Image source: https://blog.ipleaders.in/indemnity-contracts-guarantee-and-consideration/

This article has been written by Shivam Sharma pursuing a Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho.

Introduction

A devastating second wave has left India with a demoralized population and a crippling economy. With some 400,000 cases per day, India witnessed an unprecedented crisis. This disaster is bound to repeat itself if it is not tackled on a timely basis.  Vaccination of the entire population is one such way. But for now, with only 150 million doses administered, a complete vaccinated population seems to be a pipe dream. 

Currently, India has only two vaccines, COVISHIELD and COVAXIN, which are both indigenously produced in the country. But the Indian manufacturers can only make so many vaccines. This is one reason why only 2 percent of the entire population of the country is completely vaccinated. To tackle this mayhem the most viable option is to import vaccines from foreign manufacturers, like Pfizer and Moderna.

But both Pfizer and Moderna have reservations against the supply of their vaccines to India. As a precondition to the supply of their vaccines, they want the Indian government to indemnify them.  This article attempts to explain what this indemnity is and how they affect the vaccination drive in India. It first explains the elements of indemnity and then correlates it to the demands of the vaccine manufacturers. Finally, it makes an argument as to why India should grant indemnity to the vaccine manufacturer and why it should not. The article ends with the author’s suggestion on the issue. 

What is an indemnity?

Indemnity is a kind of contract in which one party promises to save the other from the consequences of an act. In day-to-day parlance, it is a protection against any loss or damage. The word ‘indemnity’ is defined under Section 124 of the Indian Contract Act, 1872 as a contract where the promisor promises to save the promisee from any loss which occurs due to the act of the promisor himself or the act of some other person. In the illustration to the said section, a promisor promises to the promisee that he will save the promisee from the consequences of any legal action taken against him. This makes an indemnity contract a contingent contract because the liability of the indemnifier arises only when a contingent event occurs.

The person giving the indemnity is called the ‘Indemnifier’ (the Indian government) and the person to whom the indemnity is provided is called the ‘Indemnity Holder’ (the foreign vaccine manufacturers). In accordance with the interpretation of Section 125 of the Indian Contract Act, 1872, an Indemnity Holder has the right to recover the following from the Indemnifier: 

  1. Any damages that the Indemnity Holder has to pay under a legal suit (where such suit is covered under the scope of indemnity being provided);
  2. Any other costs that have to pay in such suits;
  3. Any sum which had to be paid under the terms of any compromise in the context of such a suit.

 As per the principle under re Richardson, in indemnity, the Indemnity Holder shall be never called upon to pay. This principle is also followed in Indian jurisprudence. The most important judgment in this context is Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri.  In this case, the Bombay High Court held that when an Indemnity Holder’s liability becomes absolute, he shall be absolved of the same by the Indemnifier. The Calcutta High Court has followed the same principle in Osman Jamal & Sons Ltd. v. Gopal Purshottam

What indemnity is required by the vaccine manufacturers?

Typically, it can take decades to develop and approve a vaccine. This is because a vaccine can alter human biology at a very fundamental level. However, the covid situation is unprecedented. Covid has caused a 3.5 percent fall in the global output levels in 2020 alone, as per the stats of the IMF. On top of this economic loss, there is the loss of innocent and indispensable human lives. This is why the vaccination initiative across the globe was given a green go even before it had been through the requisite process of approval. While there haven’t been any adverse effects of the vaccines yet, there have been instances of blood clotting and the long-term effect of these vaccines are still unknown.

The dilemma that the vaccine manufacturers now face is that will they be liable for any injury caused to any person due to the administration of the vaccine that they had produced? And if yes, what will be the extent of their liability? Will they have to pay heavy damages and compensation, even though they had in effect observed all requisite care and caution in the production and distribution of vaccines in such pressing times?

The vaccine manufacturers thus seek to be bestowed with such indemnity from the government so as to protect them from any claims of damages and compensation. On the global level, Pfizer and Moderna have been given such immunity under US Countermeasures Injury Compensation Program and WHO’s COVAX. However, there are no such promises given by the Indian government. This makes the vaccine manufacturers liable.  

Practice in other nations

In America, the Public Readiness and Emergency Preparedness Act, 2005 is the substantial statute that grants legal immunity to companies that are engaged in the making of critical medical supplies. The immunity does not exempt any intentional misconduct on part of the companies. Currently, Pfizer and Moderna have been granted immunity that protects them from any liability which could arise out of the vaccines that they produce.

As for the United Kingdom, the Human Medicine Regulations, 2012 has been put to use to grant civil immunity to Pfizer and Moderna. South Africa, like India, does not have a statute to protect the vaccine makers. In order to facilitate the import of foreign vaccines, South Africa has set up a compensation fund that will be used to indemnify the vaccine manufacturers for any damage which is caused by the vaccines. 

Arguments for indemnity

In 2020, a 40-year-old man enrolled himself in trials for the ‘Covishield’ vaccine. The indigenously developed vaccine is manufactured by Serum Institute. Later the said person, issued legal notices to Serum Institute alleging that he had suffered serious and irreversible side effects which included neurological breakdowns and damage to cognitive function. In the same notice, he also sought a compensation of INR 5 Crores from Serum. Since the occurrence of this incident, Serum has consistently demanded that it should be provided with indemnity for any damage caused by the vaccine. 

Presently, the agreements between vaccine manufacturers and the central government all have liability clauses. Due to this clause, the vaccine makers are liable for any damage caused because of the administration of their vaccine. But it is not just the vaccine manufacturers who can be sued, the central government can itself be held liable. This is because the government can be made liable for commercial transactions. All commercial transactions of the government are an exception to the sovereign immunity held by it, as was highlighted in the case of Peninsular and Oriental Steam Navigation Company v. Secretary of State for India and later in Ethiopian Airlines v. Ganesh Narain Saboo. Hence, it is legally possible that the government can take over the liability of the vaccine manufacturers with the insertion of an indemnity clause.

Going further, it is a tenant under the Second Restatement of Torts that no vaccine manufacturer should be made liable for any latent damages which are very unavoidable. This is especially true in the present context where the vaccine manufacturers cannot adhere to the normal protocol due to the urgency of the situation. As long as the vaccines are properly manufactured with the highest degree of care and caution, the manufacturers should be subjected to unreasonable expectations. 

Arguments against indemnity

With the shortage of supply and the ‘grant of indemnity’ being the only hindrance in procuring foreign vaccines, it appears rather straightforward that the government should grant it. There is, however, caution to be observed. In Gunjan Moreshwar v Moreshwar Madan, it has been held that when the liability of the Indemnity Holder becomes absolute, so does the liability of the Indemnifier. 

This would mean that the government will become liable for all the damages caused by these vaccines. This would add to the financial burdens of the government which is already struggling with the economic ravages of the Covid era. In addition, granting indemnity to foreign manufactures would seem unjust if the same courtesy is not extended to the Indian manufacturers like Serum Institute. Thus, the government will have to indemnify all the players in the market, adding more to the already heavy basket that it carries. 

Conclusion

There is no way of knowing the magnitude of loss that Covid has caused to the children who missed out on their education. In the coming years, we will have to get them vaccinated as well. But no vaccine manufacturer would be willing to supply vaccines to a nation where it is facing civil suits for damages and compensation in lieu of the vaccines it provided for the adult population.  

In addition, the Indian government has set out to achieve 100 percent adult vaccination coverage by the end of 2021, a feat that seems more and more impossible as the deadline arrives nearer. To bridge the vaccine deficit for both the young and adult population, India seeks to purchase some 50 million vaccines from Pfizer. But Pfizer along with Moderna have refused to enter the Indian market without the assurance of Indemnity from the Indian government. India will consider reaching a middle ground with the manufacturers, just like the UK did.

This has indeed become a catch-22 situation where the Indian government will either have to give up the vaccine procurement from these foreign entities or they will have to bear the burden of hefty damages and compensation. If the choice is between vaccines and a budget deficit, it is rather rational to get more vaccines. An immune crowd can still put the economy back on its feet. There are 25 jurisdictions with no-fault compensation programs. It is time that India joined their ranks.


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