THE PARADIGM OF INDEMNITY CONTRACT IN INDIA VIS-A-VIS ENGLISH PROVISIONS

Author: Ishita Chandra, II year of B.A.,LL.B.(Hons.) from Dr. B. R. Ambedkar National Law University, Sonepat, Haryana

INTRODUCTION

Indemnity is a security against, or compensation for loss, etc. To ‘indemnify’ means “to make good the loss of another in certain events”. Longman’s Dictionary of Contemporary English defines indemnity as protection against loss or security or compensation in case of loss.As per Section 124 of the Indian Contract Act 1872, “A contract by which one party promises to save the other from loss caused to him by the conductof the promisor himself or by conduct of any other person, is called a contract of indemnity”[1].

Illustration: A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of Rs. 500. This will be considered as a contract of indemnity.

Another example of indemnity can be - A sends a parcel of books to his friend B through railways. A sends the railway receipt by post which entitles B to claim the parcel from the railways. If the receipt is lost, B can claim the parcel from the railways by filling in an indemnity bond by which he undertakes to make good the loss of the railway in case any other claimant comes forward to claim the parcel[2].

The person giving the indemnity is called the “indemnifier” and the person for whose protection the indemnity is given is called the “indemnity holder” or “indemnified”.

ESSENTIAL INGREDIENTS

The essentials of a contract of indemnity are :

1. It must be a valid contract under section 10 of the Indian contract Act, 1872. Section 10 of this Act states that : “All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.” The general principles of the law of contract are also applicable to a contract of indemnity. Therefore, the consideration or object of an indemnity contract must be lawful. For example, an agreement to indemnify the printer/publisher of a libel by the writer of the same cannot be enforced.

2. There must be two parties: Indemnifier (promisor) and indemnity holder (promisee).

3. There must be a loss to the indemnity holder: Occurrence of loss or damage is a contingency upon which liability of the indemnifier comes into existence. A contract of indemnity is an original and direct engagement between two parties. It is a type of "contingent' contract. The promisee under a contract of indemnity must have suffered loss before holding the promisor liable.

WHEN CAN THE INDEMNIFIER BE MADE LIABLE

There has been a controversy regarding the point, as to whether the indemnifier can be asked to indemnify before the indemnity-holder has actually suffered the loss, or his liability arises only after the loss has been suffered by the indemnity holder. As per the English Common law, no action could be brought by the indemnityholder until he had suffered actual loss. But according to the Court of equity, an indemnityholder can claim compensation even before he has suffered actual loss. He can compel the indemnifier to save him from the loss in respect of liability against which indemnity has been promised.The existence of a clear enforceable claim suffices to call the indemnifier’s obligation into action. The indemnity holder can compel the indemnifier to place him in a position to meet the liability that may be cast upon him without waiting until he has actually discharged it.

In India, there were two different views in this regard.

• Lahore and Nagpur High Court’s view: A Person must be damnified before he can be indemnified.

• Bombay, Madras, Calcutta, Patna High Court’s view: They recognised the English principle followed in court of equity. i.e. Indemnity holder can compel the indemnifier to indemnify even before the actual loss occurs.

INDIAN VS ENGLISH LAW ON THE CONTRACT OF INDEMNITY

“Indemnity” in English law means a promise to save a personfrom the consequences of an act. The definition is wide enough to include a promise of indemnity against loss arising from any cause whatsoever e.g. loss caused by fire or by some other accident. Indeed, every contract of insurance, other than life assurance, is a contract of indemnity. But the definition of a contract of indemnity under Indian law, is not exhaustive. It does not include:

1) Implied promises to indemnify or something done by the indemnified at the request of the indemnifier.

2) Cases when loss arises from accidents/events notdepending on the conduct of the promisor or any other person, such as death.

3) Cases where loss arises due to accidents such as fire/marine or any unforeseen event.

However, the scope of indemnityunder Indian law isrestricted to cases where there is a promise to indemnify against loss, caused by (a) by the promisor himself, or (b) by any other person. Thus, in the case of Sumitomo Heavy Industries Ltd. V ONGC Ltd. (AIR 2010 SC 3400)[3], an agreement to compensate for the loss caused by change in law was held to be not a contract of indemnity since the loss was not becauseof the conduct of the promisor or that of any other person.

The definition under Indian law covers indemnity for loss caused by human agency only. It does not include loss caused by natural factors, not involving human conduct, like accidental fire, perils of the sea, etc., therefore insurancecontracts are not covered by the said definition. But, in English law, the loss might be caused by a human agency or by other natural factors also. Example : Insurance in case of damage due to fire is a contract of indemnity under English law. The English definition is thereby wider than the Indian definition.

RIGHTS OF INDEMNITY HOLDER WHEN SUED

According to Sec. 125 of the Indian contract Act 1872[4], an indemnityholder (promisee) is entitled to recover from the indemnifier (promisor):-

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

(ii) all costs which he may be compelled to pay in such suits, provided he acted as any prudent man would act under similar circumstances in his own case, or with the authority of the promisor (indemnifier); and

(iii) all sums which he may have paid under the terms of any compromise of any such suit, provided the compromise was prudent or was authorized by the promisor (indemnifier).

There is no provision in the Act regarding the rights of a indemnifier (promisor) in a contract of indemnity. There are some conditions that must be fulfilled before invoking Section 125. They are as follows:

1) Existence of a contract of indemnity

2) Indemnity holder should have acted within the scope of his authority

The indemnity holder is entitled to recover the following from the indemnifier

1. Damages

2. All costs, provided -

• Indemnity holder did not contravene the orders of the indemnifier

• Indemnity holder acted prudently; or

• Indemnifier authorized indemnifier to bring/defend the suit

3. Any compromise payment, provided -

• compromise is not contrary to the orders of the indemnifier

• Indemnity holder acted prudently

• Indemnifier authorized indemnity holder to compromise the suit

INDEMNITY CLAUSE

An indemnity clause is a provision in a contract under which one party (or both parties) commit to compensate the other (or each other) for any harm, liability, or loss arising out of the contract. The formula to compute the amount of compensation is usually included in the contract.

LANDMARK CASE OF GAJANAN MORESHWAR PARELKAR V. MORESHWAR MADAN MANTRI (AIR1942 BOM302)[5]

The case of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri is a contract law case relating to the contract of indemnity. In this case, the Court held that sections 124 and 125 of the Indian Contract Act, which deal with the concept of indemnity, are not exhaustive. The Court held that if his liability had become absolute, then he was entitled either to get the indemnifier to pay off the claim or to pay into Court sufficient money which would constitute a fund for paying off the claim whenever it was made. The council did not accept the defendant's stance that plaintiff had suffered no loss and thus could not claim anything under Sections 124 and 125 of The Indian Contract Act, 1872. The Council held that an indemnity holder has rights apart from those mentioned within the sections mentioned above. If the indemnity holder has incurred a liability and if the liability is absolute, he can address the indemnifier to require care of the liability and pay it off. Thus, the plaintiff was entitled to be indemnified by the defendant against all liability under the mortgage and deed of charge.

[1]Indian Contract Act, 1872, s124, No. 9, Acts of Parliament, 1872 (India) [2]2 Dr. Ashok K. Jain, Contract – II, (1st Edition, Ascent Publications 2016) [3]Sumitomo Heavy Industries Ltd. V ONGC Ltd., AIR 2010, SC 3400 [4]Indian Contract Act, 1872, s125, No. 9, Acts of Parliament, 1872 (India) [5]Gajanan Moreshwar Parelkar V. Moreshwar Madan Mantri (AIR1942 Bom302)