What did the Supreme Court decide in this case?

The Court held that when a buyer promises to clear an existing mortgage, the law treats it as an implied contract of indemnity in the seller’s favour.

Why is this case important for indemnity under Indian law?

It shows that indemnity can arise by implication from the conveyance terms; it need not be in express words.

Who suffered the loss and why?

The seller (plaintiff) lost part of his land because the buyers did not pay the mortgage. He then sued to recover that loss.

What was the key clause in the sale?

A large part of the price was kept aside with the buyers to pay off the mortgage. That covenant triggered an implied indemnity.

Does indemnity need express wording in the deed?

No. If the conduct and terms show an intent to protect against loss, the court may imply an indemnity.

Shanti Swarup v. Munshi Singh

AIR 1967 SC 1315 — Implied Contract of Indemnity

Supreme Court of India 1967 AIR 1967 SC 1315 Contract • Indemnity ~6 min India

Author: Gulzar Hashmi • Published: 26 Oct 2025

Quick Summary

The seller mortgaged his land. Later, he sold half to a buyer and left most of the price with the buyer to clear the mortgage. The buyer took possession but did not pay the mortgagee. The seller lost part of his land in proceedings and sued the buyer. The Supreme Court said: when a buyer promises to clear an encumbrance as part of the sale, it creates an implied contract of indemnity. The buyer must compensate the seller for the loss.

Issues

Does the sale covenant to discharge a mortgage create an implied indemnity in favour of the seller?
Can indemnity exist without express words in the deed?

Rules

If a conveyance says the purchaser will pay off an existing encumbrance on the property, the law treats this as an implied indemnity.
An indemnity need not be in exact words; the court can infer it from the bargain and conduct.

Principle applied by the Supreme Court of India in AIR 1967 SC 1315.

Facts — Timeline

1914 → 1967

09 May 1914: The plaintiff mortgaged his land to Bansidhar and Khub Chand for ₹12,000.

09 Feb 1920: He sold half of the land to Mr. Shanti Saran for ₹16,000. ₹13,500 was retained by the buyer to pay the mortgage.

After sale: Buyer took possession but no payment was made to the mortgagees.

Litigation by mortgagees: Suits followed; finally, the Collector ordered self-liquidation of the mortgage from ¾ of the plaintiff’s half of the land.

Loss to plaintiff: The plaintiff parted with substantial property.

Suit for recovery: Plaintiff sued the buyer for the loss caused by the buyer’s failure to pay the mortgage.

Arguments

Appellant (Plaintiff)

Buyer agreed to apply ₹13,500 towards the mortgage.
This created an implied indemnity to save the seller from loss.
Because buyer did not pay, the seller suffered loss of land and must be compensated.

Respondent (Defendant)

Contended no express indemnity clause existed.
Argued the seller remained primarily liable to mortgagees.
Denied obligation to compensate for the loss.

Judgment

For the Plaintiff

The Supreme Court ruled in favour of the plaintiff. The arrangement in the sale deed—keeping ₹13,500 with the purchasers to clear the mortgage—operated as an implied contract of indemnity. Since the buyers failed to pay and the seller suffered loss, the buyers were liable to indemnify.

Ratio (Legal Principle)

A covenant by a purchaser to discharge an encumbrance on the property sold amounts to an implied indemnity in favour of the seller. Indemnity can be inferred; it need not be stated in exact terms.

Why It Matters

Clarifies that indemnity arises from the substance of the bargain, not just wording.
Protects sellers when purchase money is earmarked for clearing debts.
Guides drafting: even without “indemnify”, duties may be implied from context.

Key Takeaways

Promise to clear a mortgage = implied indemnity.
Failure to pay → liability to compensate the seller’s loss.
Look at the purpose of retained consideration in sale deeds.

Mnemonic + 3-Step Hook

Mnemonic: “Buyer Clears, Seller Cheers.”

Clears: Buyer promises to clear encumbrance.
Fails: Mortgage not paid; seller suffers loss.
Cheers: Implied indemnity makes buyer pay up.

IRAC Outline

Issue

Does the buyer’s covenant to pay the mortgage create an implied indemnity?

Rule

Covenant to discharge encumbrance = implied indemnity; express words not essential.

Application

₹13,500 retained for mortgage shows intent to protect the seller. Buyer’s failure caused seller’s loss of land.

Conclusion

Implied indemnity exists; buyer must indemnify the seller.

Glossary

Indemnity: A promise to save another from loss caused by a specified event.
Encumbrance: A legal burden on property (e.g., mortgage) that reduces its free use or value.
Covenant: A binding promise in a deed or contract.