September 1, 2020

CONTRACT OF INDEMNITY : NATURE AND THE SCOPE

By E-Justice India Legal Articles 3 Comments

Author : Richa Gupta, Dharmashastra National Law University, Jabalpur, MP

Co-Author : Vandana Budhrani, Dharmashastra National Law University, Jabalpur, MP

INDEMNITY, as elucidated in Cambridge Dictionary means, “protection against possible damages or loss or a promise of payment at the time of loss “[1]

Much like other contracts, contract of Indemnity is also a sub species of Contracts satisfying all the essentials of a valid Contract as discussed in Section 10 of Indian Contracts Act, 1872. Contract of Indemnity in section 124 of ICA, 1872 states, ‘A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person.[2] Here, the party promising to indemnify for the losses is the indemnifier or promisor and the the party being promised for the compensation of loss is indemnity holder or indemnified or promisee. The Contract of Indemnity deals with only one contract (i.e. between Indemnifier and Indemnified), it has got nothing to do with contract that Indemnity holder has with the third party. The liability of Indemnifier against Indemnity holder is primary liability.

For Instance, A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 500 rupees. Here, A is Indemnifier, B is Indemnity holder while C is third party. This is a valid contract of Indemnity between A and B.

The commitment to indemnify the indemnity holder is entirely a voluntary decision by indemnifier. The question that comes to light is, when does the liability of Indemnifier commences? Does it begin at the moment when apprehension of loss is there(i.e. before the actual loss) or the moment when loss actually incur? Indian Contract Act doesn’t expressly talks about these set of circumstances and hence it has always been a matter of debate among various courts.

Liablity of Indemnifier commences even before actual loss incurres to indemnity holder :-

In the case of Osmal Jamal & Sons Ltd. v Gopal Purushotham[3] , plaintiff company acted as commission agent for defendant’s company for purchase and sell of “hessian” and “gunnies”, and for every such purchase, plaintiff’s firm used to charge commission from Defendant’s company and in return, defendant’s company promised to indemnify the plaintiff’s company from all such losses in respect to this transaction. Thereupon, Plaintiff’s company purchased the product from “Maliram Ramjidas” but Defendant’s company failed to pay for the product and hence, Maliram Ramjidas resold the product at lesser amount to another party and is now asking for the amount of loss incurred from plaintiff’s company. The Plaintiff’s firm went into liquidation and therefore filed a suit for amount of recovery as indemnity from defendant’s company in order to pay Maliram Ramjidas. Defendant’s company argued that, since plaintiff haven’t paid any amount yet, so, they were not entitled to maintain a suit under indemnity but court here HELD that, Indemnity is not necessarily given by repayment after payment. Indemnity requires that, the ‘party to be indemnified ’shall never be called for payment.

Liability of indemnifier arises when indemnified actually suffers loss :-

In the case of Chand Bibi v Santosh Kumar Pal(1933)[4], defendant’s father during purchase of certain property agreed to pay off mortgage debt incurred by the plaintiff along with the promise to indemnify plaintiff if they were anytime made liable for mortgage debt. Defendant’s father failed to pay off the debt and hence, plaintiff filed a suit to enforce the convenant they agrred upon before. But here, court HELD that, suit was premature in relation to contract of indemnity as plaintiff hadn’t incurred any loss yet.

Hence, it is still not comprehensible as to when the liability of indemnifier actually commences in respect to contract of Indemnity. But this vagueness doesn’t affect the rights of indemnity holder or indemnifier in regards to Contract of Indemnity.

Rights of Indemnity holder

Section 125 of Indian Contracts Act states that[5], 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;

Abhay contracts to indemnify Bobby against the consequences of any suit proceedings which Clara may take against Bobby in respect of a transaction of 1000 Ruppees. If Clara does initiate the legal proceeding against Bobby in that matter of transaction of 1000 Rupee and bobby was made to pay for the damages to Clara. Now, Abhay will be liable to indemnify or compensate Bobby for what Bobby had to pay in the case before.

(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;

In the case of Adamson v. Jarvis(1827),[6] Jarvis on advice of Adamson and on the basis of contract of indemnity, sold the cattle in auction without knowing that ,the true owner of cattle was not Adamson but somebody else. Now, when true owner of cattle initiated a suit against Jarvis, Jarvis demanded the Adamson to compensate for the losses incurred and it was held in the court that, Adamson needs to indemnify jarvis as Jarvis acted in accordance to the orders by Adamson only.

(3) 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.

RIGHTS OF INDEMNIFIER

Indian Contracts Act,1872 doesn’t expressly disucuss about Rights of Indemnifier but in the case of Jaswant Singh v. Section of state Bombay, it was held that, Rights of Indemnifier are similar to Rights of surety as provided in Section 141 of Indian Contracts Act,1872 where surety becomes entitled to the benefits or perks of all the securities that the creditor has against principle debtor. Once indemnified, indemnifier will step into shoes of Indemnity holder and he will have all the rights with which the original indemnifier protected himself against loss or damage. This is principle of Subrogation, which means ,Substitution is founded in equitable principles and this principle is applicable because it is an essential part of law of contract of indemnity and follows the principle of equity and no provision are in contradiction to Indian contracts Act, 1872.

INDEMNITY IN AGENCY

Section 222 of Indian Contracts Act, 1872 talks about Agent to be indemnified against consequences of lawful Act as, “The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.”[7]

ILLUSTRATIONS –

In the case of Adamson v. Jarvis,(1827) as discussed above, it was held by the court that Jarvis was liable to be compensated for the loss from Adamson, incurred to him due to performance of an act authorized by Adamson(selling of cattle that didn’t belong to Adamson but somebody else and Jarvis thereafter on the advice of Adamson sold the cattle in auction for which he was later sued by true owner.)

A (at Bombay) under the directions of B(at Ahmadabad) entered into a contract with C at Bombay for purchase of certain product. Afterwards B refused to accept the product due to which C sued B. When A consulted B regarding the same, B repudiated the whole contract altogether. Now, B had to pay for all the damages and expenses incurred during the transaction. Here, B is liable to compensate A for all the damages and expenses incurred to A related.

Section 223 of Indian Contracts Act, 1872[8] talks about Agent to indemnified against the acts done in good faith as, “Where one person employs another to do an act, and the agent does the act in good faith, the employer is liable to indemnify the agent against the consequences of that act, though it cause an injury to the rights of third persons.”

ILLUSTRATION –

B on the request of A, sold certain thing which was in possession of A that time. But what B didn’t know was that, A though had possession of the product, didn’t have the right to dispose it off. So, B handedover the sale proceeds to A. Now, the true owner of the product sued B and recovered the value of goods and cost. Here, A is liable to indemnify B for what he has been compelled to pay C, plus B’s own expenses.

This was the case of implied Contract of Indemnity.

CONCLUSION AND SCOPE FOR FUTURE

Indemnity in general parlance denotes ‘protection from the losses’. The contract is between 2 parties only, indemnifier and the indemnity holder where one party(indemnity holder) will be compensated against all the future losses by other party(indemnifier) due to conduct of either promisor or third party related. For instance, if a student parks a scooty in vehicle stand for which he was provided a token. Afterwards, student lost the token and hence, vehicle stand contractor didn’t allow him to take the scooty unless the student provides the contractor with an indemnity bond to compensate for the losses which contractor might incur if any third party come and claim for the scooty in future. From the situations above, it is now clear that, Contract of indemnity can either be expressed or implied. Indian Contracts Act,1872 discusses about the Right of Indemnifier when suit is filed against him and that he can claim for all the damages, cost or sum of comprise from Indemnifier. Here, Liablity of the Indemnifier against indemnity holder is primary liability. Thus ,Indemnity clauses shifts the entire risk of future loss to the promisor or indemnifier safeguarding the interest of Indemnity holder, provided, indemnity holder acted in accordance to Indemnifier or as how prudent man would have acted if Contract of indemnity would not have been there. In case of Insurances, every other insurance except life Insurance comes under Contract of Indemnity. Life Insurance is put aside as Life of someone cannot be measured in value and hence, it is excluded.

All these clearly states that, contract of indemnity has a very narrow scope and certain changes are required keeping in mind the development of variety of contracts coming to light these days. There is a dire need for inclusion of certain clauses in section 124 of the Act. The Act includes only human agency under Contract of Indemnity and not expressly the events which is one of the majort shortcomings of the Act. Taking notes of Rights that Parties hold here, Rights of Indemnifier have been defined (Section 125 of ICA, 1872) while Act is silent in relation to the Rights of Indemnifier which is required to get clarity over the terms of Contract. Also, Act didn’t discuss, as to when, the Liablity of Indemnifier commences (apprehension of loss or actual loss). Summarizing it, Contract of Indemnity though a good contract in business or contract world, requires certain attention as to remove vagueness from the section and have lucidness in terms and conditions of the contract.

[1] https://dictionary.cambridge.org/dictionary/english/indemnity

[2] Indian contracts Act (9 of 1872)

[3] Somali Jamal & sons v. Goal Purushottam ,208, AIR,(Cal.1929)

[4] https://www.casemine.com/search/in/chand%20bibi

[5] Indian contracts Act (9 of 1872)

[6] adamson v. jarvis (1827) 4 bing.66

[7] Indian contracts Act (9 of 1872)

[8] Indian contracts Act (9 of 1872)

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