This article is written by Shivani Sharma, from Symbiosis Law School, Noida. The article deals with contracts of indemnity under English law and Indian law.  

Introduction

Contract of Indemnity can be defined as doing something good for a person who is suffering any loss or helping him like that his previous condition has been restored. “Indemnity can be considered as sub-species of compensation or damages” whereas contract of indemnity can be treated as species or a type of contract, more specifically the contract of indemnity is falling under the category of special contracts because the subject matter of this type of contracts is specific in nature.

Contract of indemnity is defined under Section 124 of the Indian Contract Act, 1872. Similar to other contracts, the conditions provided under section 10 of the Indian Contract Act, 1872 must be fulfilled.

In simple words, the meaning of contract of indemnity is when two parties enter into a legal relationship where one party promises another party to compensate him if any loss incurred by the promisor himself or by any other third party.

Example: Mr. A enters into a contract with Mr. B that if Mr. C is not able to pay the loan that you give to Mr. C then Mr. A will be liable to pay the loan amount. The contract between Mr. A and Mr. B is a contract of indemnity.

In this case, Mr. A promises to indemnify Mr. B to pay the loan, so Mr. A is indemnifier, Mr. B is creditor and Mr. C is indemnity holder. This example helps us to understand that the contract of indemnity takes place between the principal debtor (indemnity holder) and surety (indemnifier).

Origin and growth of contract of indemnity under English law

The principle of contract of indemnity originated under English law in the landmark judgment of Adamson v/s Jarvis. 

• Adamson v/s Jarvis

Facts

In this case, Adamson was plaintiff and Jarvis was defendant. The plaintiff by profession was an auctioneer to whom Jarvis, who was not the real owner of the cattle, gave the cattle and this was sold at an auction. The plaintiff followed the respective instructions which was given by Jarvis and sold the cattle. The real owner of the cattle sued Adamson for conversion, and he was successful in it and Adamson had to pay the damages for the same, subsequently Adamson sued Jarvis to be indemnified for the loss that he incurred to pay the damages to the owner.

Held

The court held that the plaintiff followed the instructions of the defendant, so this is presumed that anything went wrong as per the instructions, so the defendant will be liable to pay the damages so at the end Jarvis had to pay the damages to Adamson.

After reading this case I analyzed that there is a promise to save the person from the loss but the party has to follow all the instructions of the other party that is indemnified in order to claim indemnity. After this case, the law further changed by the case Dugdale vs. Lowering. This is the case it was shown that the promise may be expressed and implied.

• Dugdale vs. Lowering

Facts

In this case, the K.P CO and defendant were claimed for certain trucks which were in the possession of the plaintiff. The communication was held between the plaintiff and defendant in which the plaintiff’s concern for asking indemnity if they delivered the trucks to the defendant. The defendant without giving an answer and told him that sent all the trucks back to him. The K. P Co brought a lawsuit against the plaintiff for the conversion, and the plaintiff has to pay the damages. Subsequently, the plaintiff sued the defendant for indemnity.

Held

In this case, the court held that the plaintiff is entitled to recover indemnity because there is no intention of the plaintiff to send the trucks without indemnity. So, in this case, there is an implied promise which is agreed by the defendant when he told that sent all the trucks back to him, then it is automatically presumed that he agreed for the indemnity.

After studying this case the new provision regarding the contract of indemnity it has come that the implied promise is also enforced.

Provisions under English law and its enforceability

Basically, contract of indemnity is a wider concept in English law as compared to Indian law, because in English law all the matters are looked upon which are related not only because of the acts of some individual but also arises from some event or accident in case of fire or act of God.

In order to define the contract of indemnity under English it is very important to relate with the legal maxim called “you must be damnified before you can claim for indemnified” which means if promisor is not incur any loss then he will not claim indemnity, this shows that injury is the most essential element for claiming indemnity under English law.

The general rule of the contract of indemnity under English law is as follows:

1) Indemnifier will compensate indemnity holder only when indemnity holder incurs any loss.

2) If the indemnity holder follows the instructions of the indemnifier.

3) If the indemnity holder incurs any cost during suit proceeding or pays any amount in compromise.

These rules prove that without injury indemnity holders cannot claim indemnity. But these provisions were creating a problem in those conditions when the indemnifier is not able to pay the claim, so courts of equity in order to give some relief and removed the principle that in order to get indemnity first you incurred some loss. Then indemnifier is liable for indemnity for the promise. But now the situation has changed and now indemnifiers are liable also when the actual loss has not happened.

In another landmark judgment of Re Law Guarantee and Accidental case, the court was of the view that the contract of indemnity should not only be limited to reimburse the person for any loss of the money. A contract of indemnity seeks to ensure that the indemnity holder stands in the same position as he was before the loss had occurred. The indemnity shall, therefore, lose its significance if the indemnity holder is called to pay the loss and thereafter reimburse the amount from the indemnifier.

There are following provisions of the contract to indemnity under Indian law.

Origin and growth of contract of indemnity under Indian law

In India, the contract of indemnity originated in the case Osman Jamal & Sons Ltd v/s Gopal Purshotam. These are the facts of the case:

• Osman Jamal & Sons Ltd v/s Gopal Purshotam

Facts

In this case, the plaintiff is a company which is working as a commission agent for a defendant firm. The defendant firm was engaged in buying and selling of Hessian and Gummies, where the defendant firm promised with the plaintiff firm that in case of any loss the defendant firm will be indemnified. The plaintiff firm bought Hessian from Maliram Ramjets, but the defendant company is not able to make payment and take delivery of Hessians. So Maliram Ramjets sold the same to other people at a lower price. Maliram Ramjets sued the plaintiff for the loss, but the plaintiff company was winding up and asked the defendant to indemnified for the same. But the defendant refused to pay the damages and claimed that because of the plaintiff he was not able to do the payment.

Held

The court held that the defendant is liable to indemnify the plaintiff because he promised for the same.

As we discussed above there is the case of an express contract of indemnity which was introduced in the year1929, after this a new case was introduced in the year1938, which was the case of an implied contract of indemnity, Secretary of State vs. Bank of India Ltd.

• Secretary of State vs. Bank of India Ltd

Fact

In this case, an agent was in possession of a government promissory note which was endorsed by the agent to the bank with forged endorsement. The agent presented the promissory note to the bank with the malafide intention but the bank within good faith uses that promissory note for a redeveloped and issued from” public debt office.  In the meantime, the real owner of the promissory note sued the secretary of state for the conversion of the promissory note. Subsequently, the secretary of state sued the bank on the basis of implied indemnity.

Held

The court held that when a person does any act on the request of any third person and such act violates the right of the third person then the person who commits an act entitled to claim indemnity from that person who is requested to do that act. 

This was the case where we saw the implied contract of indemnity. The law was further amended where the original rule under English law was that if the indemnity holder suffers any kind of loss then he will be able to claim indemnity from the indemnifier. But this principle was also changed in England which was discussed above with the reference of some cases. Exactly in India Justice Chagla explained the process of transformation in the landmark judgment of Gajanan Moreshwar vs. Moreshwar Madan Mantri.

• Gajanan Moreshwar vs. Moreshwar Madan Mantri

Facts

In this case, Gajanan Mores was having land in Bombay but at a lease for a long period. Gajanan Moreshwar was transferred to Moreshwar Madan Mantri but for a limited period. M Madan started construction over the plot and ordered some material from K D Mohandass, when K D Mohandass asked for the payment of the material, M Madan refused to pay the amount and requested G Moreshwar to prepare a mortgage deed in favour of K D Mohandass. The interest rate was decided and G Moreshwar put a charge over his possession. According to the deed, a date was decided for the return of the principal amount. But M Madan decides that he will pay the principal amount along with the interest in order to release from a mortgage deed, and decides a particular date for the same. On the predefined date M Madan did not pay anything to K D Mohandas, and G Mores war had to pay some amount of interest to K D Mohandas. After many requests, M Madan did not pay anything, so G Moreshwar decided to sue M Madan for the same.

Held

In this matter, the court held that if indemnity holder has raised any responsibility and the nature of that responsibility is absolute then indemnity holder can ask the indemnifier to fulfil that responsibility or pay the amount. It is not necessary that a promise should pay the loss incurred.

Case analysis

According to my understanding, the court took the correct decision because here the indemnifier is willing to compensate the indemnity holder if any responsibility arises so the indemnifier should pay the debt directly. Because if the indemnity holder does some act which leads to arise the liability so he should pay the same because indemnifiers promise the indemnity holder to restore him in the original situation.

Provisions of a contract of indemnity under Indian law

Contract of indemnity under Indian law is a narrow concept because the matters in which human beings are involved which is prescribed under Section 124 of the Indian Contract Act 1872. Indian law only covers expressed contracts of indemnity.

The essentials of contract of indemnity are as follows:

1) There are two parties, indemnity holder and indemnifier. Indemnifier is that person who promises to pay compensation whereas indemnity holder is that person whose loss is to be compensated.

2) There should be a contract to compensate the person for the loss incurred by indemnifier or any other person, as we discussed above the origin and growth of contract of indemnity under English law, so we also discussed the same under Indian law.

There are many rights which are given to indemnity holders which is defined under section 125 of the Indian Contract Act, 1872.

1) Right to recover damages.

2) Right to recover costs.

3) Right to recover some money under the compromise.

Rights of indemnifier

As we talk about the rights of indemnifiers are not given under contract of indemnity but they have similar rights as the same as given in guarantee.

The major difference between the two is as follows-

National Law School of India Review

In this article, the author talks about indemnity under English as well as Indian law. Basically, the contract of indemnity is based upon the ideology of command law principles, in this article, they talk about the changes which are held in a commission report (13 reports) regarding implied indemnity. The main purpose of the contract of indemnity is to reimburse the person so that he comes back to his original position. In my opinion indemnifier should not be liable for the act which is caused naturally or without the interference of human beings because these acts are not in the hands of indemnifier because this is beyond the control of the human beings so, in this context, I support provisions of India, I also analyzed that the principles of Indian contract act are not self-exhaustive there are situations where we referred to common law principles are taken into consideration which is not contradictory to our laws

Conclusion

In India, all matters are looked upon where losses are incurred due to the promisor himself or any other third party whereas in England all the matters are looked upon where a loss incurs from any person as well as from any accident.

The original rule in England was that first indemnity holder incurs a loss then he will be indemnified but further this principle changed and now the principle is the liability of indemnifier is arising when there is a possibility that indemnity holder will incur a loss in future.

References

• The Indian Contract Act, 1872
• Law Times Journal
• http://www.legalservicesindia.com/article/379/Indemnity-in-a-contract.html

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