Contract of Indemnity

Sanjay Bang
Introduction
The Contract of Indemnity is defined in section 124 of
the Indian Contract Act-1872.
It’s a specific type of contract and its provisions are
containing in sections 124 and 125 of the Contract Act.
Being special type of contract, it has to satisfy all the
general provisions contain from sec. 1 to 75 of the
Contract Act as well the specific provisions of the
above two sections.
Origin of the term
Contract of indemnity means doing good to the person
who has suffered loss or putting the person back into
the same position as if no loss has occurred.
But not to earn profit only to compensate.
The word “ Indemnity” has been derived from the Latin
word “indemnis” which means unharmed or
undamaged.
Meaning of Indemnity
The term “ Indemnity” means to make good the loss or
to compensate the party who has suffered some loss.
The contract of Indemnity is entered into with the
object to protect the promisee against the anticipated
loss.
The contingency upon which the whole contract of
indemnity depends is the happening of loss.
Definition of Indemnity
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 Contract of Indemnity. (Sec 124).
Thus, it’s a contract in which one person promises to
protect or to compensate the other for the loss suffered
by him due to conduct of the promisor or any other
person.
Examples
1) A contracts to indemnify B against the consequences of
any proceedings which C may take against him in respect of
certain sum of Rs 200. This is a Contract of Indemnity.
The person who promises to make good the loss is called
the “ Indemnifier”. In the above example A is the
indemnifier.
The person whose loss is to be made good is called the
“Indemnity holder” or “ Indemnified”. B is the Indemnity
holder in the above example.
Continued
2) Shyam Singh vs. State of Mysore AIR 1972 SC
2440.
Promise to join service of Govt of India
3) The Railway receipt pertaining to certain goods is
lost by B. A as also B claim the goods from Railway
company. In view of the rival claimants of goods, the
Railway Co. asked A to give an “ indemnity bond”. A
accordingly , gets the goods on executing the Indemnity
bond. Who is “Indemnifier “ and “ Indemnity holder”
in the above case?
Continued
A is the indemnifier and the Railway company is
Indemnity holder. Later B, the real owner. Sues the
Railway Co. for damages and gets the decree against
the Railway company. The Railway company can claim
from A the loss caused to it by his conduct.
Any example from your side?
Essentials of Contract of Indemnity
1) A contract of indemnity, being a species of contract,
must have all the essentials of a valid contract.
E.g- A asked B to beat C and in case , if B gets injured
he will take care of the hospital expenses. Is this
Contract of Indemnity?
A was suffering from Cancer but didn’t disclose while
taking health insurance policy. Later at the time of
treatment he was denied the claim? Is he entitled to
claim under section 125 of the Contract Act?
Continued
2) There are two parties one Indemnifier and the
indemnified.
3) There must be a loss and the loss must be caused
either by the promisor or by any other person.
Mr. X attempts to commit suicide but was saved and
then hospitalized by his family members. He was
having one health insurance policy. Can he claim for
the expenses from the insurance company for bills of
hospital?
Continued
It is a contingent agreement to make good the loss and
become enforceable only when the loss occurs.
E.g Motor Vehicle Insurance.
There are certain limitations in the definition of
indemnity in the Indian Contract Act. It covers loss
only by the act of promisor or by third party but it
doesn’t cover the loss by promisee or by accident or by
Act of God.
Continued
If we compare this definition with English definition that is
much wider in the scope. It covers not only the loss caused
by the promisor, or by third person but by Act of God,
Accidents or even by the promisee.
The Court upholds the English definition when it comes
about rights of Indemnity holder.
The definition is like this “ A promise to save another
harmless from loss caused as a result of a transaction
entered into at the instance of the promisor”.
Continued
Thus, it’s a wider definition, it covers the loss for
whatsoever the reason may be.
Adamson v/s. Jarvis 1827 Bing 66
The plaintiff sold the goods on the instruction of the
defendant but later found he was not the real owner.
Claimed the indemnity
Gajjanan Moreshwar vs Moreshwar Madan (1942) 44
BOMLR 703
Bombay High Court observed that both sec 124 and 125 of
the Indian Contract Act are not exhaustive of the law of
indemnity and courts here would apply the same principles
that the courts in England do
Lord Halsburys statement
It is a general principal of Law that when an act is done
by one person at the request of another which act is not
itself manifestly tortuous to the knowledge of the
person doing it and such act then turns out to be
injurious to the right of a third party, the person doing it
is entitled to indemnify from him who requested that it
should be done”.
Continued
4) The Contract of Indemnity may be expressed or implied.
Dugdale Vs Loweringq
E.g- Contracts entered by furnishing bonds are best example
of the express contract.
Sec 145 In every contract of guarantee there is an implied
promise by the principal debtor to indemnify the surety, and
the surety debtor is entitled to recover from the principal
debtor whatever sum he has rightfully paid under the
guarantee, but no sums which he has paid wrongfully.
Implied Indemnity
Implied contract- It’s a contract of indemnity where
there are no expressed ways but inferred from the
circumstances of the case and also from the relationship
of the parties
Sec 69 of the Contract Act, a person who is interested
in the payment of money which another is bound to pay
Continued
By virtue of sec 222 of the Indian Contract Act, “ the
Principle of an agent is bound by law to pay indemnity to
him against the consequences of all lawful acts done by
such agent in exercise of authority conferred upon him”.
Gopaldas Purshottam vs Osman Jamal
1928 ILR 56 Cal 262
Law Commission in its 13th report suggested to amend the
definition of indemnity long back in 1970s but up till now
no any firm action has been taken in that regard.
Rights of indemnity-holder (125)
An indemnity holder is entitled to recover the following
amounts from the indemnifier provided he acts within
the scope of his authority.
1) Damages 125(1):If indemnity holder is being sued, is
entitled to recover from the indentified all damages
which he may be compelled to pay in respect of any
matter to which the promise of indemnify applies.
Contiued
2) Costs125 (2):-All costs which he may be compelled to
pay in any such suit in instituting or defending it, provided
the indemnity holder had not contravened the orders of the
promisor.
3) All sums Sec 125 (3) All sums which he might have paid
under the terms of any compromise of any suit.
4) Suit for specific performance: Besides above rights , an
indemnity holder can sue for specific performance of the
contract of indemnity if he incurs absolute liability which is
covered by the contract of indemnity.
Warn Brothers vs Mrs Nelson (1937) 1KB 2019
Limitation to file 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.
Under the Contract of Indemnity, the limitation to file a
suit to recover the damages, cost or sum is 3 years
according to the Limitation Act-1963.
Rights of Indemnifier
No separate provisions have been made in the Indian
Contract Act regarding the rights of an indemnifier.
It has been held that his rights in such cases are similar to
the rights of a surety , under section 145 of the Indian
Contract Act.
Right of subrogation.( Jaswant singh v/s Section of state 14
Bom 299)
To sue against third party after indemnifying the indemnity
holder.
Not to compensate the losses not covered in the Indemnity
contract.
Commencement of Indemnifiers
liability.
Regarding the commencement of the indemnifier the
Act is again salient.
There have been diversified views held regarding the
time of commencement of the indemnifiers liability.
There is difference of opinion among the different High
Courts.
While Bombay, Nagpur High Courts are of the opinion
that the indemnifier can be made liable only when the
indemnity holder has incurred actual loss
Continued
Where as Calcutta, Madras, Allahabad and Patana
High Courts are of the opinion that the indemnified can
compel the indemnifier to make good his loss even
before he has actually discharged his liability.

What's your opinion?

Why?
English position for commencement
In England, under Common Law, it was essential for
an indemnity holder to pay first for the losses and then
claim indemnity.
With time Court of Equity softened the law and in 1911
in Richardson, Ex parte of ST Thomas Hospital
case, made it norm to pay even before the payment for
indemnity is made
Continued
Further in 1914 in Law Guarantee and Accidental
case declared ” indemnity doesn’t 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.”
Hence it is settled principal in England regarding the
commencement of liability of Indemnity to be paid by
the indemnified.
Continued
But in India, the Principal is not yet settled and it is left
to the judiciary only for the interpretation just like the
definition of indemnity.
The 13th law Commission report in its report
recommended that above view ( English view) can be
adopted by appropriate Legislation
Indemnity in case of international
transactions.
Indemnity clauses are debated deeply and focused upon
during negotiation of commercial contracts.
Serious consequences arise due to poorly negotiated
indemnity clause.
It is important to understand whether common law
principals apply for interpreting indemnity clauses or is
the Contract Act itself is sufficient and exhaustive?
Continued
The Bombay High Court in Gajjanan Moreshwar vs
Moreshwar Madan, clearly held that the Contract Act is
not exhaustive and common law principles are to be
relied upon. Hence, unless there is a conflict with the
Contract Act or any judicial decisions rendered by the
courts in India, the common law principles pertaining
contracts will continue to be applicable to indemnity
provisions.
Concluding remarks
Recently indemnity clauses have become very popular
and are used widely in commercial transactions,
specially due to increased risk of loss from various
sorts of tax liabilities, labour troubles etc.
It is a well known principle in the Contract, one cannot
claim compensation for a breach of contract when the
loss suffered is indirect or remote. However, there
remains no such exception for a contract of indemnity.
Continued
A typical indemnity clause, provides for protection
against all kind of losses, claims and liabilities.
Thus, Indian Law is not different than Common Law in
this regard.
The Law usually, leans unfavourably towards those
who try to avoid liability or seek exemption from
liability of their actions.