This article is written by Ms. Sushree Surekha Choudhury from KIIT School of Law. The article gives a detailed overview of the laws relating to indemnity under Section 124 of the Indian Contract Act (1872).
It has been published by Rachit Garg.
Indemnity, in its basic understanding, means to ‘compensate for loss or damage caused.’ It is a security against losses or damages that might occur by one party to another. Indemnity contracts or indemnity clauses in any contract denote an agreement between two parties – insurer and the insured where the insurer promises to pay compensation or make good the losses incurred by the insured, if any, in case of default, damage, or any other consequential loss. A contract made on this behalf is known as an ‘indemnity contract.’ A contract of indemnity is defined under Section 124 of the Indian Contract Act (1872).
Let us understand this with the help of an example. A and B are friends. C is B’s landowner, whose house B has rented. A and C entered into an agreement. A promises to C to pay a certain sum of Rs. 25,000/- which is B’s monthly rent payable to C, in case B makes a default in payment. Here, A became an insurer, and B his insured and the agreement entered into is a contract of indemnity. Now, C can recover from A the due amount in case B defaults. In other words, A shall indemnify B against C. A here becomes an indemnifier, and B is the indemnity holder.
Indemnity under English Law
Indemnity under English law has a wider ambit than under Indian laws. While Indian laws only cover acts or conduct of individuals, English law also gives recognition to unforeseeable events like accidents, fires or an act of God. English law of indemnity is governed primarily by one rule which states that you must be damnified before you claim to be indemnified. This means that, as per English law, there must be proof of injury or loss in order to be eligible to claim compensation as indemnity.
Essentials of an indemnity contract under English Law
The following conditions must be fulfilled before a person can claim for damages under an indemnity contract under English law:
- There must be injury/loss/damage.
- The indemnity holder must have adhered to all the necessary conditions and instructions given by the indemnifier.
- An indemnity contract will also compensate for costs incurred in any legal proceedings arising out of the indemnity contract.
There were certain instances where justice was denied due to this precondition of proving injury. Thus, later on, the English court went on to relax these rules and also made room for cases where loss has not actually occurred, as per the facts and circumstances of the case. The concept of indemnity originated under English law in a landmark judgement of Adamson v. Jarvis (1827).
Facts of the case
In the instant case, Adamson was the plaintiff and Jarvis, the defendant. Adamson was an auctioneer who purchased livestock from Jarvis. He then sold the livestock after complying with all the instructions that he received from Jarvis. It was later found that Jarvis was not the real owner of the livestock that he sold. The real owner sued Adamson for damages. Adamson had to pay damages. Later, Adamson sued Jarvis, the defendant, to indemnify him for the losses he incurred.
Judgement of the Court
The Court held that, since Adamson followed all the instructions given by Jarvis, anything that went wrong due to following those instructions must be compensated by the one giving such instructions. Thus, Jarvis could be held liable and was bound to indemnify Adamson for the losses he incurred.
Expressed or implied contract of indemnity
In the landmark case of Dugdale v. Lovering (1875), the concept of an implied contract of indemnity was discussed.
Facts of the case
The plaintiff was in possession of some trucks that the defendant wanted to be delivered. Plaintiff and defendant had a telephonic conversation about the same in which the plaintiff expressed their want for indemnity. The plaintiff in clear words stated that they shall send the trucks only if the defendant agrees to indemnify in case of any losses incurred. The defendant, though, gave no direct answer to this but asked the plaintiff to send the trucks. The plaintiff presumed that the defendant agreed to indemnify as they asked for the trucks to be sent. It was later found that one K. P. Co. was the one who was entitled to those truck deliveries and not the defendants. K. P. Co. sued the plaintiff for damages and they had to pay. Now, the plaintiff sued the defendants to indemnify against losses incurred by him.
Judgement of the Court
It was held by the court that the defendants are liable to indemnify the plaintiff as the plaintiff clearly stated their precondition of sending the trucks as the promise to indemnify. Since this was communicated to the defendants and after which they asked to send the trucks, it is presumed that they also agreed with every precondition stated by the plaintiff. Thus, there was an implied promise to indemnify. This judgement was significant since it gave recognition to implied contracts of indemnity.
What does indemnity mean under Section 124 of Indian Contract Act
Section 124 of the Indian Contract Act (1872) defines a ‘contract of indemnity.’ It states that when one party promises to compensate another against the losses incurred by them due to anything done or omitted to be done by the promisor, a contract of indemnity is said to be made between the parties. The promisor comes to be known as the indemnifier, and the person to whom a promise is made is called the indemnity holder.
Since a contract of indemnity is a form of contract, it must satisfy all the conditions of a valid contract as specified under Section 10 of the Indian Contract Act. As per Section 10, a contract is said to be valid if it fulfils the following conditions:
- It must be made with free consent.
- There must be an offer and acceptance of that offer.
- This must become a promise to do or not to do something.
- This promise must be made on a lawful object.
- This promise must be made under lawful consideration.
- It must fulfil a legal obligation.
- The contracting parties must be competent to contract (Section 11) –
- Must be 18 years of age or above.
- Must be of sound mind.
- Must not be an undischarged insolvent.
- Must not be disqualified by any law in force.
- It must be made with good faith.
- It must not be disqualified by law of the territory.
When is an indemnity contract made
An indemnity contract is made when one party promises to compensate another party for losses incurred by them. This loss may be due to the act of the promisor himself or any other person. If the person insured by a contract of indemnity has fulfilled all the necessary conditions for enforceability of the contract and that followed all the instructions, laws and rules governing the contract, he/she becomes eligible to be compensated.
An indemnity contract is usually made as a contingent contract. It is like an insurance which one party avails from another for the future probability of events, as security.
Parties to an indemnity contract
There are usually two parties to an indemnity contract. The one who promises to indemnify is known as the indemnifier. The person who is promised to be indemnified is called the indemnity holder. There is also a third party, the creditor or the owner. This is usually the person who has the legal right against the object in consideration of the contract and can also sue for damages incurred by him/her. Only then does a case of enforcing an indemnity contract come into the picture.
Essentials of an indemnity contract
Firstly, since the indemnity contract is a form of contract, as a result, it must fulfil all the ingredients of a valid contract as has been mentioned under Section 10 of the Act. It has been discussed above. Other essentials can be listed as follows:
- Apart from Section 10 of the Indian Contract Act, other general provisions of the law of contract are also applicable to an indemnity contract.
- There must be two parties to form a contract of indemnity. Those parties are called the indemnifier and the indemnified (or indemnity holder).
- As a contract of indemnity is to compensate for “losses” incurred, such loss must have been caused. It is essential to prove the occurrence of loss or damage.
- Such loss/damage must be that one that has been promised to be indemnified and not any other.
- Such loss/damage must be caused due to the act/omission of the promisor or any other person.
- The act under promise must be contracted as done by individuals. It does not include uncertain future events or events occurring without any human intervention, like an Act of God.
- It can be a contract of insurance, except for life insurance. Insurance contracts are a kind of contract of indemnity.
- The contract of indemnity must be absolute in nature. It must not be collateral to the happening or non-happening of certain events. An indemnity contract must be independent of all hindrances to its absoluteness.
- It may be either an express or implied contract.
- The conditions, promise, object, and every other prerequisite must be in a clear and concise manner.
Enforcement of a contract of indemnity
Enforcement of an indemnity contract can be made through the following steps:
- The validity of an indemnity contract is established.
- Proof of claim by the indemnity holder and good faith established.
- After this, the contract can be enforced as per the terms and conditions mentioned and agreed upon by both parties.
- It includes not only the amount of compensation as promised in the contract of indemnity but shall also include the extra costs incurred in maintaining a legal claim, adjudication, and any other extra amount that must be paid to the indemnity holder in regards to the terms of the contract.
The laws of enforceability have been shaped through a series of judicial pronouncements. It began with the case of Osmal Jamal & sons ltd. v. Gopal Purushottam (1728) where the right of indemnity was discussed for the first time. Currently, the courts have come a long way and there is a common consensus regarding indemnity laws in India. Through cases like Secretary of State v. Bank of India (1939) and Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942) [cases discussed below], the rights of indemnity holders have widened and the ambit increased. It places into consideration several other factors than only a loss or damage, it also sets absolute liability on indemnifiers as per the facts and circumstances of the case.
Rights of an indemnity-holder (Section 125 of Indian Contract Act)
As the contract of indemnity is made, the indemnity holder is vested with a set of rights with a prerequisite notion that the indemnity holder shall act diligently, in good faith, and with a bona fide intention. He/she must not be defrauding or attempting to defraud the indemnifier. Those rights are described under Section 125 of the Indian Contract Act. He has the right to recover from the indemnifier the following:
The indemnity holder can recover in the form of damages, all the sum that he has paid in compensation to any party against which he is entitled to be indemnified under the promise made under the indemnity contract.
It was upheld in Nallappa Reddi v. Vridhachala Reddi and Anr. (1914) where the rights of an indemnity holder were given validation.
Facts of the case
The plaintiff was a minor and the defendant had agreed to manage property in his name on his behalf till he attained the age of majority. Such an agreement also involved a promise by the defendant to pay the interest of debts to another person who was the creditor. He was the indemnifier in this case to indemnify the debts taken by the minor. However, he failed to pay the amount promised. The plaintiff paid the sum due to the creditor when the creditor filed a lawsuit to recover it against the minor and his indemnifier as co-defendants. Now, the plaintiff (indemnity holder) sued the co-defendant (indemnifier) to recover damages.
Judgement of the Court
The Madras High Court observed that the defendant failed to fulfil his obligation to indemnify the plaintiff even though he had plenty of opportunities to do so. The plaintiff had to incur losses because of such a failure. He had to make payment to the creditor and also bear legal costs in defending his case. Hence, the court decided that the defendant is liable to pay the amount to the plaintiff for which he promised to indemnify. The plaintiff has a right to recover damages from his indemnifier.
The indemnity holder can recover the sums of money that he has spent in maintaining or defending a lawsuit against the claim of damages by a competent third party. An indemnity holder can recover this money if he/she has complied with all the instructions of the indemnifier, has acted in good faith, and has taken reasonable care as an ordinarily prudent man would have done.
It was upheld in Pepin v. Chunder Seekur Mookerjee and Anr. (1880) that the indemnity holder has a right to recover costs incurred by him.
Facts of the case
In the instant case, a suit was filed by an assignor of a lease against the assignee. The defendant had promised to pay covenants on the lease but failed to do so. As a result of such failure and default, a suit was brought against the plaintiff by the administrator general, and also bore costs in defending the lawsuit which arose due to non-payment on the part of the indemnifier. Hence, the plaintiff brought a lawsuit against the defendant to recover damages and recover costs incurred by him.
Judgement of the Court
The Calcutta High Court observes that there is an implied obligation on the defendant to pay covenants on the lease in the instant case. Failure to do so has given rise to a good and valid cause of action from the plaintiff. The costs incurred by the plaintiff in paying to the administrator general and in defending the lawsuit have arisen properly and reasonably and due to the reasons of failure on part of the defendant. Hence, the plaintiff is entitled to recover costs and damages from the defendant and the defendant (indemnifier) is liable to pay.
Recover sums paid under compromise
If and when the indemnity holder pays a certain sum of money to compromise and end the litigation, such a sum can be recovered from the indemnifier. Preconditions for being eligible to recover such sums are:
- The indemnity holder must have acted in good faith.
- He should have deceived the indemnifier.
- The indemnity holder must not have recovered or attempted to recover sums fraudulently.
- He must have followed all instructions and directions as given by the indemnifier.
- The claim under-recovery must be fair and reasonable.
In Anwar Khan v. Gulam Kasam (1919), the Court held that the sum of money demanded under damages to recover sums under the compromise, by the indemnity holder, must be fair and proportionate. The indemnifier is liable to indemnify only to the extent he has promised to indemnify and no further. If the amount asked for recovery is beyond what has been promised, the indemnifier can refuse to pay.
In Alla Venkataramana v. Palacherla Manqamma (1944), the Madras High Court stated the conditions under which the claims of the indemnity holder shall be validated. The conditions discussed by the Court were that:
- The compromise must have been made in a bona fide manner.
- The compromise must have been resolved amicably.
- The bargain must not be deemed immoral.
Duties of an indemnity-holder
As the indemnity holder has been vested with enormous rights in the contract of indemnity, he has also been given certain duties that he is expected to perform and adhere to. These are implied and sometimes expressed in the contract so made. Some of the core duties can be stated as follows:
- The most basic yet crucial duty of the indemnity holder is to comply with the terms and conditions of the contract of indemnity so made. If there is any contravention of the terms and conditions laid down in the contract by the indemnity holder, the indemnifier cannot be made liable to indemnify.
- It is the duty of the indemnity holder to act prudently. He is expected to act diligently like a reasonable man with ordinary prudence would do. In case the indemnity holder does not act reasonably and with ordinary prudence, the indemnifier cannot be made liable to indemnify.
- It is the duty of the indemnity holder to act with good faith. The indemnity holder must act with a bona fide intention and any malice would be considered a contravention. The intent is given importance here. If the indemnity holder malafidely tries to make the indemnifier pay for his losses while the losses are self-inflicted, the indemnifier will not be made liable to indemnity on grounds of mala fide intention by the indemnity holder.
- It is a core duty of the indemnity holder to not cause loss or damage. The indemnity holder must act responsibly and must not incur the losses himself due to negligence. If the loss or damage occurs due to negligence of the indemnity holder or due to any other reason which would have ordinarily been avoided to save from loss or damage, the indemnifier would not be made liable to indemnify for such loss.
- It is the prime duty of the indemnity holder to comply with the instructions of the promisor. If the indemnity holder, knowingly or unknowingly, fails to comply with instructions and follow the directions given to him by the promisor, then any loss or damage arising due to such non-compliance will be the burden of the indemnity holder. The indemnifier would no longer be liable to indemnify.
Thus, the duties of an indemnity holder can be essentially categorised as
- Duty to act with prudence,
- Duty to comply with instructions,
- Duty to act in good faith, and
- Duty to adhere to terms and conditions of the contract of indemnity.
Interestingly, the duties of the indemnity holder automatically become the rights of the indemnifier. His liability or non-liability is determined by the same. Though the rights of the indemnifier have not been codified under the laws of indemnity, they can be interpreted from the intention of the legislature and through judicial pronouncements.
Rights of an indemnifier
Although the Indian Contract Act is silent on the rights of an indemnifier, it can be understood through various judicial pronouncements. It was in Jaswant Singh v. The State (1965), that the rights of an indemnifier were discussed for the first time. It was held that the rights of an indemnifier under a contract of indemnity are the same as the rights of a surety under a contract of guarantee. Thus, an indemnifier is vested with the following rights:
- When an indemnifier indemnifies for an indemnity holder, he steps into the shoes of the indemnity holder and gets access and rights over the property of the indemnity holder under the indemnity.
- He is liable to indemnify the promisee only to the limit and for the amount of loss as has been set under the terms and clauses of the indemnity contract. After these claims are settled, he assumes the role of a creditor.
- The indemnifier is eligible to sue third parties regarding the property that he has gained rights to, after fulfilling his obligations under the contract of indemnity. The indemnifier acquires absolute rights over the property. However, he attains such a right only after he has fulfilled his obligation against the contract made between him and the indemnified. He can therefore sue third parties over the property only after gaining absolute rights to do so, i.e., after fulfilling his obligations and settling the claim.
- The indemnifier can be made liable to compensate for losses in such amounts and to such extent as have been agreed to in the contract. This right was upheld in V. M Rv. Ramaswami Chettiar v. R. Muthukrishna Iyer and Ors. (1966) where the Supreme Court decided that the indemnifier is liable to make good only up to the amount of Rs. 1236/-as has been mentioned in the contract of indemnity and no further. The same was upheld by the Supreme Court and the defendant’s appeal to recover more money was dismissed.
- In certain cases, the indemnifier can exercise subrogation rights. It is the right that has been enjoyed by a surety in the case of a contract of guarantee. In a contract of guarantee, after the surety makes the payments and settles the claims of the creditor, he steps into the shoes of the creditor and can now recover such amounts from the principal debtor. Similarly, the indemnifier can exercise subrogation rights and act as a creditor to recover the monies he has paid as indemnity, in the form of money, or by assuming rights over property or in any other manner.
Duties of an indemnifier
The duties of an indemnifier are not particularly codified under Indian Contract Act but it is understood to be the same as the rights of the indemnity holder as is mentioned in Section 125 of the Indian Contract Act. Thus, the duties of an indemnifier can be stated as:
- It is the primary duty of the indemnifier to abide by the rules and clauses of the indemnity contract.
- The indemnifier must act in good faith with due care and diligence.
- The indemnifier must act prudently and reasonably. He must act as a reasonable man of ordinary prudence would do and be vigilant to the terms of the contract so made.
- The indemnifier must perform his part of the contract when needed to do so.
- It is the duty of the indemnifier to pay the indemnity holder for all the damages that he might have suffered due to the non-payment of indemnity.
- It is the duty of the indemnifier to pay all costs incurred by the indemnity holder due to a breach of contract by the indemnifier. If the indemnity holder has acted in good faith and has followed all directions given by the indemnifier, it becomes the duty of the indemnifier to compensate for his losses.
- When the indemnity holder pays a certain sum of money for a compromise against a suit, it is the duty of the indemnifier to compensate the indemnity holder for all such sum of money spent by him under such compromise or arrangement.
- Thus, it comes under the duty of the indemnifier to first adhere to the terms and conditions of the contract. If and when he fails to do so and the indemnity holder suffers a loss, it becomes the duty of the indemnifier to compensate for such damages and costs incurred by the indemnity holder and the sums payable under the amicable compromise, if any.
In Kali Charan v. Durga Kunwar and Ors. (1931), the Allahabad High Court held that it is a right of the indemnity holder to recover damages and costs from the indemnifier. Thus, it is also the duty of the indemnifier to pay for such damages and costs.
In Venkatarangaiya Appa Rao v. Varaprasada Rao Naidu (1921), the Madras High Court held that it is the duty of the indemnifier to indemnify or otherwise pay for damages, costs, and sums under compromise if all the prerequisites are met bonafide transaction, amicable settlement, and fair bargain.
In Bishal Chand Jain v. Chattur Sen (1966), the Allahabad High Court held that the duty of the indemnifier to indemnify applies only to the extent of agreed clauses of the contract of indemnity. In this case, when the indemnifier was asked to make subsequent payments which he had not contracted upon, the Court held that he could not be made liable to do so and was eligible to refuse to make such payments.
Difference between a contract of indemnity and a contract of guarantee
A contract of indemnity and a contract of guarantee look strikingly similar, but there is a conceptual difference, making the two distinct. Defined under Section 126 of the Indian Contract Act, when a person promises to another, to pay on behalf of another, in case of default, a contract of guarantee is said to be made between the promisor and promisee. The person who promises to pay and fulfil the promise or discharge the liability on behalf of another is called a ‘surety.’ The person on whose behalf the surety is given is known as the ‘principal debtor.’ The person for whom the guarantee is given is called the ‘creditor.’ The liability of the surety is secondary.
For instance, A promises to B that he will pay a sum of Rs. 20,000/- for goods that C has purchased from B in credit if C does not make the payment by the end of the month. Here, A is the surety, B is the creditor, and C is the principal debtor. Here, A’s obligation is secondary, which shall arise only if C makes a default.
In P. J. Rajjapan v. Associated Industries (1983), the guarantor (surety) had agreed to the contract of guarantee which he said he would sign later but never signed. When the situation came for him to fulfil his obligation as a surety, he tried to escape the obligation by saying that he never signed the contract thus, there is no contract made between the parties. The Kerala High Court stated that a contract of guarantee involves three types of agreements between the principal debtor and creditor, the surety and principal debtor, and the surety and creditor.
In an instance, where there is evidence proving the intention and involvement of the surety in this contract, the mere failure to put a signature on the contract does not render the agreement void. His promise to act as a surety and to later sign the contract all indicated that he agreed to the terms of the contract and to be bound by it. This is sufficient to ask for due performance. The presence of intention, knowledge, and an expressed promise is good enough to establish the existence of a contract. It is further pertinent to mention that both oral and written forms of a contract of the guarantee are legally recognised in India.
Mentioned below are the defining differences that distinguish a contract of indemnity from a contract of guarantee:
|Criteria||Contract of Indemnity||Contract of Guarantee|
|Parties to contract||There are two parties to a contract of indemnity – indemnifier and indemnity holder.||There are three parties to a contract of guarantee – creditor, principal debtor, and the surety.|
|Nature of performance of contract||The indemnity holder claims the compensation directly from the indemnifier in case of loss or damage. There is a direct relationship.||The creditor recovers the amount defaulted by the principal debtor from the surety. The relationship is secondary and arises only in an event of default.|
|Number of contracts involved||There is only one contract- a contract of indemnity between the indemnifier and indemnity holder.||There are three contracts. One contract is between the surety and the principal debtor in which one party agrees to become the surety for another in a certain event or transaction. The second contract is between a creditor and principal debtor where the principal debtor promises to make payment to the creditor and also guarantees him that in case of default a surety would make good or discharge his liabilities. Finally, a third contract is made between the surety and the creditor where the surety promises to the creditor that he would discharge the liability in case the principal debtor makes a default.|
|Liability||It is primary in nature.||It is secondary in nature.|
|Basis of performance||A contract of indemnity is performed in case of loss or damage.||A contract of guarantee is performed in case of default in payment.|
|Manner of recovery||The indemnity holder recovers the sum payable from the indemnifier.||The recovery of money in case of a contract of guarantee is twofold. First, the creditor recovers the defaulted amount from the surety. Then, the surety acts as a creditor and is eligible to recover the amount from the principal debtor that he has paid on his behalf.|
Landmark case laws under Section 124 of Indian Contract Act
Several judicial pronouncements have shaped the laws of indemnity over the years. Since the implementation of Section 124 of the Indian Contract Act, the cases mentioned below have helped in the growth of indemnity laws in India:
Osman Jamal & Sons Ltd. v. Gopal Purshotam (1928)
Facts of the case
In this case, the plaintiff is a company that acts as a commission agent for the defendant’s firm. The defendant’s firm sold certain hessian and gunnies with the help of the plaintiff and had promised the plaintiff to indemnify in case of occurrence of any loss or damage. The plaintiff brought the goods from one Maliram Ramjidas to supply them to the defendant’s firm. This time, the defendant’s firm was unable to make the deliveries and make payment. Due to this, Ramjidas had to sell those products at a price lower than the contracted price and sued the plaintiff to pay the balance amount. So, the plaintiff then asked the defendant firm to indemnify for this loss and also pay the commission amount as the plaintiff would have received under normal circumstances.
Judgement of the Court
The Calcutta High Court held that this is a case of expressed indemnity as the defendant had agreed to indemnify the plaintiff in case of loss or damage. Thus, the defendant’s firm must fulfil what was promised and indemnify the plaintiff.
Secretary of State v. Bank of India (1938)
Facts of the case
In this case, a woman named Gangabai was the indorser and holder of a promissory note worth Rs. 5000/- Her agent, Acharya, forged documents and endorsed them for value to the respondents. The respondents, in good faith, applied to the Public Debt Office to issue them a fresh note in exchange for the note indorsed by Acharya. When Gangabai came to know about this fraud, she sued the appellant (Secretary of State) for conversion and damages. The appellants brought an action against the respondent (Bank of India) for damages incurred by them due to following the respondent’s instructions. The Secretary of State sued to be indemnified.
Judgement of the Court
The Bombay High Court held that there was an implied indemnity arising between the parties. The court said that when a person does any act on the instructions of a third person and incurs losses due to that, the person who does the act under instructions is entitled to be indemnified by the one giving such instructions.
Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942)
Facts of the case
In this case, the plaintiff leased his piece of land to BMC for 999 years. The defendant wanted to build on that piece of land, to which the plaintiff agreed. The defendant was in possession of the land while ownership was with the plaintiff. One Keshavdas Mohandas supplied construction materials. There became a due of Rs. 5000/- which the defendant could not pay. The defendant mortgaged the property with the principal amount and an interest rate of 10%, but he made a second default, and now the property was transferred to Mohandas. When the plaintiff came to know about this, he demanded the property back from the defendant, but the title deed was with Mohandas. The plaintiff now sued the defendant to indemnify and also for transfer of title deeds. The defendant contended that there has not been any loss or damage as specified under Section 124 therefore, the plaintiff cannot invoke Section 125.
Judgement of the Court
The Bombay High Court held that the rights of indemnity holders and laws of indemnity go beyond what is mentioned under Sections 124 and 125. In case the indemnity holder has incurred an absolute liability, the indemnifier becomes liable to pay it off. Thus, the plaintiff must be indemnified against the mortgage of his land and other charges.
Mohit Kumar Saha v. New India Assurance Co. (1996)
Facts of the case
In this case, the petitioner was a truck owner who had taken an insurance policy for his truck from the respondent’s company. The driver of the truck with goods loaded in it stole the truck after assaulting the petitioner’s father, who was present during the incident. The petitioner filed a complaint about the loss of the truck and injuries sustained by his father.
Judgement of the Court
The Calcutta High Court held that the insurance claim shall cover this loss. The insurance company must indemnify the plaintiff for the loss in full and no less. Insurance as a form of indemnity contract was recognized and laws under Section 124 and Section 125 were applied.
Lala Shanti Swarup v. Munshi Singh (1967)
Facts of the case
In this case, the respondent had mortgaged land to one Bansidhar and another Khub Chand for an amount of Rs. 12000/- The real owner of the land, later, sold this land to one Shanti Saran for Rs. 16000/- Shanti Saran agreed to pay whatever the due amount to Bansidhar and Khub Chand. Later, Shanti Saran failed to do so, due to which Bansidhar and Khub Chand brought a lawsuit for indemnity.
Judgement of the Court
The Supreme Court held that Shanti Saran promised to pay the amount, which he failed to do, and this brought losses to the vendor. Thus, he is liable to indemnify as per Section 124 of the Indian Contract Act.
A contract of indemnity, as defined under Section 124 of the Indian Contract Act gives rise to a legal relationship between two parties, namely, the indemnifier and the indemnity holder. While the rights of an indemnifier are not defined anywhere in the Indian Contract Act, the rights of an indemnity holder are wide as has been described under Section 125 of Indian Contract Act. The rights of an indemnifier become like those of a surety under a contract of guarantee. These indicate high similarities between a contract of indemnity and a contract of guarantee but the two are quite different from one another in terms of application and nature. Several judicial pronouncements have helped in shaping the laws relating to indemnity as it is today, so much so that the courts grant rights beyond which is mentioned under Section 125. Indemnity laws have been prevalent in India and across the world for over years now and have helped in preventing several fraudulent occurrences and provided justice to the injured. In this article, we have also tried to understand, in brief, about the contract of guarantee through relevant sections of the Indian Contract Act and judicial pronouncements.
Frequently Asked Questions (FAQs)
What is the difference between an indemnity and a guarantee?
Mentioned under Section 124 of the Indian Contract Act is a contract of indemnity which lets one party recover from another the losses incurred by him if the other party has promised to do so. It is different from a contract of guarantee as has been mentioned under Section 126 of the Indian Contract Act in a manner such that a contract of guarantee grants rights to a creditor to recover money from a surety in case his principal debtor makes a default in payment if there is a contract of guarantee made governing the same.
Does indemnity cover insurance?
Yes. A contract of indemnity covers all kinds of insurance except life insurance.
What are the rights of indemnity holders?
The rights of an indemnity holder are described under Section 125 of the Indian Contract Act. It grants rights such as the right to recover damages, and the right to recover money incurred in maintaining a lawsuit or compromise settlement for the object under an indemnity.
How many parties are involved in a contract of indemnity?
In a contract of indemnity, two parties are involved primarily. They are known as an indemnity holder and indemnifier.
How many parties are involved in a contract of guarantee?
A contract of guarantee is a contract between three parties, namely, the creditor, principal debtor, and surety. There are also three forms of contracts involving two of these parties in each, that together form the contract of guarantee.
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