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LAW OF INDEMNITY IN INDIA VS. UNITED KINGDOM ON THE RECOMMENDATION OF LAW COMMISSION OF INDIA

Author: Yashwin Agarwal, B.A.,LL.B.(Hons.)


Introduction

The law of contract in Indemnity includes the act of kindness to a person who has experienced damage, else placing a person back to his original situation as if no harm has taken place. The word 'indemnity' has been originated from a Latin term 'indemnis' which implies safe or prevent from loss. The word indemnity generally implies that having safety or protection against a loss or any other financial burden. As per the Section of 124[1] of the Indian Contract Act, 1872:

“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.”


Illustration: A contract to indemnify Q against the outcome of any action taken which R may take against Q in respect of a certain sum of money. The purpose of entering into indemnity deals is to secure the promise from accidental damages.

Parties to the Contract of Indemnity

A contract of indemnity involved parties i.e., Indemnifier and Indemnified. The person making a promise or who is going to give the compensation is called the indemnifier or promisor. The individual to whom the benefit has been made or compensation is given is called the promisee or indemnified.


In the above- stated illustration, A is the Indemnifier who is making compensation. Q is the indemnity holder to whom the benefit is made or compensation is given.


Essentials of Contract of Indemnity

1. Parties in a contract

There must be two parties involved, namely, promisor or indemnifier and the promisee or indemnified or indemnity-holder.


2. Defence from the losses

To cover the promisee against damage, a bond of indemnity is entered into. The loss can be caused by the actions of the indemnifier or any other person.


3. A Promise should be made

There shall be a contract or promise made to compensate for the loss or damages.


“According to the situations of a particular case, it is decided whether the promise is expressed or implied. Expressed Contracts of Indemnity are the ones which are expressed by words or in written form. Whereas Implied Contracts of Indemnity are the ones that come into account by statute and therefore are also called as the promise by operation of law.


In the case of Adamson v. Jarvis [2], the concept of indemnity emerged, in this case, the complainant on the defendant's orders sold the cattle to another person. It was later discovered that the claimant was not the livestock's actual owner and that the complainant had to pay damages for such a sale. Plaintiff demanded the defendant reimbursement. In this case, the court ruled that the plaintiff's actions were according to the defendant's orders, so the defendant was liable to indemnify the plaintiff or make up the losses.


An insurance contract aside from life insurance is the best example of an indemnity contract. The concept of an indemnity contract is restricted to those cases which occur because of the actions of certain human acts and not otherwise.”

Rights of the Indemnity Holder

The contract of indemnity is a special kind of contract. As per Section 125 [3] of the Indian Contract Act, 1872 the following rights are available to the promisee/ the indemnified/ indemnity-holder against the promisor/ indemnifier, provided that he has acted in the scope of his authority.


  • Right To Recover Damages [Section 125(1)]

“An indemnity-holder has the right to recover from the indemnifier all damages which he may be compelled to pay in any suit in respect of any matter to which the contract of indemnity applies.”


  • Right To Recover Costs [Section 125(2)]

“An indemnity-holder has the right to recover from the indemnifier 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.”


  • Right To Recover Sums Paid Under Compromise [Section 125(3)]

“An indemnity-holder also has the right to recover from the indemnifier all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.”

The Commencement of Liability of Promisor/ Indemnifier

The Indian Contract Act (1872) does not account for the time the liability of the Indemnifier contract duty begins. However, the following laws have been introduced by various high courts in India:

  • Since the indemnified party has sustained the damage, he shall not be responsible.

  • The indemnified is entitled to sue the compensator to refund his liability even though he did not remove his obligation.


Historical growth of the Indemnity Concept

The Indemnity was restricted to the damages or loss caused by the human agency only.


“In the case of Gajanan Moreshwar vs. Moreshwar Madan,[4]It is stated that this definition includes damage liability ONLY incurred by human agency. It does not deal with certain types of situations where the payout occurs from damages induced by incidents or injuries which do not or do not focus on the actions of the indemnifier or any other individual, whether from the responsibility suffered by something performed by the indemnified at the indemnifier's request. The terms and conditions of payments must be specifically indicated in the contract statement.


At Indian State Bank and another vs. MulaSahkariSakharKarkha[5], It says: A contract must be constructed, as is well known, based on the terms and conditions specified therein. It is also correct that the court would not supply any terms that the author did not use when creating a text. A commercial document is a document in question. It does not have any uncertainty on its face. The High Court itself claimed that the agreement appeared to be an indemnity deal ex facie. For the creation of a text, underlying conditions are important only if there is some uncertainty inside it and not otherwise.


According to the Supreme Court, the agreement constituted an agreement of Indemnity and not a document of promise, which is evident from the fact because, by default of that agreement, the appellant was obligated to indemnify the cooperative community against all injuries, lawsuits, penalties, acts and costs which it may incur.”

Indemnity Theory

Both insurance policies, excluding private insurance, are, as a general, indemnity policy. According to this theory, in the case of failure, the insurer undertakes to place the insured in the same role that he held immediately before the incidence of the insured incident against, under any type of protection, the concept of indemnity is changed to adhere.


In marine or fire insurance, for example, a small gross margin that might have been gained in the absence of the incident is often included in the expense. The insured is not entitled, in a true sense of the indemnity, to benefit from his loss.


Provisions of Indemnity and Position in the U.K

To describe the U.K. indemnity contract, the English statute uses the principle "You must be before you can claim to be compensated” [6]. By this, we say that unless and until the pledge has sustained no harm, he cannot seek damages. The injury is the most important form of compensation within English rule. The English law of indemnity is that the indemnifier must pay the holder of the indemnity only after he has sustained an injury or has acted in line with the orders of the indemnifier or has incurred losses in the course of the litigation or has charged some defective sums. In the absence of damage, an indemnity contract cannot be invoked by the issuer of the indemnity. Prior, the indemnity was applicable until the losses had been paid by the indemnity holder. After making up the losses, he may demand indemnity insurance from the indemnifier.


Later the enforceability of the award changed with Buckley LJ's decision in the Richardson Re case, ex parte the Governors of St. Thomas Hospital where he remarked, "Indemnity is not necessarily given by repayment after payment. Indemnity demands that, in the first place, the party to be liable shall never be called upon to pay.”


Provision of Indemnity and Position in India

“In India, the rule on indemnity has a narrower scope than English law. As specified in the definition of indemnity under section 124 of the Indian Contract Act, 1872 indemnity is narrow in scope, as the holder of the indemnity is paid only in the event of a loss owing to a human entity. It does not contain any other incident or disaster of the same nature.


According to the Law Commission of India [7] in its 13th report, the definition of a contract of Indemnity is not exhaustive and deals with some of the definition of Indemnity. In English Law, the word Indemnity is used in a much wider sense then indicated in the definition. It includes all the promise to save the promisee from all events or accidents which may or may not depend on the conduct of human agency or person, or from liability arising due to the act of promisee at the request of the promisor.

Conclusion

“The Indian Contract Act does not expressly allow for the existence of a conditional provision of indemnity. However, the Privy Council also acknowledged an implied contract of Indemnity. (Secretary of State v Bank of India Ltd.)[8].In its report (13th Report, 1958, Indian Contract Act, 1872), the Law Commission of India proposed an amendment to section 124. According to its guidance, the meaning of the indemnity contract in Section 124 shall be used to cover cases of injury incurred by accidents which may or may not impact on the actions of any person.


It should also make it clear that the pledge can also be inferred. The rule of the contract to be enforced by the Courts in India or by some other class thereof, the Act of 1872 does not say that it is a full code concerned with the legislation relating to contracts.


The law, when enacting this Statute, did not wish to codify the entirety of the Statute alone. Thus, it was held that Sections 124 and 125 of the Act did not set down the entire right of indemnity. As a result, in all cases on which it is silent, the courts have had to return to the title rules of the English Common Law as standards of equity, dignity and good faith.


I conclude that it is better to apply to the Act the standards of English common law that have been followed by our Courts for almost a century so that it might not be appropriate to resort to English law in certain cases. Accordingly, the interpretation of these Standards is one of the purposes of my reform.”


[1] The Indian Contract Act,1872, Act No. 9 of 1872, s.124

[2][1827] 4 BING 66.

[3] The Indian Contract Act,1872, Act 9. Of 1872,s.125

[4]Gajanan Moreshwar Parelkar vs Moreshwar Madan Mantri, (1942) 44 BOMLR 703.

[5]State Bank of India and another vs. Mula Sahakari Sakhar Karkhana Ltd, Appeal (civil) 2801 of 2006

[6]Yash Arya, Contract of Indemnity & Guarantee, Academia. Retrieved from <http://www.academia.edu/9012692/Contract_of_Indemnity_and_Guarantee

[7]lawcommissionofindia.nic.in

[8]Secretary of State v. The Bank of India Ltd. AIR 1938 P.C 191