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NATURE OF CONTRACT OF INDEMNITY

Indemnity can be treated as a sub-species of compensation and a Contract of Indemnity is a species of contracts. The obligation to indemnify is a voluntary obligation taken by the indemnifier.

Mere possibility of loss occurring will not make the indemnifier liable. Loss to the indemnity holder is essential, otherwise, the indemnifier cannot be held liable. Plus, the loss must arise due to the conduct of the indemnifier or any other person related.  Strictly speaking this does not cover the acts of God; otherwise various insurance transactions will be rendered untenable. Under Indian law, the definition of contract of indemnity is restricted to cases wherein the loss is caused by human agency. Losses from other causes are covered in other chapters of the Indian Contract Act, 1872.

 

Contract of Indemnity should have all the essentials of a valid contract like free consent, legality of object, etc. Consideration in this case can be anything done, or any promise made which serves as motivation behind the contract. It is sufficient inducement that the person for whom the indemnifier has promised indemnity has received a benefit or that the indemnity holder has suffered an inconvenience of doing what the indemnifier asks.

 

A contract of indemnity is one of the species of contracts.

 

ADAMSON vs. JARVIS [1827] 4 BING 66

 

FACTS: Adamson was an auctioneer who was given cattle by Jarvis to be sold at an auction. Adamson followed the instructions and sold the cattle. But Jarvis was not the owner of the cattle. The real owner of the cattle sued Adams for conversion and was successful. Adamson had to pay damages and he then sued Jarvis to be indemnified for the loss that he suffered by way of damages to be paid to the real owner.

 

HELD: Adamson carried out Jarvis’s instructions and was entitled to presume that if anything went wrong as per instructions, he would be indemnified. Jarvis was ordered to pay damages to Adams.

 

 

Indemnity, as per English Law, is a promise to save another harmless from the loss caused as a result of a transaction entered into at the instance of the promisor. It is not necessary under English law that the loss be due to the conduct of a person; the loss could be caused by accidents or forces beyond one’s control. Thus, the scope of application under English law of indemnity is wider.

 

The Law Commission of India recommended expansion of scope of law of indemnity in its 13th Report but no amendment has been made executing the same.

 

A contract of Indemnity may arise by:

 

a)     Express Promise. There can be an agreement between parties to indemnify one party.

 

b)     Operation of Law. Under Section 145 of the ICA, 1872 if the surety pays the creditor, the principal debtor in lieu of whom the surety had to pay has to indemnify the surety.

Similarly, under Section 13 of the Indian Partnership Act, 1932 a firm is bound to indemnify an agent who suffers a loss by doing a lawful act of the firm. There are provisions in the Negotiable Instruments Act, 1938 as well as Indian Companies Act, 1952.

 

 

In GAJAN MORESHWAR vs. MORESHWAR MADAN AIR 1942 BOM 302, it was decided that law relating to indemnity is by no means exhaustive and thus, the Courts in India shall follow the English Law. In the same case, English equity law was discussed; whether requiring an indemnity holder to actually pay and clear the damages before claiming them from the indemnifier places an undue burden on the indemnity holder. Thus, if the liability of an indemnity holder became absolute, he was held entitled to get the indemnifier to pay off the claim or to pay the court sufficient amount of money for making a fund to pay the claim as and when it was made.

 

 

The contract of indemnity is an actionable claim. Of course, it must not be against public policy or unlawful to valid. If a contract of indemnity for indemnifying bail in a criminal case is invalid. For example, if A publishes a libel at the request of B and suffers damage due to such publication, A cannot sue B to indemnify him.

 

A right of indemnity exists where one party is obliged to make good certain losses suffered by the other party. The losses which the indemnifying party must make good will depend on the wording of the indemnity.

No third person or a stranger to the contract of indemnity cannot sue the indemnifier due to the principle of privity of contract as decided in the case of NATIONAL PETROLEUM COMPANY vs. POPAL LAL by the Bombay High Court.

 

Generally, a contract of insurance is not treated as a contract of indemnity in India. But contracts of marine insurance, fire insurance or motor insurance are deemed to be contracts of indemnity. The reasoning offered is that a life insurance as a contract does not offer to make good a loss but offers a particular sum of money upon the death of the policy holder. But when we look at policies where a policy is taken by a creditor on the principal debtor, he becomes entitled to an exact amount of money. Thus, courts look deeply into the terms and conditions of contracts in such cases.

 

GAJAN MORESHWAR vs. MORESHWAR MADAN 1942 BOM 302,

FACTS: G Moreshwar got a plot in Bombay for a long lease period. He transferred the lease to M Madan for a limited period. M Madan started construction over the said plot and got his supplies from a K D Mohan Das. When Mohandas asked for payment, the defendant could not pay up. Upon request of M Madan, G Moreshwar executed a mortgagee deed in favor of K D Mohan Das. Mohandas, the supplier. Interest rate was decided and G Moreshwar put a charge over his properties. A date was set for the return of the principal amount. M Madan had agreed to pay the principal amount, the interest and to get the mortgage deed released before a certain date. M Madan did not pay anything to K D Mohan Das; it was G Moreshwar who paid some interest.

 

When despite repeated request, M Madan did not pay the principal amount, interest or get the mortgage deed released, G Moreshwar sued him for indemnity.

HELD: The Privy Council did not accept M Madan’s stance that G Moreshwar had suffered no loss and thus could not claim anything under Sections 124 and 125. The Council held that an indemnity holder has rights other than those mentioned in the Sections above. If the indemnity holder has incurred a liability and the liability is absolute, he can turn to the indemnifier to take care of the liability and pay it off. Thus, G Moreshwar was entitled to be indemnified by M Madan against all liability under the mortgage and deed of charge.

 

 

A contract of indemnity identifies the parties, describes the types of losses covered and clarifies whether legal expenditure in the filing or fighting a suit is included.  Generally, the contract will also make clear the ‘triggering event’; happening of which will make the indemnifier liable. The triggering events are described with help of terms like “arise out of”, “in connection with,” or “occasioned by”, “acts or omissions” or “negligence.” The contract also makes clear the extent of indemnification due.

RIGHTS OF INDEMNITY HOLDER

 

The rights of the indemnity holder are dependent on the terms of the contract of indemnity as a general rule. Section 125 of the Indian Contract Act, 1872 comes into play when the indemnity holder is sued i.e., under specific situation.

 

The indemnity holder is entitled to recover the:

 

a)     all the damages that he may have been compelled to pay in any suit in respect of any matter to which the promise of the indemnifier applies.

 

For example, if A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a particular transaction. If C does institute legal proceeding against B in that matter and B pays damages to C, A will be liable to make good all the damages B had to pay in the case.

 

b)     all the costs of suits that he may have had to pay to the third party provided he acted as a man of ordinary prudence and he did not act in contravention of the directions of the indemnifier or if he had acted under the authority of the indemnifier to contest such a suit.

 

In the case of ADAMSON vs. JARVIS [1827] 4 BING 66, Adamson was entitled to recover the money he had to pay to the true owner of the cattle as well as any expenses incurred by him to get a legal counsel, etc.

 

c)     All the sums that he may have paid under the terms of any compromise of any such suit provided such compromise is not contrary to the indemnifier’s orders and was a prudent one or if he acted under authority of the indemnifier to compromise the suit.

 

The indemnity holder is also entitled to losses due to change of law not foreseen by the parties when they entered into such contract of indemnity

 

 

RIGHTS OF THE INDEMNIFIER

 

The rights of the indemnifier have not been mentioned expressly anywhere in the Act. In JASWANT SINGH vs. SECTION OF STATE 14 BOM 299, it was decided that the rights of the indemnifier are similar to the rights of a surety under Section 141 where he becomes entitled to the benefit of all securities that the creditor has against the principal debtor whether he was aware of them or not. Where a person agrees to indemnify, he will, upon such indemnification, be entitled to succeed to all the ways and means by which the person originally indemnified might have protected himself against loss or set up his compensation for the loss.

 

The principle of subrogation i.e., substitution is founded in equitable principles. Once the indemnifier pays for the loss or damage caused, he will step into the shoes of the indemnified. Thus, he will have all the rights with which the original indemnifier protected himself against loss or damage. The principle of subrogation is applicable due to both the ICA, 1872 itself and principles of equity.

 

Contract of Indemnity, When enforceable

 

In England, under common law, it was essential for an indemnity holder to first pay for the losses and then claim indemnity. With time, Court of Equity softened the law and in 1911 with the RE: RICHARDSON, EX PARTE THE GOVERNORS OF ST THOMAS HOSPITAL case, indemnity before payment by the indemnity holder was made the norm. Further in 1914, in the case of RE LAW GUARANTEE & ACCIDENTAL case, it was stated that ‘to indemnify does not mean merely to reimburse with respect to the money paid but to save from loss with respect to liability for which indemnity has been given’. A Contract of indemnity would serve little purpose if the indemnity holder was made liable in the first instance. What if he is unable to meet the claim in the first instance?

 

In India, there is no specific provision which states when a contract of indemnity is enforceable. There have been confliction judicial decisions throughout. OSMAL JAMAL & SONS LTD vs. GOPAL PURUSHOTHAM [1728] ILR 56 CAL 262, was amongst the first Indian cases where right to be indemnified before paying was recognised. But now, a consensus of sorts has been formed in favour of the opinion of Equity Courts. In K BHATTACHARJEE vs. NOMO KUMAR 1899 26 CAL 241, SHIAM LAL vs. ABDUL SALAL 1931 ALL 754 and GAJAN MORESHWAR CASE, it has been decided that the indemnified may compel the indemnifier to place him in a position to meet liability that may be cast upon him without waiting until the promisee (indemnified) has actually discharged it.

 

Indemnity requires that the party to be indemnified shall never be called upon to pay. Thus, the liability of the indemnifier commences the moment the loss in form of liability to the indemnified becomes absolute.

 

 

ConCLUSION

Simply put, indemnity requires that one party indemnify the other if certain expenses spoken of in the contract of indemnity are incurred by him. For example, car rental companies stipulate that the person hiring will be responsible for damage to the rental car caused by his reckless driving and will have to indemnify the rental company.

 

Most attention of late has been given to development of indemnity contracts in the IT industry. There are some circumstances in which the existence of an indemnity would make a significant difference while in others, a contract of indemnity will have little or no role to play. Another new concept called ‘Indemnity Lottery’ can be found in the law of contract that implies that in civil cases of indemnity results can never be predicted. Brazilian jurist Leonardo Castro is credited for coining the term. These topics are dealt with in more detail in the textbook available for Contracts II.

 

A simple indemnity clause is not the answer to liability issues. The law leans disfavouably towards for those who try to avoid liability or seek exemption from liability of their actions. The underlying reasoning is that a negligent party should not be able to completely shift all claims and damages made against it to another, non-negligent party. For example, many a times a ticket to an amusement park may claim that a person entering the park will not hold the management liable. Rarely will such a defense work in a court of law because it is not based on a contract. Most people hurt on an amusement park ride are able to sue for damages quite successfully.

 

 

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