CONTRACT OF INDEMNITY

Contract of Indemnity –Definition, Nature and Scope - Rights of indemnity

holder – Commencement of the indemnifier’s liability
The term Indemnity literally means “Security against loss”. In a contract of indemnity one
party – i.e., the indemnifier promises to compensate the other party i.e., the indemnified
against the loss suffered by the other.

The English law definition of a contract of indemnity is – “it is a promise to save a person
harmless from the consequences of an act.” The promise may be express or it may be implied
under English law.

An illustration in English law of the meaning and effect of contract of indemnity is to be

found in the facts of Adamson v. Jarvis.

The plaintiff, an auctioneer sold certain cattle on the instruction of the defendant. It
subsequently turned out that the livestock did not belong to the defendant, but to another
person, who made the auctioneer liable and the auctioneer in his turn sued the defendant for
indemnity for the loss he had suffered by acting on the defendant’s directions.

The court laid down that the plaintiff having acted on the request of the defendant was entitle
to assume that, if, what he did, turned out to be wrongful, he would be indemnified by the
defendant.

In Dugdale v. Lovering, the plaintiff was in possession of certain trucks which were claimed
both by the defendants and one K.P. Company the defendants demanded delivery and the
plaintiffs asked for an indemnity bond, but received no reply. Even so they delivered the
trucks to the defendant. K.P Company, having successfully sued the plaintiffs for conversion
of their property, the plaintiffs were held entitled to recover indemnity from the defendants
on an implied promise as evidenced by the fact that by demanding an Indemnity, they made it
quite clear that they had no intention to deliver except on indemnity.

Similarly, in Sheffield Corporation v. Barklay, A corporation, having registered to transfer a

stock on the request of a banker, was held entitle to recover indemnity from the banker when
the transfers were discovered to be forged.

Thus, the English definition of Indemnity includes within its ambit losses caused not merely
by human agency but also those caused by accident or fire or other natural calamities. Indeed,
every contract of insurance, other than life insurance, is a contract of indemnity.

A Contract of indemnity is a direct engagement between two parties whereby one promises to
save another from harm. According to section 124 of the Indian Contract Act a contract of
indemnity means “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.”

The definition provided by the Indian Contract Act confines itself to the losses occasioned
due to the act of the promisor or due to the act of any other person.
DEFINITION: - As provisions made in section 124 of the Indian Contract Act 1872 says
that, “whenever one party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of the any other person, is called a
Contract of Indemnity.”

Example

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.

Nature of contract of Indemnity

A contract of indemnity may be express or implied depending upon the circumstances of the
case, though Section 124 of the Indian Contract Act does not seem to cover the case of
implied indemnity.

A broker in possession of a government promissory note endorsed it to a bank with forged

endorsement. The bank acting in good faith applied for and got a renewed promissory note
from the Public Debt Office. Meanwhile the true owner sued the Secretary of State for
conversion who in turn sued the bank on an implied indemnity. It was held that – it is general
principle of law when an act is done by one person at the request of another which act is not
in itself manifestly tortious to the knowledge of the person doing it, and such act turns to be
injurious to the rights of a third person, the person doing it is entitled to an indemnity from
him who requested that it should be done. [Secretary of State v Bank of India].

ESSENTIAL ELEMENTS: The following are the essentials of the Contract of Indemnity: -

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.

COMMENCEMENT OF LIABILITY
When does the Indemnifier become liable to pay, or, when is the indemnity-holder
entitled to recover his indemnity?

The Indian Contract Act, 1872 is silent on the time of commencement of liability of
Indemnifier. On the basis of judicial pronouncement of courts, it can be said that the liability
of an indemnifier commences as soon as liability of the indemnity holder absolute and
certain. In other words, if the indemnity holder has incurred an absolute liability even though
he has himself paid nothing, he is entitling to ask the indemnifier to indemnify him.

The original English rule was that indemnity was payable only after the indemnity-holder had
suffered actual loss by paying off the claim. The maxim of law was: “you must be damnified
before you can claim to be indemnified.” But the law is different now.

In Gajanan Moreshwar Parlekar v. Moreshwar Madan Mantri, Chagla J explained the

transformation of process. It is true that under English law no action could be maintained
until the actual loss had been incurred. It was realized that 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 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. This principle
was expounded in Richardson Re, Ex Parte The Governors of St. Thomas’s Hospital and
Osman Jamal & Sons ltd. V. Gopal Purushottam observed that “Indemnity is not necessarily
given by repayment after payment. Indemnity requires that the party to be indemnified shall
never be called upon to pay.

Example:

X promises to compensate Y for any loss that he may suffer by filing a suit against Z. The
court orders Y to pay Z damages of Rupees 5000/. As the loss has become certain, Y may
claim the amount of loss from X and pass it on to Z.

Commencement Of Liability
An important question arises when does the indemnifier become liable to pay
or when is the indemnity-holder is entitled to recover his indemnity.

In English law, indemnity was payable only after the indemnity-holder had
suffered actual loss by paying off the claim. The maxim of law was: “You
must be damnified, before you can claim to be Indemnified” But the law
now is different. The process of transformation of law is well explained
by Justice CHAGLA of the Bombay High Court in the case of
Gajanan Moreshwar Parelkar vs Moreshwar Madan Mantri (1942), he
says that it is true that under the English common law no action could be
maintained until the actual loss has been incurred. It was very soon realised
that an indemnity might be worth little indeed, but the Indemnified could not
enforce his indemnity till the judgement was pronounced, and it was only
after he had satisfied the judgement that he could sue on his Indemnity. It is
clear that this might under certain circumstances throw on intolerable burden
upon the indemnity-holder. He might not be in a position to satisfy the
judgement and yet he could not avail himself on his indemnity till he had
done so.
Therefore, the court of equity stepped in and mitigated the rigor of the
common law. 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.

This principle was founded in the Richardson Re case, where Buckley J

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 High Court Of Calcutta in it’s well known decision of, Osman Jamal &
Sons Ltd vs Gopal Purushottam case followed this principle.
Facts
In this case, A company was acting as the commission agents of the
defendant’s firm and in that capacity brought certain goods for the defendants
which they failed to take. The suppliers became entitled to recover from the
company a certain sum of money as damages for breach of contract. The
company went into liquidation before paying the claim.

Judgement
It was held that the official liquidation could recover the amount even though
the company had not actually paid the vendor. The court directed that the
amount should be set apart so that it is used in full payment of the vendor in
respect of whose contract the company had incurred liability.

The High Courts of Allahabad, Madras and Patna have expressed their
concurrence in the principal that as soon as the liability of the indemnity
holder to pay becomes clear and certain, he should have the right to require
the indemnifier to put him in a position to meet the claim. But contrary views
have also been expressed.

Specified time for notice

It implies that the act should be done with all the convenient speed. In other
words, nothing to be done should be done as quickly as is reasonably
possible.
In the case of Praful Kumar vs Oriental insurance Co Ltd,
Facts of the case
An insured motor vehicle was lost by theft. The insurance policy required the
assured to send notice to the insurance immediately after the theft or any
other criminal act. The assured made police report of the theft immediately
after the incident, but informed the insurer after one month.

Judgement
The court said that the expression immediately implies that notice to be given
with promptitude avoiding unnecessary delay. Immediate police report
showed the Bonafide of the assured in the matter. Reporting to the insurance
after one month could not be regarded as unreasonable. Therefore,
indemnification could not be denied.

SITUATIONS 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 JAMAL & SONS LIMITED 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 KUMAR [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.

Losses or damages on the breach of contract of indemnity holder or rights of the indemnity-
holder under Sec.125 of Indian Contract Act’1872 are as follows,
  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.

Judicial pronouncement on 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.Modan 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.