This article is written by Sambhav Purohit and Aayushi Bhatti.

Introduction

Indemnity is defined as “security against loss” in its literal sense. The contractual duty of one party to pay the other party for losses or damages that have happened or may arise in the future as a result of his or any other party’s conduct is known as indemnification.

Section 124, Indian Contract Act, 1872 defines Contract of Indemnity:

“Contract by which one party guarantees to save the other person from loss caused to him by the action of the guarantor himself, or by the action of any other person.”

The nature of Contract of Indemnity

Contract of Indemnity can be both express or implied.

Under Sec.69, ICA: “Reimbursement of person paying money due by another, in payment of which he is interested. – A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.”

Under Sec.145, ICA: “Implied promise to indemnify surety. – In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully.”

Section 222, ICA:  “Agent to be indemnified against consequences of lawful acts. – The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him”.

Implied indemnity was identified in the case of Secretary of State v. The Bank of India,  when a Broker endorsed a government promissory note with a fake endorsement. The bank sought for and received a renewal of a promissory note from the Public Debt Office after acting in good faith. In the meanwhile, the real owner sued the Secretary of State for conversion. As a result, the bank was sued by the Secretary of State based on implicit indemnification. Held, the general principle of law; when a person performs an act at the request of another, and the act is not manifestly tortious in itself to the knowledge of the person performing it, and the act injures a third person, the person performing the act is entitled to indemnification from the person who requested the act.

The order for particular enforcement requires the indemnification guarantee to be fulfilled following its provisions. It’s only accessible for and compatible with preventative promises.

McIntosh v. Dalwood:

The court in this obersved that in every instance, the contractual duty must be determined first. There is no need for equitable relief if the duty is simply to indemnify a person, in the sense of returning him an amount of money after he has paid it. Damages will be sufficient compensation. On its true construction, the obligation is to relieve a debtor by preventing him from having to pay his debt. Equity will grant relief in the form of quia timet relief, and instead of forcing the party indemnified to pay the debt first, and possibly ruining himself in the process, it will specifically enforce the obligation by ordering the indemnifying party to pay the debt.

Adamson vs. Jarvis

In this case, the plaintiff was an auctioneer who sold animals on the defendant’s instructions. It was later discovered that the cattle sold did not belong to the defendant, but rather to someone else, making the auctioneer (plaintiff) responsible for the conversion. The auctioneer then sued the defendant for indemnification for the losses and damages he incurred while working under the defendant’s orders. The plaintiff had complied with the defendant’s request and was entitled to assume that if anything went wrong, he would be compensated, according to the court. As a result, the defendant was ordered to compensate the plaintiff for his losses and damages.

Recognized problems or loopholes

• Negligence: Whether the indemnity agreements cover the owner in situations when the accident was caused or contributed to by the carelessness of its workers.

Any indemnity agreement will offer compensation in situations when the losses are caused entirely by the contractor’s fault or carelessness, according to the law. If the owner is held liable as a result of the accident, most jurisdictions have a common law right to indemnification that applies even if there is no written indemnification agreement in place. “It is clear, from the foregoing common law rules, that one who is himself without fault and is forced by operation of law to defend himself against the act of another is entitled to indemnification.”

In situations when the owner of the building contributed to the losses resulting via carelessness or another fault of its workers, the courts are hesitant to impose an indemnity duty on the contractor. In such a scenario, most courts have ruled that the indemnification contract does not apply unless there is an explicit declaration that it does or unless the court finds the wording to be so plain that no other reading is possible. In deciding whether or not to enforce an indemnity arrangement in such a circumstance, the courts have looked at a variety of considerations.

In a Wisconsin case, Criswell v. Seaman Body Corp.,” Even though there was no intentional negligence or fault on the part of the owner, he was found responsible to a subcontractor’s employee for failing to comply with the Wisconsin Safe-Place Statute obligation to provide a “safe place” of work.

1. If the costs and losses are entirely due to a third party’s carelessness or another fault, and the event satisfies the other requirements of the indemnity language in terms of time, location, and cause of the occurrence, the scenario should be covered by the indemnification agreement. For example, a workmen’s compensation statute could make a building owner liable for injuries sustained by one of his employees on the premises, even if neither the owner nor the contractor was at fault and the accident was caused solely by the fault of a third party or the fault of the injured party himself. In the most typical type of indemnity agreement, such costs should be covered.
2. Most indemnity agreements would cover the owner if the losses and expenses incurred are the results of a pure accident that happens while the contractor-Indemnitor is on the premises and has some relationship with the contractor-activity. indemnitor’s A workmen’s compensation law, for example, may impose responsibility on the building owner regardless of negligence.
3. Contrsuction and drafting problems: Indemnity provisions may cause a substantial shift in the (normal) risk distribution in a contract. As a result, courts have usually regarded indemnification provisions with great caution and subjected them to “exceptionally stringent criteria.” The “inherent probability” that the other party to a contract containing such a provision meant to relieve the other from a responsibility that would otherwise accrue to that party is the rationale for placing such requirements on such clauses.

Draftsmen are faced with the choice of stating negligence and scaring away potential contractors and lessees, or not specifying negligence and giving an Indemnitor a legitimate reason to refuse indemnity if the indemnitee is at fault. The issue will not go away, and a close case containing such a provision will almost certainly result in litigation. If the indemnitee expects to be protected against responsibility as a result of his negligence, it might be argued that the moment has come to address the problem front-on by having the contract explicitly offer such protection. After all, there’s nothing wrong with ensuring against responsibility for one’s negligence; the appropriateness is unaffected by the fact that the indemnitee is a landowner rather than a driver, and the Indemnitor is a contractor or lessee rather than an insurance company.

5. Use of confusing phrases and words in a more effective manner. When employing the terms “arising out of” and “in conjunction with,” caution should be used. The term “keep harmless” is often used in indemnity agreements, and although this is typical phraseology in indemnity clauses, the Courts have ascribed the meaning of indemnification to it.

Conclusion

In certain ways, Indian law on contractual indemnities has deviated from English law and taken its course. However, their commonalities far outnumber their differences. More than a century after the Act, the level of consistency is pretty amazing.

Liability problems can never be solved with a simple indemnification provision. Those who attempt to avoid responsibility or seek relief from liability for their conduct will find the law to be unfavourable to them. The basic rationale is that a negligent party should not be allowed to fully transfer all claims and damages against him to a non-negligent party.

References

1. Criswell v. Seaman Body Corp., 233 Wis. 606, 290 N.W. 177 (1940).
2. Adamson v. Jarvis, (1827) 4 Bing 66.

3. McIntosh v. Dalwood, (1930) 30 SR (NSW) 415.

4. Secretary of State v. The Bank of India, (1938) 40 BOMLR 868.
5. Yeoman Credit v Latter [1961] 1 WLR 828.
6. Peter J, Booth, “Problems with Contractual Indemnities”, Victorian Bar, available at “https://svensonbarristers.com.au/wp-content/uploads/2017/07/Problems_with_Contractual_Indemnities_-_Peter_Booth.pdf”.
7. Collins & Dugan, “Indemnification Contracts- Some suggested Problems and Possible Solutions”, Marquette Law Review, available at “https://core.ac.uk/download/pdf/148690515.pdf”.
8. Tiwari & Toppo, “Contract of Indemnity Case laws”, International Journal of Scientific Engineering and Research, available at “https://www.ijser.in/archives/v6i5/IJSER172511.pdf”.
9. Wayne Courtney, “Indemnities and the Indian Contract Act 1872”, National Law School of India Review, available at “http://docs.manupatra.in/newsline/articles/Upload/78F904F2-E9A9-4BA3-9748-09C42A63621E.pdf”.
10. Contract and Specific Relief, AVTAR SINGH(11th edition), Eastern Book Company.

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:

https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA

Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.