Indemnity

This article has been written by Mudit Gupta, currently pursuing BBA.LL.B (Hons.) from the University of Mumbai Law Academy. This article discusses all the necessary details about the contract of indemnity and rights of an indemnity holder.

It has been published by Rachit Garg.

Introduction 

In the past, people were a lot more secure about their commitments. Word of mouth was good enough to give a sense of trust. But as trust levels started to decrease, people preferred to have everything in writing. People also felt the need to mitigate the risk levels in exchange for something. As this concept took prominence in society, it was considered to find a place in the law as well. So the concept of indemnity was discussed in English law and legislation was made regarding the concept. 

When the Britishers started operating in India and started ruling over our country, they also introduced various laws. One such law was the Indian Contract Act, 1872. As these laws were made by the British lawmakers, they were dominantly dependent on the English laws with a twist as per the cultural requirements of India. The concept of indemnity was also discussed in the law passed in 1872.

Now, as the Indian Contract Act, 1872 was presented with some changes, there were also some significant differences between the English and Indian legislations. The scope of indemnity under English law is a bit wider as compared to that of Indian law. As per English Law, a contract of indemnity has been defined as a promise by one party to compensate another for the loss suffered as a consequence of a specific event, called the “trigger event”. This definition of indemnity has nothing to do with who was behind the happening of the event that yielded to the maturity of liability. But, the concept of indemnity under Indian law only includes indemnity for the loss caused by the acts of the indemnifier or any other person, and it does not include any loss caused because of some natural calamity, whereas in English law the concept includes the situations where covering for losses caused because of all the three mentioned situations is valid.

In this article, all the information relating to the contract of indemnity in India and, more specifically, relating to the indemnity holder, has been discussed thoroughly.

What is a contract of indemnity 

As per the preamble of the Indian Contract Act, 1872, the Act was passed to amend and define certain parts of the contract. This does not mean that this Act is the primary statute to be referred to in the case of a contract; it is not the only one. As pronounced in the judgement of Irrawaddy Flotilla Co. v Bhagwandas (1891), the statute named the Indian Contract Act, 1872, is not a complete code. It is the primary one which has to be referred to while dealing with contracts within the jurisdiction of India, but other specific statutes as per the circumstances are also to be referred to. This means that the statute provided for contracts is not exhaustive and gives room for other updations to be made. As and when the need arose, new statutes were brought in to manage the situation. The Sale of Goods Act, 1930; the Indian Partnership Act, 1932 etc. are some of the few examples of these. These statutes were earlier a part of the Indian Contract Act, 1872 but later they were separated from it and new statutes were enacted on the same. 

But some special types of contracts are not separated from the statute till now. They all fall under the second part of the statute, commonly known as specific contracts. One such type, which is very important and widely used, is a contract of indemnity.

Let’s first discuss what a contract of indemnity actually is.

The contract of indemnity was first introduced in the case of Adamson v. Jarvis (1827). In this case, the plaintiff, an auctioneer, sold cattle on the instructions of the defendant, and subsequently, the cattle were found to be owned by some other person. The owner sued the plaintiff. The plaintiff subsequently sued the defendant, who instructed him to sell the cattle. In this case, the judgement was given in favour of the plaintiff. The Court said that the person who instructed the auctioneer, in a way, indemnified the auctioneer and hence was held liable for the same under his liability as an indemnifier.

As per Section 124 of the Indian Contract Act-

A contract of indemnity is a contract whereby one party promises to save the other from the loss caused to him by the conduct of the promisor or any other person.

A contract of indemnity is a contingent contract because it is the happening of a certain event by the indemnifier or the third party that triggers the contract. The occurring event triggers the contract and leads to the maturity of liability.

For a valid contract of indemnity, there are certain conditions-

  • The consideration for the contract must be lawful.
  • The object of the contract must be lawful. 
  • Loss to the indemnity holder is an essential requirement.
  • It is dependent on a particular event.
  • The indemnity may be expressed or implied as per the situation.
  • All the other essentials of a valid contract.

These conditions need to be fulfilled for a valid contract of indemnity to take place. 

Who is an indemnifier

As we talked about the concept of indemnity, now let’s talk about who is an indemnifier. An indemnifier is a person who guarantees to pay for the loss caused to the indemnity holder upon the happening of a certain event, whether it be done by the indemnifier himself/herself or some third party. As soon as the loss occurs to the indemnity holder because of the acts of the indemnifier or some third party, the maturity of liability arises. 

For example, A gives an indemnity to B that if any sort of damage happens to his house which is caused by human activity within the next 2 years, then A will pay for all the losses to B. If in this case, a fire breaks out at the house of B which has taken place due to an event organised in a neighbourhood activity, then in this case A is bound to pay B for all the damages incurred by him. In this case, A is the indemnifier as he has taken the responsibility to make up for the losses incurred by B and he is bound to do so as per the agreement.

Who is an indemnity holder 

The beneficiary party in a contract of indemnity is the indemnity holder. An indemnity holder is a party who is assured by the indemnifier of the costs and damages that can take place in the future regarding a particular thing. The damage needs to have taken place by the happening of an event for which the indemnifier himself or any other third party is liable. 

As in the example discussed above, A is the indemnifier. B, who has been assured of all the damages, is the indemnity holder as he is the beneficiary party in the agreement made between them.

Rights provided to an indemnity holder under Section 125 of Indian Contract Act, 1872 

In a contract of indemnity, the indemnity holder is the beneficiary party and hence, the majority of the rights are in his favour. An indemnity holder holds the right to recover damages, costs incurred by him concerning the suit relating to the matter, and also the amount paid under the compromise of the suit. These rights are provided to him by Section 125 of the Indian Contract Act, 1872.

Section 125 of the Indian Contract Act, 1872, confers some rights to the indemnity holder and are to be fulfilled by the indemnifier and these rights include-

  1. Right to recover damages (Section 125(1))
  2. Right to recover the costs incurred (Section 125(2))
  3. Right to recover sums paid during compromise (Section 125(3))

All these rights are comprehensively discussed in the coming subheadings. 

Right to recover damages 

As we discussed, the main motive of the contract of indemnity is to undo the losses caused to the indemnity holder which were caused due to the happening of an event, and the happening of that event is either triggered by the indemnifier himself or some other third party. As per the provisions given under the Indian Contract Act, 1872, an indemnifier becomes liable to pay to the indemnity holder all the damages to which the contract of indemnity applies.

For example, if two people, namely A and B, sign a contract of indemnity wherein A indemnifies B for the potential losses that could be incurred by him if a ship, which is used to carry goods sinks by some human error. In this scenario, if the ship sinks due to some human error, then A is liable to pay B the damages incurred by him, and it is the right of B to recover those damages from B.

Right to recover costs incurred 

The indemnity holder holds all the rights to recover all the costs incurred in the suit of indemnity from the indemnifier as it is their right to do so. The main essence of the contract of indemnity is to mitigate the losses incurred by the indemnity holder, and if some costs relating to a suit to the matter concerned arise, then the costs regarding that suit have to be borne by the indemnifier. However, in bringing up or defending such a suit, he must not go against the directives of the indemnifier and should act in such a way as he would have acted in the absence of the indemnity. Otherwise, the authorization to defend or bring up the suit is given by the promisor expressly.

As far as these conditions are taken care of, any costs related to the same are to be borne by the indemnifier.

For example, if two people, A and B, contracted with each other wherein, A indemnified B for the losses caused to him by a particular shipment of goods. Now, if any suit takes place regarding the event that caused the loss to the shipment, like an accident, then the result may play a key role in the case. Then, in that case, the costs incurred regarding the suit will also become recoverable from the indemnifier as per the right of the indemnity holder to recover them conferred on him by Section 125 of the Indian Contract Act, 1872. However, in bringing up or defending such a suit, he must not go against the directives of the indemnifier and should act in such a way as he would have acted in the absence of the indemnity.

Right to recover sums paid under compromise 

The indemnity holder also holds the right to recover all the sums paid under the compromise of any suit if such a compromise was not against any directions given by the indemnifier specifically. Another condition is that he should act in such a way as he would have acted in the absence of the indemnity or the authorization to compromise the suit given by the promisor.

For example, if A and B contract with each other, and A indemnifies B regarding the completion of a task assigned to B by a third party. Now, if the task is not fulfilled and the person who assigned the task to B  files a suit regarding the same, and subsequently, both the parties compromise and B needs to pay a certain sum under this compromise, then in that case, the sum paid is also recoverable from A as per the right to recover sums paid under a compromise subject to. However, in bringing up or defending such a suit, he must not go against the directives of A and should act in such a way as he would have acted in the absence of the indemnity.

Are contracts of insurance indemnity contracts

When the analogy between the insurance contracts and the contract of indemnity has to be drawn, the different perspectives offered by the English and Indian laws have to be discussed.

As per English law, contracts of insurance are indemnity contracts, as, under contracts of insurance, one party has incurred a loss and the other has promised to make good for a loss so incurred by the indemnified party. The source responsible for the happening of the trigger event is not a matter of concern in this case. 

But as per Indian law, the source of the activity that caused loss to the party holds much importance. Any loss occurring due to non-human activities is outside the purview of the contract of indemnity. Hence, the majority of the insurance contracts in India are indemnity contracts, but the difference between Indian and English legislation is that the purview of English legislation is much wider as compared to Indian legislation. 

Life insurance contracts are not contracts of indemnity. The reason behind this is that most deaths do not happen unnaturally. They happen naturally and do not have any relation to any sort of trigger activity. So, as there is no involvement of the indemnifier, i.e., the insurer or any other third party, and the contrary has not been proved, the death cannot be said to have happened due to a particular event triggered by either the indemnifier or some other third party. 

The Indian judiciary has many times discussed this concept in the past.

In the case of New India Assurance Company Ltd. v. Kusumanchi Kameshwara Rao and Ors.(1996), the Hon’ble Supreme Court pronounced that the statute regarding the contracts of indemnity does not deal with cases where the happening of events does not depend on any acts of the indemnifier or some third party.

Hence, it can be safely concluded that most insurance contracts don’t fall under the purview of contracts of indemnity and the scope of the same is much wider in the case of English laws.

When does the liability of an indemnifier commence

Talking about the commencement of liability on the part of the indemnifier, the liability commences as soon as the trigger event takes place. The happening of the event, either by the indemnifier himself or by some third party, marks the commencement of the liability on the part of the indemnifier with an underlying principle that the loss must have occurred to the indemnity holder and he should have acted in the same way as he would have acted when he would not have indemnity to save the loss.

Clarifying with the help of an example, if A indemnifies B regarding the damage to his office, then the liability arises as soon as some trigger event happens, causing damage to the office and loss to B.

The extent of liability in the case of indemnity where there is an indemnity bond in the form of a bank guarantee

In the case of Cargill International SA v. Bangladesh Sugar and Food Industries Corpn, (1996), it was held that where a person encashes an indemnity bond in the form of a bank guarantee, the extent of liability is only limited up to the value of the bond and not beyond it.

Remote losses in indemnity

The basic principle of the Indian Contract Act, 1872 says that immediate damages are to be paid for and remote ones should not be taken into consideration. Remote damage is not considered. But in the case of contracts of indemnity, the remote damage is also mitigated for the indemnifier. Losses which can’t be foreseen normally can also be accounted for while calculating the damages in case of indemnity.

Case laws

Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942) 

In this case, the plaintiff got a piece of land from Bombay Municipal Corporation for a long term of 999 years on lease. He transferred the lease to M. Madan for a limited period. M. Madan started the construction on the land and got his supplies from K.D. Mohan Das. When asked for the payment of the supplies, M. Madan could not pay for them. He further asked the plaintiff to prepare a mortgage deed in favour of K.D. Mohan Das. G. Moreshwar put a charge on his possessions and they also agreed upon the interest rate. They decided on a date for the return of the principal amount and interest by M. Madan. 

He had decided to repay the principal amount along with interest and to get the mortgage deed released before a particular date. But M. Madan did not pay anything to K.D. Mohan Das and G. Moreshwar had to pay some interest. When after several requests and intimations, M. Madan didn’t get the mortgage deed released, G. Moreshwar sued M. Madan for indemnity.

In this case, the court adjudged that if the indemnity-holder has incurred a liability and the liability is absolute, then he can ask the indemnifier to take care of it. Hence, the plaintiff was indemnified by the defendant for all those liabilities under the mortgage and deed of further charges. 

The Secretary of State v. the Bank of India Limited (1938) 

In this case, a promissory note with a false endorsement was issued by a broker, and the bank applied for and got it renewed by the Public Debt Office, all in good faith. Meanwhile, the Secretary of State was sued by the real owner of the promissory note for the conversion, and the Secretary of State, in turn, sued the Bank of India Ltd. on the ground of implied indemnity.

In this case, the judgement was based on the case of Dugdale v. Lovering (1875) where it was held that it is a general principle of law that, when an act done by a person at the request of another, action is not manifestly tortious in itself to the knowledge of the person doing it, and if that act turns out to be injurious to the third person, then that person doing it is entitled to indemnity by the person who requests that the act be done.

Recent example

Recently, in a video released by Sandeep Maheshwari on his Youtube channel, there was a conversation between Sandeep Maheshwari and Shwetabh Gangwar in which Sandeep Maheshwari orally indemnified Shwetab regarding the compensation demanded by a person in a legal suit. He said that “as the Shwetabh is going through a financial crunch, if he loses the legal tussle, then the compensation demanded by the other party will be paid by Sandeep Maheshwari.” Although this is not something provided in writing, it holds value and is a very apt example for understanding a contract of indemnity. 

Conclusion 

The contract of indemnity or clause of indemnity in a contract has become an essential part of most commercial contract relationships and other contractual agreements. The scope of indemnity in Indian law is only limited to the events that took place due to the acts of the indemnifier or some other party. The statute doesn’t have any provisions relating to natural calamities. This is becoming a bit of an issue in the times we are all living in. Hope that the lawmakers of our country understand the importance of this point and amend the statute so that the contracts are clearer and more exhaustive in nature. The scope of the provisions needs to be widened to cover the losses of the indemnity holder comprehensively. So let’s hope that the changes are made and the statute becomes more exhaustive in nature. 

Frequently Asked Questions (FAQs) 

What is unlimited indemnity?

The indemnity which does not have any limitation of time for enforcement is called an unlimited indemnity.

Can a contract of indemnity be implied?

Yes, a contract of indemnity can be expressed or implied, depending upon the terms of the contract and/or the circumstances of the case.

Can contracts of indemnity be oral?

Yes, in India, contracts of indemnity can be either written or oral, but it can be very difficult to prove oral indemnity contracts in courts.

Can contracts of indemnity be enforced even if there is no actual loss?

As per the interpretation of the statute only, the same cannot be done but as per some judgements if an absolute liability has accrued and it is absolute in nature, then the same can be enforced by the indemnity holder. One such case was Khetarpal Amarnath vs Madhukar Pictures (1955).

References 


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