INTRODUCTION. According to Indian Contract Act 1872 124.Contract of indemnity indemnity defined.defined.- A contract by which one party promises to save the Sec 124.Contract
other from loss caused to him by the conduct of the promisor himself, or by the conduct of any . other person, is called a "contract of indemnity"
Different definitions of the term Indemnity. As a legal concept, it has a more specific meaning, to compensate another party to a contract for any loss that such other party may suffer during the performance of the contract. Indemnity is a duty to make good any loss, damage or liability incurred by another. It is the right of an injured party to claim reimbursement for any loss, damage, or liability from any person who had such a duty. According to Longman’s dictionary indemnity is protection against loss esp. in the form of a promise to pay, or payment for loss of money, g oods etc. In a contract of Indemnity, the person who promises to indemnify is known as indemnifier and the person in whose favor such a promise is made is known as indemnified or indemnity holder. In sec 124 the provision incorporates a contract where one party promises to save the other from loss which may be caused either by the conduct of the promisor himself or himself or by the conduct of any other person. To indemnify someone means to cover them for their loss in a certain circumstance. Most forms of insurance - except life insurance– are based on the indemnity principle. principle. This means you can only recover the replacement value of your loss. 1
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According to the definition of Indian Contract Act the definition covers indemnity for loss caused by human agency and it does not deal with those class of cases where the indemnity arises from loss caused by events or accidents or natural calamity which do/may not depend upon the conduct of the indemnifier or any other person, or by reason of liability incurred by something done by the indemnified at the request of the person who promises to indemnify (indemnifier). When an act has been done by the Plaintiff under the express directions of the defendant which occasions injury to the rights of the third persons, yet if such an act is not apparently illegal, but is done in honest and bona fide in compliance with the defendant’s directions, he shall be bound to indemnify the Plaintiff against the consequence thereof 1 So we see that the definition of Indemnity in Indian Contract Act 1872 and English law is different in certain extend. The definition under English Law is much broader. In India contract of insurance is not covered by the definition of Sec 124 of ICA. Thus if under a contract of insurance, insurance, an insurer insurer promises to pay compensatio compensation n in the event of loss by fire, such a contract contract does not come under the purview of Sec 124. Such contracts are defined under Sec 312. Under English law the word indemnity carries a wider meaning. It includes a contract to save the promise from the loss whether it is caused by human agency or by natural calamity like accident or fire. Contract of insurance3 except life insurance is a contract of indemnity.
H.K. Dutt on Contract , 1 Topis v Crane, Crane, 5 Bing NC 636 cited in Saharay, H.K. Dutt Contract , Eastern Law House, 2006, Kolkata.
2 Bhadbhade, Nilima (ed), Pollock & Mulla. Mulla Indian contract and specific relief acts. 12th ed., Butterworth, 2001.
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Concept of Indemnity. An agreement by one person (X) to pay to another (Y) sums that are owed, or may become owed, to him by a third person (Z). It is not conditional on the third person defaulting on the payment, i.e. can sue X without first demanding payment from Z. If it is conditional on the third person's default (i.e. if Z remains the principal debtor and must be sued for the money first) it is not an indemnity but a guarantee. Unlike a guarantee, an indemnity need not be evidenced in writing.4 The concept of indemnity can be found in the facts of the case Adamson case Adamson v Jarvis,5 The plaintiff who is an auctioneer sold certain cattle on the instruction of the defendant. It turned out later that the livestock did not belong to the defendant but it belonged to another person, who made the auctioneer liable and the auctioneer sued the defendant for indemnity for the loss he had thus suffered by acting on the defendant’s directions. The court held that the plaintiff having acted on the request of the defendant was entitled to assume that if what he did turned out to be wrongful, he would be indemnified by the defendant. 4 Markanda, P.C. Law P.C. Law of Contract. Wadhwa Publishers. 2008. Nagpur. 5 (1827) 4 Bing 66 referred from, Singh, Avtar. Law Avtar. Law of Contract. Eastern Book Company. 2008. Lucknow. 3
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In another case Dugdale case Dugdale v Lovering,6 The plaintiff possessed some trucks which were claimed by both the defendant and K.P. Co. the defendant demanded delivery and the plaintiff asked for an indemnity bond, but received no reply. Even then the trucks were delivered to the defendant. K.P.Co sued the plaintiff for conversion of property. The plaintiff were held entitled to recover indemnity from the defendant on an implied promise as evidence by the facts that by demanding an indemnity, they made it clear that they have no intention to deliver except on indemnity.
Section 124 of the Act deals only with one particular kind of indemnity which arises from a promise made by the indemnifier to save the indemnified from the loss caused to him by the conduct of the indemnifier himself or by the conduct of any other person, but does not deal with those classes of cases where the indemnity arises from loss caused by events or accidents which do not or may not depend upon the conduct of the indemnifier or any other person, or by reason of liability incurred by something done by the indemnified at the request of the indemnifier.7 Section 125 of the Act deals only with the rights of the indemnity-holder in the event of his being sued. It is by no means exhaustive of the rights of the indemnity-holder, who has other rights besides those mentioned in the section. Where the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and to pay it off. Indemnity shifts liability from the legally responsible person to an 8other person. Indemnity is a claim for reimbursement by a party who has paid or may pay money for a loss or liability against 6 (1875) 10 CP 196
7 Markanda, P.C. Law P.C. Law of Contract. Wadhwa Publishers. 2008. Nagpur. H.K. Dutt on Contract , Eastern Law House, 2006, Kolkata. 8 Saharay, H.K. Dutt
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a part party y who shoul should d reim reimbur burse se the the payor payor beca becaus usee of an agre agreem ement ent,, rela relati tions onshi hip, p, or duty duty.. Indemn Indemnity ity's 's roots roots are grounde grounded d in princi principle pless of equity equity.. Indemn Indemnity ity,, a form form of restit restituti ution, on, is founded on equitable principles; it is allowed where one person has discharged an obligation that another person should bear; it places the final responsibility where equity would lay the ultimate burden.
A contract of insurance an example of a contract of indemnity . In consideration of a premium the insurer promises to make good the loss suffered by the assured on account of the destruction by fire of his property insured against fire. However the contract of life insurance does not come under the category of contract of indemnity. This is because the life of a person cannot be valued and replaced. Indemnity is one of the basic tenets of insurance that the insured should not profit from a loss or damage but should be returned as near as possible to the same financial position that existed existed before the loss or damage occurred. In other words other words,, the insured cannot recover more than his or her actual loss from the insurer . There are, however, certain exceptions to this rule, rule, such as personal accident and life insurance policies where the policy the policy amount is paid on occurrence of accident or death or death and the question of profit does not arise. Some marine insurance policies also constitute an exception because the settlement of a total loss is based on a sum agreed upon at the time the insurance policy was written. written.9 Most contracts of insurance are contract of indemnity, whereby the insurer agrees to compensate the assured for the loss that the later may sustain through the happening of the event upon which the insurer’s liability may arise but not always so. Contracts such as life insurance and insurance provides for specified sum of money when the accident has already happened are actually contingency contracts. Courts consider it unlikely that an insurance contract will indemnify the
9 Markanda, P.C. Law P.C. Law of Contract. Wadhwa Publishers. 2008. Nagpur. 5
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assured against a loss which is inevitable. The fundamental nature of insurance is that they insure against risks and not certainty. certainty.10 Indemnity is implicated when a person discharges another's duty: A person who, in whole or in part, has discharged a duty which is owed by him but which as between himself and another should have been discharged by the other, is entitled to indemnity from the other, unless the payer is barred by the wrongful nature of his conduct.
The unexpressed premise has been that indemnity should be granted in any factual situation in which, as between the parties themselves, it is just and fair that the indemnifier should bear the total responsibility, rather than to leave it on the indemnity-holder or to divide it proportionately between the parties by contribution. It is sometimes said that a right to indemnity arises when the indemnifier owns an independent duty to the indemnity-holder. This may prove to be nothing more than a way of stating the problem (when is the duty owed?), but it happens to be true in some of the instances instances in which the indemnity-ho indemnity-holder lder would have an action action of tort against against the indemnifier, irrespective of a right of indemnity.
Indemnity and contribution are distinct remedies. Contribution is when the parties responsible for a loss share its liability. Indemnity shifts the entire liability from one legally responsible person to another. "Contribution is based on concurrent negligence of the parties toward the injured party, and before there can be contribution among tortfeasors, there must be tortfeasors. Contribution requires common liability to the injured injured party. party. Where the parti parties es have have no common common liabilit liability, y, there there can be no right right of contribution. Indemnity, on the other hand, does not require common liability and is permitted in circumstances where there is no common liability to the injured party, provided there is an agreement, relationship, or duty between the indemnifier and indemnity-holder that allows for
10 Chitty, Chitty on Contracts, Sweet and Maxwell, 2004, London.
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indemnity.
"A third third party' party'ss action action for indemn indemnity ity is not exactl exactly y for "damages "damages"" but for reimbu reimburse rsemen ment," t,"'' althoug although h this this seems seems to be a disti distinct nction ion without without a differ differenc ence. e. The indemn indemnifi ifier er receiv receives es no consolation by calling the money paid to the indemnity-holder "reimbursement" or "restitution" rather than "damages."
A claim for indemnity is also not a claim for breach of contract. A claim for breach of contract is separate separate and distinct distinct from a claim for indemnification indemnification.. The plaintiff plaintiff may choose between the claims or include both in the same action.11 A contract claim requires proof of a breach of a contractual duty and proximate cause of the claimed damages, while an indemnity claim has other elements, including the requirement that the indemnity-holder is liable for the underlying claim.
A right to indemnification is not a "promise to pay." Unless modified by contract, the indemnity-holder’s liability generally must be fixed first by settlement or judgment.
Contractual Contractual indemnity indemnity is the promise of "'one party the indemnifier indemnifier to hold another another party (the indemnity-holder harmless for loss or damage of some kind." Courts do not disfavor contractual indemnity and will generally enforce it. The parties need no special words to establish the obligation and it can arise "without specifically expressing the obligation as indemnification." The parties create an indemnification agreement when their words express the "intention by one party to reimburse or hold the other party harmless for any loss, damage, or liability. As with other issues of contract law, intent is the controlling consideration for whether an indemnity agreement exists. exists.12
Contract , Eastern Law House, 2006, Kolkata. 11 Saharay, H.K. Dutt H.K. Dutt on Contract ,
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Scope of Sec 124 & 125 in Indian Contract Act. Section 124 of the Act deals only with one particular kind of indemnity which arises from a promise made by the indemnifier to save the indemnified from the loss caused to him by the conduct of the indemnifier himself or by the conduct of any other person, but does not deal with those classes of cases where the indemnity arises from loss caused by events or accidents which do not or may not depend upon the conduct of the indemnifier or any other person, or by reason of liability incurred by something done by the indemnified at the request of the indemnifier. Section 125 of the Act deals only with the rights of the indemnity-holder in the event of his being sued. It is by no means exhaustive of the rights of the indemnity-holder, who has other rights besides those mentioned in the section. Where the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and to pay it off. The cause of action for the claim against the promise accures to the promise when the later is actually demnified. Under a contract of indemnity the promise can claim only damages as distinguish distinguished ed from the debt for the non-payment non-payment of which the promisor as agreed to indemnify him. So a suit before the actual loss may be considered as premature. The main thing is that the person must prove a loss. This sections deal a particular type of indemnity which arises from a promise made by the indemnifier to save the indemnified from the loss caused to him by the conduct of any other person but does not deal with those classes of cases where the indemnity arises from the loss caused by the event of accident which do not depend on the conduct of the indemnified or any 12 Bangia, R.K. Contract -2, Allahabad Law Agency, 2004, Faridabad.
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other person.13
The sections 124 and 125 in Indian Contract Act have a narrow meaning. The word “indemnity” has a wider scope than what is mentioned in Sec124 and 125. A fire insurance or marine insurance is always a contract of indemnity though under the contract act it would more properly come under Sec 31 which defines contingent contract. Fire contract is a contract of indemnity and when loss occurs it is assured to prove the actual loss in the absence of which no decree can be passed. English usage of the word Indemnity is much wider. It includes promise to save the promise from harm or loss caused by events like accident which do not or may not depend on the actions of the promisor. In the case of life insurance, it is not a contract of indemnity. In case of life insurance, death in inevitable and contact of indemnity will not be against an inevitable event. The right of indemnity indemnity is not confines confines to cases of contract. It exists exists where the relation relation between between the parties is such that, either in law or equity, there is an obligation upon one party to indemnify the other. The right of indemnity may arise between the principal and agent, an employer and employee, in favor of a trustee from the trust fund. The The obli obliga gati tion on to inde indemn mnif ify y may may aris arisee out out of a legal legal duty duty to inde indemn mnif ify y in part partic icul ular ar circumstances. Whenever an act is done by one person at the request of another which act 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. In contract of indemnity there are two parties and in contract of guarantee there are three parties. In order to create a contract of suretyship there must be a creditor, a principal debtor and a guarantor or surety, who makes himself liable for the liability of the principal debtor. The relationship may be established in an agreement between the principal debtor and the surety to which the creditor is the party. It may also be established by an agreement to which the creditor is not a party, where there is a collateral contract between the surety and the principal debtor that one shall be liable to the default of the other. But where the contract between the surety and the 13 Gajanna moreshwar Parelkar v Mereshwar Madan Mantri. AIR 1942 Bom 302
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creditor is not collateral undertaking but creates an original liability, then it is a contract of indemnity.14
English cases establish the right of indemnity in several ways,15 (1) It may be created by express contract, contract, that is, if it is given in terms terms of the contract contract itself itself between two parties. (2) It may arise from implied contract, that is, is, if the true inference inference to be drawn from the facts is that the parties intended such indemnity even if they did not express themselves to that effect. (3) The position position of the parties is such that that either in law or in equity there is an obligation obligation on the parties to indemnify the other. (4) (4) If there there is a stat statee of circum circumst stan ances ces to whic which h the the law law atta attach ches es a legal legal duty to the the indemnify. (5) A right of indemnif indemnify y may be given in statute. statute.
There is a distinction between right of indemnity and damage. Right of indemnity is given in the original contract whereas the right of damages is not present in the original contract but arises out of breach breach of the particul particular ar contrac contract. t. It is often often seen seen that that when when contra contract ct is broken the indemnity and damage coincides.16
When an act is done by one person at the request of another which act not itself tortuous to the knowledge knowledge of the person doing it and if such an act turns out to be injurious injurious to the rights of the 14 Bangia, R.K. Contract -2, Allahabad Law Agency, 2004, Faridabad. P.C. Law of Contract. Wadhwa Publishers. 2008. Nagpur. 15 Markanda, P.C. Law
16 Bangia, R.K. Contract -2, Allahabad Law Agency, 2004, Faridabad.
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third party, the person doing it is entitled to an indemnity from him who requested that it should indemnity . The right of indemnity arises from contract which be done. This is implied contract of indemnity. may be express or implied. The right of indemnity exists where there exists a relationship either in law or in equity. There should be an obligation to indemnify the other party. Where there is no contract of indemnity no claims can be made for the damages. Where there is no express contract of indemnity, even if the facts are true as mentioned by the defendant, the defendant will not be indemnified.
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Rights of indemnity-holder indemnity-holder when sued.-
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; (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; (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 17 .
Sub-sec (1) requires that the suit must be in the respect of any matter to which the promise to indemnify applies. Sub-sec (2) and (3) also state that in bringing or defending or compromising, such suit, the indemnity holder should have been either authorized by the promise or he did not
Contract , Eastern Law House, 2006, Kolkata. 17 Saharay, H.K. Dutt H.K. Dutt on Contract ,
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contravene the orders of the promisor or in absence of such authority or orders, his acts should be acts of a prudent.18
There There are controv controvers ersies ies regard regarding ing the point point that that whethe whetherr the indemn indemnifi ifier er can be asked asked to indemnify before the indemnity-holder has actually suffered the loss or his liability arises only after the loss has been suffered by the indemnity-holder. In English Law no action can be brough broughtt agains againstt the indemn indemnifi ifier er until until the indemn indemnity ity-hol -holder der has suffer suffered ed actual actual loss. loss. But a problem arises in such cases. There are situations where the indemnity-holder is not in a position to pay from his own. In the court of equity relief was provided. So a rule has evolved “it “it was no more necessary for the indemnity-holder indemnity-holder to be demnified demnified before he could be indemnifie indemnified d .” That is the indemnity-holder can now compel the indenifier to save him from loss in respect of liability against which the indemnity has been promised. In India it is a rule that no indemnity can be claimed until un til the indemnity-holder has actually suffered loss.19 But in 1942 (Gajanna Moreshwar Parelkar v Mereshwar Madan Mantri 20) the Indian courts applied the rules of the Court of equity that the indemnity-holder can compel the indemnifier to indemnify even before the indemnity-holder has actually suffered losses. It was held by Chagla J. in the case Gajanna Moreshwar Parelkar v Mereshwar Madan Mantri “ The Court of equity held that if his 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 which would constitute a fund for paying off the claim whenever it was made.” made.” He also held “ I have already held that Sections 124 and 125 of the Indian Contract Contract Act are not exhaustive of the law of indemnity and that the Courts here would apply the same equitable principles that the Courts in England do. Therefore, if the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and to pay it off .” .” 18 Ibid.
19 Bangia, R.K. Contract -2, Allahabad Law Agency, 2004, Faridabad. 20 AIR 1942 Bom 302.
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13th Law Commission 1958 had expressed the opinion that the view expressed by Chagla J. is correct and should be adopted by the legislature. The Law Commission recommended that as in English Law “The “The right of the indemnity-holder should be more fully defined and the remedies of an indemnity-holder should be indicated even in cases where he has not been sued ” In Osman Jamal & Gopal,21 The plaintiff company before having actually made any payment to the vendor in respect of its liability to him was entitled to recover from the indemnifier under the contract of indemnity. The plaintiff plaintiff company in liquidatio liquidation n was commission commission agents for the defendant firm in the purchase and sale of certain goods and was to be indemnified against all losses in such transaction. The plaintiff company in that capacity bought the goods from the vendors resold the goods at a loss. He sought to recover it from the plaintiff company. Hence the plaintiff company was seeking to recover this sum from the defendant firm before paying over the amount of the loss to the vendor on the basis of indemnity given by a contract. It was held that the official liquidator could recover it to the vendor. Where a person contracts to indemnify another in respect of any liability which the latter may have undertaken on his behalf, such other person may compel the contracting party, before actual damage is done, to place him in a position to meet the liability that may be cast upon him. “May be compelled to pay” cannot have a narrow meaning so as to signify that indemnity cannot be claimed unless and until damages have already been made.22 Halsbury’s Laws of England says that as soon as the liability to a third person has arisen, the indemnity-holder can obtain relief even before he as suffered losses. When A has agreed to indemnify B against any loss or injury, B is entitled to have recourse to this indemnity and to call
21 ILR 56 Cal 262.
22 Mitra, S.C. Law S.C. Law of Contract. Vol-2, Orient Publishers, 2005, New Delhi. 13
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upon A to discharge his liability as soon as the loss or injury becomes imminent. Indemnity holder B is going to wait until he has actually suffered loss or injury.23 Plaintiff has two causes of action that it was permissible for the plaintiff to call upon the defendant to pay the amounts claimed and it was also permissible for the plaintiff to wait till he suffers loss. Such suits will lie within the period of three years under Art 113 of Limitation Act from the date of payment. payment.24 In Sec 125 there is no provision in the Act for the rights of a promisor in such a contract. The absence, however, of such a provision does not take away the rights which such a promisor has according to English Law, and which are same as the rights of surety mentioned in Sec 141.
Conclusion. Indemnity is a special contract under the Indian Contract Act, 1872. The legislation is a very well drafted one, but has given a very narrow definition of indemnity, due to which the Indian Courts have time and again held that certain documents do not come under the purview of the definition of indemnity contained in the Act. Such decisions have not created a problem, since the courts covered the liability under other provisions of the same Act, mainly under Section 31 of the Act dealing with contingent contracts. Therefore, it would suffice to say that though the defini definitio tion n of indemn indemnity ity under under the Indian Indian Contrac Contractt Act is narrow narrow,, the princi principle pless regard regarding ing indemn indemnity ity which have have been been laid laid down down by common common law are defini definitel tely y addres addressed sed by other other provisions of the Act. The main purpose of construction and interpretation of a contract of indemnity is to ascertain and give effect to the intention of the parties. While interpreting the indemnity clause in a business contract, care should be taken so as to give the meaning to the terms and phrases according to the 23 Ibid. H.K. Dutt on Contract , Contract , Eastern Law House, 2006, Kolkata. 24 Saharay, H.K. Dutt
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common parlance used in that business rather than resorting to other means of interpretation, unless such construction leads to absurdity. The extent of liability under a contract of indemnity depends on the nature and terms of the contract, and each case must be governed by its own facts and circumstances. Interpretation of the contract or clause of indemnity thus plays a crucial role in fixing the liability.
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