ALL INDIA LEGAL FORUM

Date- 10 August, 2020

Day- 01

Contracts

CONTRACT OF INDEMNITY

Definition

The word ‘indemnity’ is derived from the Latin word ‘indemnis’ meaning unharmed or
undamaged.

In English Law ‘indemnity’ means a promise to save person harmless from the consequences of
an act. The promise may be express or implied based on the circumstances of the case.

In Indian Law definition of ‘indemnity’ is given under s. 124 of the Indian Contract Act. This
section defines ‘Contract of Indemnity’ as “A contract by which one party promises to save the
other from loss caused to him by the conduct of any other person, is called a contract of
Indemnity”. This section also provides an illustration to give a better understanding of the
concept; it says “A contract to indemnify B against the consequences of any proceedings which C
may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity”.

Contract of Indemnity in Indian Law v English Law

a. Indian law only accepts expressed contracts of indemnity while English law accepts both
expressed and implied contracts of indemnity.
b. In Indian Law cause of loss can be only via a human agency and not otherwise while in
English Law, the cause of loss could be both by human agencies as well as events and
accidents.
c. Indian laws are silent about the enforceability of indemnity contracts while In English,
Law enforceability depends upon the payment of losses.

Indemnifier- The person who gives the indemnity is called ‘indemnifier’.

Indemnity Holder- The person for whose protection it is given is called ‘indemnity holder’.

The scope of Indemnity is restricted by the scope of its definition only. It covers: - a) Losses by
the promisor himself b) Losses by any other person. It is important to note here that the losses
arising from the accidents i.e. not caused by some human agency e.g. fire or perils of sea are not
covered by the definition. All the contracts of Insurance are the contracts of Indemnity except for
the life insurances because in indemnity actual loss is estimated whereas the loss of an individual
on death cannot be estimated.

Essential elements-

The definition provides of the elements which are important for the contract of Indemnity-

1. There must be a loss.

2. The loss must be caused either by the promisor or by other person (in Indian context the
loss is to be caused by some human agency).
3. Indemnifier is responsible only for the loss.

These contracts are contingent in nature and become enforceable only when the loss occurs.

Rights of Indemnifier-

After compensating the indemnity holder, indemnifier is entitled to all the ways and means by
which the indemnifier might have protected himself from the loss.

Rights of the Indemnity Holder-

S.125 titled “Rights of Indemnity Holder when sued” of Indian Contract Act lays down the
rights of Indemnity Holder. The promisee in a contract of indemnity, acting within the scope of
his authority, is entitled to the following rights:-

1. Right of recovering Damages - all damages that he is compelled to pay in a suit in

respect of any matter to which the promise of indemnity applies.

2. Right of recovering Costs -all costs that he is compelled to pay in any such suit if, in
bringing or defending it, he did not contravene the orders of the promisor and has acted
 as it would have been prudent for him to act in the absence of the contract of indemnity,
or if the promisor authorized him in bringing or defending the suit.

3. Right of recovering Sums -all sums which he may have paid under the terms of a
compromise in any such suite, if the compromise was not contrary to the orders of the
promisor and was one which would have been prudent for the promisee to make in the
absence of the contract of indemnity, or if the promisor authorized him to compromise
the suit.

It is pertinent to mention that in order to claim right of indemnity the indemnity holder
shall have a bona fide intention without any deceit or without an aim to defraud the
indemnifier. However, the right cannot be refuted in the case of oversight.

Commencement of Liability

Past Position- Maxim “You must be damned before you can claim to be indemnified”
was widely accepted in the English common law .The original rule was that indemnity
was payable only after the indemnity holder had suffered actual loss by paying off the
claim.

Present Position- Later on in Richardson Re, Ex parte The Governors of St. Thomas’s
Hospital(1911 2 KB 705, 715 CA) a new principle was propounded by Buckley LJ. He
observed “Indemnity is not necessarily given by repayment after payment. Indemnity
requires that the party to be indemnified shall never be called upon to pay…” The same
principle applies in India as well. Reason being that it was latter on realized that an
indemnity might be worth very little indeed if the indemnified could not enforce his
indemnity till he had actually paid the loss. Therefore the court of equity held that if the
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 would constitute a fund for paying off the
claim whenever it was made.

Many High Courts here are of the same opinion say, Calcutta High Court in Osman
Jamal & Sons LTD v Gopal Purshttam(ILR 1929 56 Cal. 262); Bombay High Court in
Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri(AIR 1942 Bom 302); High
 Courts of Allahabad (Shiam Lal v Abdul Salam (AIR 1931 All 754));High Court of
Madras (Ramalingathudayar v Unnamalai Achi (1915 38 Mad 791)); High Court of
Patna (Chunibhai Patel v Natha Bahi Patel (AIR 1944 Pat 185)) etc. But at the same
time some contrary views have also been expressed.

Now there has been some contention regarding the time for giving notice of the event to the
insurer. In Praful Kumar Mohanty v Oriental Insurance Co Ltd. (1997 AIHC 2822 Ori) the court
said the notice should be given with promptitude avoiding unnecessary delay. The act should be
done with all convenient speed. In other words, the thing to be done should be done as quickly
as is reasonably possible.

Contract of Indemnity v Other Specific Contracts

 Contract of Indemnity v Contract of Guarantee-

1. Contract of Indemnity is given in Section 124 of ICA while Contract of Guarantee is
given under Section 126 of ICA.
2. Contract of indemnity is a bipartite agreement between the indemnifier and
indemnity-holder while Contract of Guarantee is a tripartite agreement between the
Creditor, Principal Debtor, and Surety.
3. Liability of the indemnifier is contingent upon the loss while liability of the surety is
not contingent upon any loss.
4. Liability of the indemnifier is primary to the contract while liability of the surety is
co-extensive with that of the principal debtor although it remains in suspended
animation until the principal debtor defaults. Thus, it is secondary to the contract and
consequently if the principal debtor is not liable, the surety will also not be liable.
5. The undertaking in indemnity is original while the undertaking in a guarantee is
collateral to the original contract between the creditor and the principal debtor.
6. There is only one contract in a contract of indemnity between the indemnifier and the
indemnity holder whereas there are three contracts in a contract of guarantee an
original contract between Creditor and Principal Debtor, a contract of guarantee
between creditor and surety, and an implied contract of indemnity between the surety
and the principal debtor.
 7. The reason for a contract of indemnity is to make good on a loss if there is any
whereas the reason for a contract of guarantee is to enable a third person get credit.
8. Once the indemnifier fulfills his liability, he does not get any right over any third
party. He can only sue the indemnity-holder in his own name while once the
guarantor fulfills his liability by paying any debt to the creditor, he steps into the
shoes of the creditor and gets all the rights that the creditor had over the principal
debtor.

 Distinction from warranties

An indemnity is distinct from a warranty in that:
a) An indemnity guarantees compensation equal to the amount of loss subject to the
indemnity, while a warranty only guarantees compensation for the reduction in value
of the acquired asset due to the warranted fact being untrue (and the beneficiary must
prove such diminution in value).
b) Warranties require the beneficiary to mitigate their losses, while indemnities do not.
c) Warranties do not cover problems known to the beneficiary at the time the warranty is
given, while indemnities do.
 Contract of Insurance and Contract of Indemnity

By Contract of Insurance, we mean a contract in which one person in order to save himself
from the future contingencies pays a premium as consideration to another. And another
person on receiving such premium promises to indemnify him from the loss arising from
such contingencies.

Whereas Contract of Indemnity means where one person enters into a contract with another
to save him from losses which might arise due to the conduct of the person himself or any
other person.

Similarities between Contract of Insurance and Contract of Indemnity

 Both the contracts are contingent contracts i.e. both the contracts depend upon the
happening and not happening of the future events.

 Both being special contracts, have applicability to general principles.

  Under both the contracts a promise is made.

 Both the contracts consist of consideration.

Differences between Contract of Insurance and Contract of Indemnity

 Contract of Indemnity has a wider scope since all the contracts of insurance are
contracts of indemnity except Life Insurance whereas vice versa is not there.

 In case of Contract of Insurance, a premium sum is to be paid whereas same is absent

in the case of Contract of Indemnity.

 Contract of Insurance consists of the Element of Uberrimae Fides(Utmost Good

Faith) whereas the same is missing in Contract of Indemnity.

Relevant judicial pronouncement on Contract of Indemnity-

Implied Indemnity was identified in the case of ‘Secretary of State vs. The Bank of
India’ [1938] where an agent presented a government promissory note in his custody to a
bank with a false presentation. The bank in good trust put into use the promissory note
for a refurbished promissory note which was issued from the Public Debt Office. In the
interim time, the real owner of the note sued the Secretary of State for conversion. The
Secretary of State, in turn, prosecuted the bank on the basis of implied indemnity where it
was held that the express indemnity clause is not necessary for face of implied right to
indemnity which is beforehand existing under the Indian Laws.

A contract of indemnity recognizes the parties, and it characterizes the types of losses or
damages covered and explain whether legal expenses in the filing of the suit or contesting
the suit are included or not. Generally, the contract also specifies the “triggering event”;
happening of which will make the indemnifier responsible. The “triggering events” are
defined with aids of terms like “arise out of”, “in connection with”, or “occasioned by”,
“acts or omissions” or “negligence”.
A Contract of Indemnity is required because a party may not be able to command all
visible features of the performance of a promise. The party can be sued for the actions of
another where the circumstances of performance were out of his authority and control.

Indemnity is considered as a sub-class of compensation and Contract of Indemnity as a

class of contracts. The responsibility to indemnify is a willing responsibility taken by the
indemnifier.

The contract of indemnity is an actionable claim provided it is not against public policy
or unlawful to be valid. A right of indemnity lies where one party is required to make
good certain losses experienced by the other party. No third person or an intruder to the
agreement of indemnity cannot bring legal charges against the indemnified due to the
standard of secrecy of contract as settled in the case of National Petroleum Company
vs. Popat Lal by the Bombay High Court.

Mostly, a contract of insurance is not treated as a contract of indemnity in India. But

agreements of marine insurance, fire insurance or motor insurance are regarded to be
contracts of indemnity as in a life insurance, the agreement offers a particular sum of
money upon the death of policy holder but where a policy is taken by a creditor on the
principal debtor, he becomes entitled to a precise amount of money.

IN ‘Gajan Moreshwar vs. Moreshwar Madan’ 1942 case- G.Moreshwar got a piece of
land in then Bombay at lease for a long period. He transferred the lease to M.Madan for
a limited period. M. Madan started development over the above-mentioned plot and
ordered his supplies from K D Mohan Das. When Mohandas asked for the payment for
the material he provided, the accused could not pay up. Upon request of M Madan, G
Moreshwar prepared a mortgage deed in favour of K.D. Mohandas. The Interest rate was
agreed upon, and G. Moreshwar put a charge over his possessions. A date was pre-
decided for the return of principal amount. M. Madan had decided to repay the principal
amount along with interest and to get the mortgage deed released before a particular date.
But M. Madan as per his assurance did not pay anything to K.D. Mohan Das, and G.
Moreshwar had to pay some interest. When after several requests and intimations, M.
Madan did not pay the principal amount along with interest and also didn’t get the
 mortgage deed released, G. Moreshwar legally prosecuted M. Madan for indemnity. The
Privy Council held that if indemnity holder has incurred responsibility and the
responsibility itself is absolute and without limits, the indemnity holder can ask the
indemnifier to take care of the liability and pay it off. Thus, G. Moreshwar was
designated to be indemnified by M. Madan against all debt under the loan agreement and
deed of charge.

Situation when Contract of Indemnity can be enforced-

In the United Kingdom, under common law, it is necessary for an indemnity holder to
first pay for the losses, injuries or damages and then claim for the indemnity. But in
India, there is no clear-cut provision which states that when a contract of indemnity is
implemented. There have been conflicting legal conclusions throughout. First Indian case
where the right to be indemnified was identified was of Osmal Jaman & Sons Ltd. Vs.
Gopal Purushotham [1728] but at present, a general agreement is formed in favor of the
opinion of the equity courts. In K. Bhattacharjee vs. Nomo Sarkar [1899], Shyam Lal vs.
Abdul Salal [1931] and G. Moreshwar vs. M. Madan cases, it was decided that the
indemnified can constrain the indemnifier to place him in a position to meet liability that
may be built upon him without waiting until the indemnified has cleared the same.

Indemnity requires that the party who will be indemnified shall not at any time be called
upon to pay. Therefore, the liability of the indemnifier starts the moment the loss or
damages in the form of liability to the indemnified becomes absolute and without limit.

 The Promisee in a contract of indemnity, acting within the capacity of his control, is
designated to recover from the promisor all losses or damages which he may be
constrained to pay in any suit in respect of any substance to which the promise to
indemnify applies.

For E.g. if X contracts to repay or indemnify Y against the outcome of any proceedings
which Z may take against Y in respect of a particular action. If Z does start legal
 proceedings against Y and as a result of outcome Y had to pay some damages to Z; X
will be responsible for reimbursing the damages that Y had incurred in the case.

 All costs or expenses which he may be forced to pay in any such suit if, in bringing or
protecting it, he did not contradict the orders of the promisor, and acted as it would
have been sensible for him to act in the absence of any contract of indemnity, or if the
promisor empowered him to bring or protect the suit.

 All sums which he may have paid under the terms of any agreements of any such suit,
if the agreement was not in contradict to the orders of the promisor, and was one
which it would have been sensible for the promisee to create in the absence of any
contract of indemnity, or if the promisor empowered him to adjusts the suit.

Conclusion-

Indemnity is a legal discharge from the penalties or liabilities incurred by any course of
action. In simpler words, indemnity needs that one party should indemnify the other if
certain costs mentioned in the contract of indemnity are acquired by another party. For
example, car rental companies lay down that the person hiring the car will be responsible
for the damage or losses caused to the car because of reckless or negligible driving by the
person himself and he or she will have to indemnify the car rental company.

Recently, indemnity contracts are being executed quite frequently in the IT industry.
There are some conditions or situations in which continuation of an indemnity does make
a meaningful change for some whereas for other it does make little changes or no
changes at all. A new concept known as “Indemnity Lottery” can be found in the law of
contract that states that in civil cases of indemnity, results can never be predicted.

A simple indemnity clause can never be an answer to liability issues. The law leans
disfavour ably towards for those who try to prevent liability or look for dispensation from
liability for their actions. The fundamental reason is that a careless party should not be
able to completely shift all claim and damages made against him to another, non-
 negligent party. For e.g. A ticket to an amusement park claims that a person entering into
park can’t hold management responsible for any accident of his/her due to
malfunctioning of rides or any other events. But seldom, such a defense works in the
court of law because it is not based on a contract.

By Tanisha Singh, Yashraj Singh, Content Board, All India Legal Forum