Identify why the principal is being asked to pay
Sections 222–225 of the Indian Contract Act, 1872 address different routes. Section 222 concerns consequences of lawful acts in exercise of conferred authority. Section 223 concerns consequences of acts done in good faith at the principal’s employment even where third-party rights are injured. Section 224 bars liability under the Act to indemnify consequences of the criminal act covered by that section, despite an express or implied promise. Section 225 requires the principal to compensate the agent for injury caused by the principal’s neglect or want of skill.
Read the applicable text: India Code: Indian Contract Act, 1872, sections 222–225.
Record authority and the act separately
Find the engagement, instructions and applicable scope. Test whether the action was actually authorised, lawful and undertaken in exercise of that authority for section 222. A later expense approval does not prove the original instruction. For section 223, retain evidence of what the agent knew at the time, the checks performed and the act requested. The section 223 illustrations involve agents who acted in good faith on the instructions they received. Section 224 turns on the underlying criminal act: the bar can apply even if the amount claimed arose from a civil damages action. Do not assume a disputed instruction is necessarily lawful or criminal without evidence.
Test liability to a third party before netting a settlement
Record the underlying demand, legal outcome or settlement, amounts actually incurred, any contribution and proof of payment. Separate estimates from amounts evidenced as due. Record any defence-cost component distinctly and establish its basis; the Act’s illustrations include costs in particular circumstances, not a universal tariff. A settlement with a third party does not by itself prove that every component is recoverable from the principal.
Make principal-caused injury its own analysis
For section 225, identify the principal’s neglect or want of skill, the resulting injury to the agent and the supporting connection. The example in the Act is a defective scaffold caused by the principal's unskilful erection. Review the facts and other applicable legal rights before concluding the amount. Do not classify it as an ordinary expense advance under an agency settlement.
Close the claim with one evidence trail
Build a claim ledger by incident, statutory or contractual route, original amount, supported cost, payments, other recoveries and residual. Review whether offsets, insurance or reimbursement rights apply and do not assert the same loss twice. Keep the final legal conclusion separate from any provision, expense or receivable recognition under financial reporting standards.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Lawful authorised transaction
Assume an agent lawfully incurs a supported ₹1,20,000 obligation within its mandate, with ₹15,000 of directly related recoverable costs under the established facts. The documented claim is ₹1,35,000 before any credits.
Illustrative example 2: Good-faith civil claim
Assume an agent acted in good faith on the principal's instructions and the established indemnity covers ₹2,00,000 civil compensation and ₹25,000 costs. After the principal pays ₹50,000 on account, ₹1,75,000 remains.
Illustrative example 3: Separate an unsupported element
A ₹3,60,000 request includes ₹40,000 not yet supported. Of the remaining ₹3,20,000 assumed recoverable, ₹1,00,000 was paid. The supported unpaid amount is ₹2,20,000 and the ₹40,000 stays unresolved.
Illustrative example 4: No statutory indemnity for the criminal act
A person engaged to commit a crime claims ₹90,000 solely as consequences of that act. On the stated section 224 facts, the statutory indemnity is nil, despite the purported promise.
Illustrative example 5: Injury and a confirmed contribution
Assume the principal's neglect caused injury and ₹1,50,000 is the established compensable amount before an agreed ₹30,000 credit. The residual in this illustration is ₹1,20,000; do not assume every third-party payment must be deducted in a real case.
Illustrative example 6: Avoid a duplicated cost
A claim schedule records ₹70,000 compensation and ₹20,000 documented costs, but a second line duplicates ₹8,000 of the costs. The draft total of ₹98,000 becomes ₹90,000 after removing the duplicate.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Identify the agency relationship | Engagement and mandate |
| 2 | Pinpoint the act requested | Contemporaneous instruction |
| 3 | Test authority and lawfulness | Scope and review memo |
| 4 | Document good faith where relevant | Knowledge and diligence record |
| 5 | Separate possible criminal consequences | Legal classification and evidence |
| 6 | Assess principal-caused injury separately | Incident and causation record |
| 7 | Substantiate amounts and costs | Orders, settlement and invoices |
| 8 | Record payments and possible offsets | Bank and counterparty evidence |
| 9 | Check claim arithmetic and overlap | Incident ledger reconciliation |
| 10 | Approve the legal and accounting conclusions | Separate reviews and sign-off |
Sixteen practitioner FAQs
1. Is there one indemnity rule for all losses?
No. Sections 222, 223 and 225 answer different questions, and section 224 sets a limit for its criminal-act case.
2. Does a request from the principal prove authority?
Check the source, scope and effective date of the instruction.
3. Can a lawful act still result in a recoverable loss?
Yes, if the facts meet the applicable indemnity conditions.
4. Does a third-party civil claim rule out indemnity?
No. Section 223 covers acts done in good faith at the principal’s employment even if they injure third-party rights. A civil claim does not remove the section 224 bar when the underlying act falls within that section.
5. What proves good faith?
Preserve contemporaneous records of instructions, information, checks and the action taken.
6. Does an express promise cure the section 224 problem?
Section 224 applies to its stated criminal-act case even where a promise was made.
7. Is every breach of contract a criminal act?
No. Establish the legal classification from the facts.
8. Are all legal fees automatically payable by the principal?
No. Check the actual basis, connection and evidence for each cost.
9. Can an agent recover for injury from unsafe equipment provided by the principal?
Assess section 225 and the facts linking the principal’s neglect or lack of skill to the injury.
10. Do expenses and injury compensation belong in one undifferentiated total?
Keep them separately traceable so the legal basis and amounts can be tested.
11. Can the agent add a projected settlement and the final settlement?
Use one reconciled figure and replace the estimate when the liability is established.
12. What if a recovery from another party is pending?
Track it separately and establish how it affects the claim rather than netting speculation.
13. Does the agent's ledger show whether the principal is liable?
The ledger shows amounts, not the legal tests. Link it to the supporting record.
14. Should parties settle disputed authority before computing the balance?
They can prepare a conditional working, keeping the disputed basis visible.
15. Does an indemnity conclusion decide recognition of an asset?
No. Apply the relevant financial reporting requirements independently.
16. What must the reviewer see at close?
A clear link between authority, statutory basis, evidence of loss, credits and the amount still claimed.