indemnity under contract law

Indemnity: Under the English Law the term “Indemnity” means a promise to save a person harmless from the consequences of an act. This promise may be express or implied depending on the circumstances of the case. This concept can be elaborated more clearly from the case of Adamson v Jarvis. 

In this case, the defendant had instructed the plaintiff who was an auctioneer to sell certain cattle. Later it was found out that the defendant was not the owner of the cattle and the real owners held the auctioneer liable for the sale of their cattle. Here the auctioneer sued the defendant for indemnity for the loss suffered as a consequence of acting in his behalf. The court held that as the plaintiff had acted upon the directions of the defendant, he is entitled to assume that if the said act is found out to be wrongful, then he would be indemnified for his actions by the defendant.

 Similarly in the case of Dugdale v Lovering, The defendants and KP CO claimed ownership of certain trucks which were in possession of the Plaintiffs. Subsequently the defendants demanded the trucks to be delivered to them. The plaintiffs in return asked for an indemnity bond to perform the delivery but received no reply. Even then they delivered the trucks. Subsequently KP Co sued the plaintiffs for conversion of their property. Here in this case the plaintiffs are entitled to get indemnity from the defendants as they demanded for indemnity to deliver the trucks, thus there is an implied promise that they would deliver the trucks only on the condition of getting indemnity. 

Under the Indian Law, Indemnity is defined under Section 124 of the Indian Contract Act which states that a contract of indemnity is one in which one party promises to save the other party from any loss caused to him by the promisor himself or by the conduct of any other person. The key difference is that under Indian Law, the scope of indemnity is restricted to loss caused by the promisor himself or some other person. Thus the loss must be caused by some human agency. Loss arising from accidents like fire or any natural disasters do not come under its purview unlike in English Law. 

Commencement of Liability under the contract of Indemnity     

According to the original English Law liability would commence only after the indemnity holder had suffered actual loss by paying off the claim. However now the law has changed and in the Indian Context from the Bombay High Court Judgement in Gajanan Moreshwar Parelkar v MoreshwarMadan Mantri, the court held that though under English Common law action could not be maintained until actual loss had been incurred by the party, the court believed that indemnity wasn’t worth much if the party had to suffer loss first before being indemnified. 

When an action was filed against a party, he often had to wait for the judgment to be delivered and then fulfill the requirements of the judgment before suing on his indemnification. Such a situation is sometimes unfavourable to the indemnity holder as he may not be in a position to satisfy the judgement and yet he cannot enforce his indemnity. As a result, the court of equity ruled that if the responsibility had become absolute, the indemnity holder was entitled to have the indemnifier pay off the claims or pay the court enough money to serve as a reserve fund for when the claim was eventually paid off by the indemnifier.

This Principle was further expanded upon in Richardson re, here one of the judges observed that it is not a necessity that indemnity has to be given only by repayment after payment rather the objective of indemnity is that the party to be indemnified should never be called upon to pay in the first place.

In in Osman Jamal & Sons Ltd v Gopal Purshttam, the High Court of Calcutta followed the above principle. In this case a company was acting as commission agents of the defendant firm and bough certain goods on their behalf which later the firm refused to take. Now the supplier became entitled to recover money from the company as a consequence of this breach and the company went into liquidation before making payment of the claims. Here it was held that the Official Liquidator could recover the amount even though the company had not paid the vendor and the amount should be set apart so that it is used in the full payment of the vendor. The high courts of Allahabad Patna and Madras have all agreed that as soon as the liability of the indemnity holder becomes certain, then the indemnifier should be immediately called upon to pay on his behalf. 

Aishwarya Says:

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