Contract of Indemnity under Indian Contract Act 1872
Topics Covered:
Define a contract of Indemnity.
What are the essential elements of a contract of Indemnity?
What are the rights of the Indemnity holder?
In the old English law, Indemnity was defined as a promise to save a person harmless from the consequences of an act. Such a promise can be expressed or implied from the circumstances of the case. This view was illustrated in the case of Adamson vs Jarvis in 1872. In this case, the plaintiff, an auctioneer, sold certain goods upon the instructions of a person. It turned out that the goods did not belong to the person and the true owner held the auctioneer liable for the goods. The auctioneer, in turn, sued the defendant for indemnity for the loss suffered by him by acting on his instructions. It was held that since the auctioneer acted on the instructions of the defendant, he was entitled to assume that if, what he did was wrongful, he would be identified by the defendant.
This gave a very broad scope to the meaning of Indemnity and it included the promise of indemnity due to loss caused by any cause whatsoever. Thus, any type of insurance except life insurance was a contract of Indemnity. However, the Indian contract Act 1872 makes the scope narrower by defining the contract of indemnity as follows:
Section 124 – 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 a “contract of Indemnity”.
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 200. This is a contract of indemnity.
This definition provides the following essential elements –
1. There must be a loss.
2. The loss must be caused either by the promisor or by any other person.
3. Indemnifier is liable only for the loss.
Thus, it is clear that this contract is contingent in nature and is enforceable only when the loss occurs.
Rights of the indemnity holder
Section 125, defines the rights of an indemnity holder. These are as follows –
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor –
i. 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.
ii. 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.
iii. 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.
As per this section, the rights of the indemnity holder are not absolute or unfettered. He must act within the authority given to him by the promisor and must not contravene the orders of the promisor. Further, he must act with normal intelligence, caution, and care with which he would act if there were no contract of indemnity.
At the same time, if he has followed all the conditions of the contract, he is entitled to the benefits. This was held in the case of United Commercial Bank vs Bank of India AIR 1981. In this case, Supreme Court held that the courts should not grant injunctions restraining the performance of contractual obligations arising out of a letter of credit or bank guarantee if the terms of the conditions have been fulfilled. It held that such LoCs or bank guarantees impose on the banker an absolute obligation to pay.
In the case of Mohit Kumar Saha vs New India Assurance Co AIR 1997, Calcutta HC held that the indemnifier must pay the full amount of the value of the vehicle lost to theft as given by the surveyor. Any settlement at lesser value is arbitrary and unfair and violates art 14 of the constitution.
Commencement of liability
In general, as per the definition given in section 124, it looks like an idemnity holder cannot hold the indemnifier liable untill he has suffered an actual loss. This is a great disadvantage to the indemnity holder in cases where the loss is imminent and he is not in the position to bear the loss. In the case of Gajanan Moreshwar vs Moreshwar Madan, AIR 1942, Bombay high court observed that the contract of indemnity held very little value if the indemnity holder could not enforce his indemnity untill he actually paid the loss. If a suit was filed against him, he had to wait till the judgement and pay the damages upfront before suing the indemnifier. He may not be able to pay the judement and could not sue the indemnifier. Thus, it was held that if his liability has become absolute, he was entitled to get the indemnifier to pay the amount.
Keywords: Contract of Indemnity in India, Concept of Contract of Indemnity, Definition of Contract of Indemnity
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