Contract of indemnity

A contract of indemnity is a promise by one party to make good a loss that the other suffers, defined in section 124 of the Indian Contract Act, 1872. It is a private allocation of money between the parties to the contract. In a contract for an AI tool or any other outsourced service it decides who pays for a failure and how much, usually up to a cap.

It does not decide who answers to a regulator. Regulation 16C of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008, in force from 10 February 2025, makes a regulated person that uses AI or machine learning tools solely responsible for investor data, for the output of the tools and for compliance, whether it built the tool or bought it. An indemnity can move the money; it cannot move that responsibility. Whether a regulatory penalty can be recovered under an indemnity at all is open. There is no judgment on the point that we know of, as at 9 October 2026.