That asymmetry is the strongest practical reason for an arbitration clause in an India-connected indemnity, and it is set out in full in our published work on enforcement.
Two consequential drafting points. The indemnity and the dispute clause should be drafted together rather than by different people at different times. And the currency and the payment mechanics should be stated, because an indemnity expressed in a foreign currency and payable by an Indian resident engages exchange control questions at the moment of payment that are cheaper to resolve in the contract than at the counter of an authorised dealer bank.
- What each side should test before signing
| Answer. Both sides ask the same five questions from different ends: what triggers it, what loss is covered, who controls a third-party claim, what is the effective ceiling once the carve-outs are read, and how long the obligation lasts in a form that is enforceable in India. |
| Question | The Indian company’s concern | The foreign company’s concern |
| What triggers the indemnity | Whether the trigger is loss suffered or liability incurred, which decides when it can call on the indemnifier under the Gajanan Moreshwar principle | Whether the trigger is objective or depends on the Indian party’s own assessment |
| What loss is covered | Whether legal and investigation costs and settlement amounts are inside | Whether indirect loss is genuinely excluded on Indian construction, not merely labelled |
| Who controls a third-party claim | Whether ceding conduct of defence damages a continuing commercial or regulatory relationship | Whether it can settle without consent, and what it pays for that right |
| The effective ceiling | Whether the carve-outs, in particular any gross negligence exception, make the cap illusory | Whether the Indian counterparty has the assets or insurance to meet the cap at all |
| How long it lasts | Whether a survival clause drafted to extinguish the right is exposed under section 28(b) | Whether a procedural notification deadline gives the same certainty as extinguishment |
| Whether it is regulated | Whether the clause is in substance a guarantee, engaging the FEMA (Guarantees) Regulations, 2026 and the Form GRN quarterly reporting | Whether the Indian counterparty has cleared the exchange control position before signing |
Frequently Asked Questions
Does section 124 of the Indian Contract Act cover a commercial indemnity?
Only partly. Section 124 defines an indemnity as a promise to save the promisee from loss caused by the conduct of the promisor or of any other person. Most commercial indemnities respond to events, circumstances or the operation of law rather than to anyone’s conduct. Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri, AIR 1942 Bom 302, holds that sections 124 and 125 are not exhaustive and that equitable principles fill the remainder.
Can an indemnity be enforced before the loss is actually paid?
Yes, where the liability has become absolute. In Gajanan Moreshwar the Bombay High Court held that an indemnity-holder who has incurred an absolute liability may call on the indemnifier to pay off the claim or to place sufficient money in court to meet it, and need not first pay and then sue. That is why the trigger should be expressed as liability incurred rather than loss paid.
Is a two-year survival period in an indemnity enforceable in India?
It depends on how it is drafted. Section 28 of the Indian Contract Act, 1872, as amended in 1997, renders void an agreement extinguishing the rights of a party on the expiry of a specified period so as to restrict that party from enforcing its rights. A clause requiring a claim to be notified within the period is materially safer than one providing that the right ceases to exist on expiry.
Is an indemnity a guarantee for exchange control purposes?
It can be. The Foreign Exchange Management (Guarantees) Regulations, 2026, notified under Notification No. FEMA 8(R)/2026-RB dated 6 January 2026, define a guarantee at regulation 2(1)(d) as a contract, by whatever name called, to perform the promise or discharge a debt, obligation or other liability in case of default by the principal debtor. A primary indemnity with no principal debtor sits outside. An indemnity answering for a third party’s default does not.
What reporting applies to a cross-border guarantee involving an Indian party?
Regulation 7 of the 2026 Regulations requires issuance, any change in amount, extension or pre-closure, and any invocation to be reported in Form GRN to an authorised dealer bank quarterly, within fifteen calendar days from the end of the quarter. Regulation 8 prescribes a late submission fee of seven thousand five hundred rupees plus 0.025 per cent of the amount involved multiplied by the years of delay.
Should a cross-border indemnity be governed by Indian law?
Not necessarily, but the dispute clause matters more than the governing law. Where the indemnifier’s assets are in India, a foreign court judgment is executable under section 44A of the Code of Civil Procedure, 1908 only from a notified reciprocating territory and otherwise needs a fresh suit, while an award from a notified Convention territory has a defined statutory route. Draft the indemnity and the dispute clause together.
How R & D Law Chambers Works on These Matters
We draft, review and negotiate cross-border commercial contracts for Indian and foreign parties, and we act on the disputes those contracts produce, in arbitration and before the Indian courts. Indemnity, limitation of liability and dispute architecture are treated as one problem rather than three clauses.
What we do differently on this subject is to test the clause against the two Indian provisions that sit outside the indemnity chapter and are therefore outside most review checklists: section 28(b) of the Indian Contract Act, 1872, and the Foreign Exchange Management (Guarantees) Regulations, 2026. A clause can be commercially perfect and still fail on either. The practice combines Indian and England and Wales qualification with the ADIT international tax qualification, which is why the tax and exchange control consequences of an indemnity payment are settled at drafting stage rather than at the point of remittance.
Related services
- Contract Drafting, Review and Management, for indemnity, limitation of liability and dispute architecture on cross-border agreements.
- Corporate Law Firms in India, where the indemnity sits in a share purchase or joint venture agreement.
- Top Arbitration Law Firm in Ahmedabad, for the dispute clause and for enforcement against Indian assets.
- International Taxation, Cross-Border Tax Planning and Litigation Services, for the tax treatment of an indemnity payment and the withholding question on remittance.
- International Arbitration Lawyers in India for Cross-Border Disputes, for the seat, the tribunal and enforcement against Indian assets.
- Commercial Disputes and Litigation Lawyers in Ahmedabad, where the indemnity is litigated rather than arbitrated.
Further reading on this site
- Terminating a Commercial Contract: Risk Management Strategies, on what survives the end of the relationship.
- Exceptions to the Enforceability of No Oral Modification Clauses, on clauses that purport to control how the contract can change.
- From Award to Execution: The Four-Step Enforcement Protocol, on what it takes to turn a foreign award into money in India.
- Essential Clauses in an International Contract, on the clauses every cross-border agreement needs beyond the indemnity.
- Enforcement of Foreign Arbitral Awards and Foreign Judgments in India, on the section 44A route for a foreign judgment, which an award does not travel by.
- Foreign Seat, Indian Counterparty: Why the Arbitration Clause Must Say More Than It Usually Does, on drafting the dispute clause alongside the indemnity.
| This article is for general information and does not constitute legal advice. It states the law as at 12 September 2026. R & D Law Chambers LLP advises on Indian law only. Nothing here creates a lawyer-client relationship, and no reader should act on it without advice on their own facts. |