Contract of Indemnity

‘Indemnity’, according to Longman’s Dictionary, means protection against loss, especially in the form of promise to pay, or payment for loss of money, goods, etc. In English law, a contract of indemnity refers to a commitment of protecting someone from the loss they might suffer as a consequence of an act. The definition of ‘indemnity’ in English law is wide enough to include loss arising from fire, or some other accident. When compared to English law the definition of ‘indemnity’ in Indian Law is narrower. According to Section 124 of the Indian Contract Act, 1872:

‘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 conduct of any other person.’

Further, the party which promises to indemnify is called an “indemnifier”. The party in whose direction such promise to indemnify has been passed is called “indemnified” or “indemnity holder”. A party is indemnified by another party when the loss is caused,

(i) by the conduct of the promisor himself or

(ii) by conduct of any other person.

The protection under ‘contract of indemnity’ in the Contract Act has been provided only against the human agency; unlike English law, it does not cover protection against fire accidents or sea perils. [1]

Illustration: Alex contracts to indemnify Bob against the consequences of any proceedings which Michael may take against Bob in respect of a certain sum of 500 rupees. This is a contract of indemnity where Alex is an indemnifier and Bob is an indemnity holder.

Insurance Contract as the Contract of Indemnity:

English Law: As already mentioned the expression ‘indemnity’ in English Law has a broader meaning. Besides covering the protection against loss caused by human agency, it also covers losses arising from fire, sea perils or any other accident. Thus, all the insurance contracts, except of life insurance, are considered contracts of indemnity.

Indian Law: The definition of ‘contract of indemnity’ as given under Section 124 of the Indian Contract Act, 1872 only covers the loss caused as the consequence of actions of promisor himself or of any other person. Thereby, insurance contracts rather than being considered contracts of indemnity, hold the position of contingent contracts (Section 31) in India.

Rights of the Indemnity Holder:

Section 125 of the Indian Contract Act defines the rights of indemnity holder when sued as follows:

The promise (indemnity holder) acting within the scope of his authority is entitled to recover the from the promisor (indemnifier):

  1. the amount he is compelled to pay in any suit concerning 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.

Enforceability of Contract of Indemnity:

The time when the contract of indemnity is enforceable has not been explicitly defined in the Contract Act. The question is regarding if the indemnity holder can claim for damages after or even before the loss has been actually suffered by him. The question has raised a lot of ambiguity.

In English Law, it was first held that the liability of the indemnifier only arises after the loss has been suffered by the indemnified. Relief in such cases was then provided by the Court of Equity. Later, the principle of being indemnified only after promisee has been damnified was rejected by the court. Therefore, now the indemnity holder can compel the indemnifier to protect him from the loss against which indemnity has been promised before the loss has been actually suffered. The claim for indemnity before the loss implies that indemnity holder has reasonably anticipated that the loss might occur in the near future.

Regarding the time of liability of indemnifier, different High Courts have given different views in India. In Shankar Nimbaji v. Laxman Sapdu [2] where the plaintiff filed to recover a certain sum from the defendant presuming that he might not get a sufficient amount from the sale of his mortgaged property which will lead to a deficit. The court held that plaintiff cannot sue unless he has actually suffered the loss. The principle was supported by the Lahore High Court in the case of Sham Sunder v. Chandu Lal [3]. The Nagpur High Court [4] was too inclined in the favour of ‘being damnified before indemnified’.

However, the contrary views have been expressed by various High Courts. The Bombay High Court while passing judgment in the case of Gajanan Moreshwar v. Moreshwar Madan [5] observed:

“If a suit was filed against him he had actually to wait till a judgment was pronounced and it was only after he had satisfied the judgment that he could sue on his indemnity. It is clear
that this might under certain circumstances throw an intolerable burden upon the indemnity-holder. He might not be in a position to satisfy the judgment and yet he could not avail himself of his indemnity till he had done so… 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 pay it off.”

Supporting the decision in the above case, the High courts of Calcutta [6], Madras [7],  Patna [8] and Allahabad [9] passed their decisions in favour of the principle of allowing the indemnity holder to compel the indemnifier to indemnify before the loss has been suffered.

Recommendations of Law Commission [10]

  • The Law Commission has recommended to expand the definition of ‘contract of indemnity’ under Section 124 of Indian Contract Act, 1872 to include protection against the loss caused by events that may or may not depend upon the conduct of any person.
  • The second recommendation is to clearly enunciate about the promise to indemnify can also be implied in nature.
  • The Law Commission in its report has also recommended that “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.”

Conclusion: The contract of indemnity as defined under Section 124 is a contract to assess protection against the loss caused by human agency. The expression has a relatively narrow viewer as compared to one in English Law. Even, the Law Commission in its report has pricked the problem and has recommended giving a broader and a more clear definition of ‘indemnity’ under the Indian Contract Act. Thus it can be concluded that ‘contract of indemnity’ has different positions in English and Indian Law. The Court of Equity evolved its principles which have been followed by various High Courts in India but the controversy has still not got a precise provision to come to the end.

References:

Dr Avtar Singh, Contract Act and Specific Relief, EBC, 12th Edition, 2017

R.K. Bangia, The Indian Contract Act, Allahabad Law Agency, 15th Edition, 2016

  1. Gajanan Moreshwar v. Moreshwar Madan, AIR 1942  Bom. 302, at p. 303.
  2. AIR 1940 Bom 161.
  3. AIR 1935 Lahore 974.
  4. Ranganath v. Pachusao, AIR 1935 Nag. 117.
  5. AIR 1942  Bom. 302, at 304.
  6. Prafulla Kumar v. Gopee Ballabh Sen, ILR (1944) 2 Cal. 318.
  7. Ramalingathudayar v Unnamalai Achi, (1915)38 Mad 791.
  8. Chunibhai Patel v Natha Bhai Patel, AIR 1944 Pat 185.
  9. Abdul Majeed v Abdul Rashid,1936 All 598.
  10. 13th Report, 1958, on Indian Contract Act, 1872.

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