CONTRACT OF INDEMNITY WITH SPECIAL EMPHASIS ON INDIAN CASE LAWS

    Edited by: Vaani Garg

    The sense of the word “indemnity” simply means “protection against loss.” It is claimed that the contractual obligation on one party to indemnify the loss or harm occurred to the other party or could occur in the future, induced by the act itself or some other party. 

    An indemnity contract is an express promise or a voluntary obligation made or assumed to ensure that a contracting party suffering the defined loss or damage has an express remedy under the contract to correct the defects in the goods or services. According  to English law, the definition of compensation contract is-” a promise that a person is saved harmless from the effects of an act.” Both, the losses caused by a person’s conduct and the loss accidents beyond one’s control like fire should be included in a promise of compensation. Every contract except life contract is a contract of indemnity.

    According to the Indian Contract Act 1872, Section 124

    “a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a „Contract of Indemnity”

    It basically comprises of two parties: Indemnifier , the person who compensates the other party, and Indemnity-holder/ Indemnified is the person who is given the protection. 

    DEFINITION AND NATURE OF CONTRACT OF INDEMNITY

    In simple words, an indemnity is a promise to compensate for another’s loss. The literal meaning of indemnity means “security against a loss”. This term was generally used for insurance contracts.

    An indemnity arrangement, as a term established under common law, is an arrangement under which the Promisor agrees to keep a person safe from damages incurred by incidents or injuries that may not rely on the person’s actions or on responsibility for something the promisor has done.

    Adamson v. Jarvis 1827

    In common law, Indemnity was established in the case of Adamson v. Jarvis 1827.

    The plaintiff an auctioneer, sold certain cattle on the instruction of the defendant. It subsequently turned out that the livestock didn’t belong to the defendant, but to another person, who made the auctioneer liable and the auctioneer in turn sued the defendant for the loss he had thus suffered by acting on the defendant’s direction. The court laid down that the plaintiff having acted on the request of the defendant was entitled to assume that, if, what he did turned out to be wrongful, he would be indemnified by the defendant.

    PROVISION IN INDIA

    Section 124 of the Indian Contract Act limits the definition of indemnity to cases where there is a promise to indemnify against loss caused by (i) by the promisor himself, or (ii) by any other person, so the definition excludes from its purview cases of loss arising from accidents like fire or perils of the sea i.e the loss must be covered by some Human Agency.

    Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri:

    Section 125 of the Act, deals only with the rights of the  indemnity-holder in the event of his being sued. It is by no means exhaustive of the rights of the indemnity-holder, who has other rights besides those mentioned in the section. It was further discussed that an indemnity might be worth very little indeed if the indemnified could not enforce his indemnity till he had actually paid the loss. If a suit was filed against him, he had actually to wait till a judgment was pronounced, and it was only after he had satisfied the judgment that he could sue on his indemnity. It is clear that this might under certain circumstances throw an intolerable burden upon the indemnity-holder. He might not be in a position to satisfy the judgment and yet he could not avail himself of his indemnity till he had done so. Therefore the Court of equity stepped in and held that where the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and to pay it off.

    The New India Assurance Company Ltd. v. The State Trading Corporation of India Ltd.

     The Gujarat High Court relied upon the judgement in Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri and held that in view of Section 124 of the Contract Act, where the defendants promise to indemnify is an absolute one; a suit can be filed immediately upon failure of performance, irrespective of actual loss.  In this judgment the Law Commission of India accepted the view that, to indemnify does not mean to reimburse in respect of the money paid, but, in accordance with its derivation, to save from loss in respect of the liability against which the indemnity has been given. The Law Commission of India in its 13th Report, 1958, has expressed the opinion that “the view expressed by Chagla J., is correct and should be adopted by the legislature.” The Law Commission recommended that as in English Law, “the right of the indemnity-holder should be more fully defined and the remedies of an indemnity-holder should be indicated even in cases where he has not been sued.”

    Indian Contract Act does not specifically provide that there can be an implied contract of indemnity. The Privy Council has, however, recognized an implied contract of indemnity also. The Law Commission of India in its 13th Report, 1958 on the Indian Contract Act, 1872, has recommended the amendment of Section 124. According to its recommendation, “The definition of the ‘Contract of Indemnity’ in Section 124 should be expanded to include cases of loss caused by events which may or may not depend upon the conduct of any person. It should also provide clearly that the promise may also be implied.”

    Osman Jamal And Sons Ltd. v. Gopal Purshottam

    Plaintiff Company agreed to act as commission agent for the defendant firm for purchase and sale of “Hessian” and “Gunnies” and charge commission on all such purchases. The defendant firm agreed to indemnify the plaintiff against all losses in respect of such transactions. The plaintiff company purchased certain Hessian from one Maliram Ramjidas. The defendant firm failed to pay for or take delivery of the Hessian. Then Maliram Ramjidas resoled it at lesser price and claimed the difference as damages from the plaintiff company. The plaintiff company went into liquidation and the liquidator filed a suit to recover the amount claimed by Maliram from the defendant firm under the indemnity. The defendant argued that in as much as the plaintiff had not yet paid any amount to Maliram in respect of their liability they were not entitled to maintain the suit under indemnity. It was held negative and decided in plaintiff’s favour with a direction that the amount when recovered from the defendant firm should be paid to Maliram Ramjidas.

    VALIDITY OF INDEMNITY AGREEMENT

    A contract of indemnity is one of the species of contracts. The principles applicable to contracts in general are also applicable to such contracts so much so that the rules such as free consent, legality of object, etc., are equally applicable. Where the consent to an agreement is caused by coercion, fraud, misrepresentation, the agreement is voidable at the option of the party whose consent was so caused. As per the requirement of the Contract Act, the object of the agreement must be lawful. An agreement, the object of which is opposed to the law or against the public policy, is either unlawful or void depending upon the provision of the law to which it is subject.

    LEGAL EFFORTS IN INDEMNITY CLAUSE 

     Several legal effects are intended in the indemnity clause which can be achieved by the contracting parties. In several ways it can be true to say that the contractual purpose of indemnity is to amend the legal regime within which the contract operates- Risk allocation, remoteness and mitigation, and negligence

     a) Risk allocation: One of the basic function of contracts of indemnity is risk allocation, it enables the parties to allocate the risk involved between them in advance. It is already held by the court that all commercial parties must be left free to decide how they can allocate the commercial risk. The indemnity clause is used as a contractual provision to attempt a distribution in such risk arising thereto by the transaction. 

     b) Remoteness and mitigation: Under Common law, remoteness and mitigation are rules which are related to damages. Here the question arises that „Whether or not are these rules also applicable to indemnity, thereby affecting the extent upon what the party can be entitled to be indemnified?‟. 

     Not a lot of authority particularly on this issue is available, but on triggering the indemnity in the event of breach of contract, the court of appeal has two decisions on interest. In Royscot Commercial Leasing Ltd v. Ismail  a director had provided an indemnity in order to support an equipment which is lease granted to his company. Further, the director argued that the lessor would have mitigated the loss with follow of a default by the lessee. It was held that “under the contract of indemnity a claim is not a claim for damage at all, but it is a claim over the debt for a special sum due upon the happening of an event which has occurred”. Also, the argument was rejected on this basis only. 

     c) Negligence: There is a development in some specific rule of construction done by the court, so that the case dealing with the provision which attempts to exclude a party’s liability for its own negligence. A three-tier test for such clause of rule of construction was formulated. It is provided for the construction of the indemnity clause that if a person is obtaining an indemnity against the consequence of certain acts, then the indemnity clause is not to be construed so that they can include the consequence of there own negligence to the extent that their negligence is covered by some other consequence.

    RIGHT OF THE INDEMNITY HOLDER – (SECTION 125)

    An indemnity holder (i.e. indemnified) acting within the scope of his authority is entitled to the following rights –

    1. Right to recover damages – he is entitled to recover all damages which he might have been compelled to pay in any suit in respect of any matter covered by the contract.

    2. Right to recover costs – He is entitled to recover all costs incidental to the institution and defending of the suit.

    3. Right to recover sums paid under compromise – he is entitled to recover all amounts which he had paid under the terms of the compromise of such suit. However, the    compensation must not be against the directions of the indemnifier. It must be prudent and authorized by the indemnifier.

    4. Right to sue for specific performance – he is entitled to sue for specific performance if he has incurred absolute liability and the contract covers such liability. The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor-

    (1) All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies

    (2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit;

    (3) All sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not

    Conclusion

    Indemnity is the sub-species of compensation while the type of contract is as mentioned above the compensation contract. This obligation is a voluntary obligation which the indemnifier assumes; it depends entirely on the promisor’s will. The definition of compensation provided for in section 124 is not very exhaustive. It is stated that the section discusses the case that has an express compensation contract but is actually the implied indemnity contract that is well-recognized in the case of SECRETARY OF STATE vs. THE BANK OF INDIA that the Privy Council has assured. In addition, one is only indemnified when the loss occurred and not merely on the possibility of loss or damage happening. Plus, the indemnifier must act, and the person acts on his behalf. My opinion that compensator should not always be held liable for acts of natural cause as well as remote acts especially. This does not take into account God ‘s actions on the static existence. In this case, the individual is only liable to take care of the expressed and implied liability. And if in the event that the compensator is charged for the unforeseen damages then it will be unjust.