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Indian Law Of Indemnity And English Law Of Indemnity: An Analysis

The word indemnity has been derived from the Latin word ‘indemnis’ which means unharmed or undamaged.[1] A contract of indemnity is a risk shifter where the risks of incurring loses are shifted from the promisee to the promisor. Indemnity can be compared to a pendulum, where the bobs when set in motion comes back to an original place. Thus, indemnity is the force behind a promiser restoring the position of promisee back to his/her original state.

The substitution of one party for another whose debt the party pays, entitling the paying party to rights, remedies, or securities that would otherwise belong to the debtor.[2]

When the risk of occurrence of losses associated with a concluded contract is insured by one of the parties by the other party, while the premium for taking the risk is included in the contract price[3]

All these definitions point out the nature of indemnity as a risk shifter.

Section 124 of the Indian Contract Act defines contract of indemnity as 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.[4]

Whereas, According to the English Law, it is defined as:
A contract in which the indemnifier undertakes to make good any loss suffered by the person indemnified as a result of his entering into a given transaction. The difference between an indemnity (in this sense) and a suretyship is that the indemnity is an independent (primary) obligation; the suretyship is a collateral, accessory or secondary obligation.[5]

A simple illustrations of the above would be:
Hammer, a dealer is contracted by Nail, a businessman, to sell his goods and while doing so if he incurs any losses, Hammer shall indemnify Nail.

The current paper provides an analysis of the Indian Law of indemnity and the English Law of Indemnity.

This paper tries to explain each and every aspect of indemnity present in the statues of the Indian law as well as the English Law.

It is very important to understand the roots of the Indian Contract Act before understanding the Indian Law and English Law of any part of the contract law as the roots of the Indian Contract act lies in the Common English Law.

This paper even provides a detailed analysis of the part relevant of indemnity of The Law Commission of India’s 13th report.

The aims of the research paper are:
  • To have the basic understanding of the origins of the Indian Contract Act and what a valid Contract means
  • To study the Indian Law of Indemnity and provide a detailed analysis of the same
  • To study the English Law of Indemnity and provide a detailed analysis of the same.
  • To analyse the Law Commission of India’s 13th report

Hypotheses: The Indian Law of Indemnity is not as developed and established as the English Law of Indemnity.

Indian Contract Act,1872

Origin And Historical Background

From 1206 AD to 1857 AD, Most of India was governed and ruled by the Muslim Conquerors and all the people, regardless of their religion were governed by the laws imposed by the rulers.[6] Even in the matter of commerce and business, which included contracts, their rules and laws were followed by the people in that era. However, the non-Muslims were complied to follow only and only those laws and the tribes and etc could chose to be regulated by their own laws.[7]

 The numerous collections of futwas (decisions) of the celebrated Mahomedan lawyers (jurists) forming a mass of precedents hardly surpassed in the legal literature of any nation were constantly referred to as authoritative expositions of the law in all the courts of justice as presided over by the Kazis or the Nawab or the Em peror sitting with the kazis, mooftis, ulamas and other jurisconsults.[8]

After the collapse of the Mughal rule, India was governed by the British Rule. The East India, Company who’s existence was the result of a merger between two companies under the orders of the acts issued by the authorities, made laws and legislations for the regions assigned.[9]  By the Royal Charter granted in 1726 the 13th year of the reign of King George 1, all the common and statute laws at that time extant in England was introduced into the Indian Presidencies.[10]

In the Sadr courts, Muslims and Hindus were judged on the basis of Mahomedan and Hindu Laws respectively, the laws on sale and pledge were based on the Muslim Law for Muslims.[11] For Hindus, Hindu laws were expressly applied in the cases of bonds, loans, conditional acquaintance of debts, surety, unjust enrichment and other allied heads.[12]

Thus, there was a lot of confusion as the Governor General and other Governors were responsible for the construction of legislations and laws in British-India and the citizens had to abide by the rules whereas in the supreme courts, the Muslims and Hindus were judged on the basis of their own laws and only those laws allowed by the relevant statutes. Sometimes, the courts would even refer to the English common law and thus the Indian law of contract is based on the English law. However, due to the reasons stated above, a proper legal framework related to commerce and contracts was needed.

Thus, The Indian Contract which was previously known as the Indian Contract Bill was drafted by the 3rd Indian Law Commission established in 1861. Although, It was modified later on. The alterations which had been made in the Commissioners' draft occurred principally in the first part of the Bill, which treated of Contracts in General, and they were alterations in form rather than in substance, though they could not be regarded as unimportant.[13]

It is worthy to note that the definition of contracts before and which was proposed originally was, A contract is an agreement between parties, whereby a party engages to do a thing or engages not to do a thing. A contract may contain several engagements and they may be either by the same party or by different parties[14]

A Valid Contract

In order to get the basic idea of a valid contract, the following two examples each are of valid contracts and void contracts, respectively:
  1. Ayan is a 24 year old law student and he comes across an advertisement where a sneaker store is selling a limited edition Jordan sneakers. Ayan decides to go buy the pair of sneakers the next day. Ayan goes into the store and checks the price of the said sneaker and the price tag on the sneaker shows that they are worth 20,000 rupees. Ayan approaches the shop keeper and says that he will buy the sneaker for 19,500 rupees. The shopkeeper refuses and Ayan agrees to buy the Sneakers for 20,000 rupees. The shopkeeper gives the package containing the said pair of sneakers along with the bill and Ayan pays rupees 20,000 to the shopkeeper.

    The above-mentioned example is the perfect example of a valid contract as the it can be called a contract as stated in the clauses of Section 2 of the Indian Contract Act, 1872.[15] Morover, It is complies with the Section 1 to Section 75 of the Indian Contract Act,1872[16] Ayan and the Shopkeeper are neither mentally unsound nor minors. There is a valid communication and consideration between them. Although, if Ayan went to the store and found out that the sneakers are sold out, he cannot sue the shopkeeper as it was just a mere invitation to offer. The Sneakers advertised and The Sneakers Ayan bought were the same in context of originality. Thus, there was no Fraud or Misrepresentation on behalf of either of them and none of them were forced or coerced into the contract.
     
  2. Dharmil is a 20 year old man who offers to sell a console to 12 year old boy called Varun. Varun thinks it is a PS5 and agrees to buy the console. Later on, when he opens the package given by Dharmil it turns out to be a PS3.

    In the above example, the contract is void ab initio as Varun is a minor. Morover, The contract would be voidable even if Varun was not a minor as the PS5 was not the object of the contract and Dharmil has cheated or committed a fraud. Let’s say Dharmil in good faith, by mistake, gave Varun a PS3. The Contract would still be voidable, considering Varun has attained the age which is 18+.

    After Section 75, The Indian Contract Act,1872 has provisions related to a special set of contracts. Indemnity, Guarantee, Bailment, etc are called special contracts because of their characteristics regarding the number of parties, the object, etc.

Indian Law Of Indemnity

Indemnity is considered as a specific contract under the Indian Law along with many other types of contracts such as bailment, pledge, guarantee, etc and there are exclusive acts made for such contracts such as the Indian Partnership Act[17], 1932, which controls and regulates partnership contracts and the other example would be the Sales of Goods[18] Act which regulates and facilitates the laws regarding the sale of goods and it has sections which defines a seller and a buyer, defines the rights of the parties, etc.[19]

In the Indian Contract Act, 1872, Indemnity as a contract is defined as A contract of indemnity is a contract by which one party promises to save the other from the loss caused to him by the conduct of the promisor himself or by the conduct of any other person.[20] This definition is given by Section 124 of The Act and it describes indemnity as a risk shifter and there are two parties, the one from the risk shifted and the other is the one who promises the said risk. The former is called the indemnified/promisee or the Indemnity-holder and the latter is called the promisor or the indemnifier.

The following are the illustrations to explain and elaborate the definition of an indemnity contract as stated by the Section 124 of the Indian Contract Act,1872.
  1. A decides to go shopping in a supermarket chain called Foodhall When A enters the premise, B, a security guard, asks A to leave the bag at the bag counter and collect the badge given at the counter. B informs A that he will only be able to collect his belongings if he returns the badge which proves that the bag and its contents belongs to A. A agrees and proceeds as directed and after receiving the badge he commences his shopping. After 2 hours, A goes to collect his bag, but on searching his pockets he realizes that he has misplaced the badge. B refuses to give back his bag unless A signs a contract of indemnity where he promises to indemnify Foodhall of any damages the establishment incurs, if the owner of the bag, if not A, claims the said bag. A agrees and signs the contract.
     
  2. Mr. Hanma is a businessman who owns Hanma Bakery. Itadori, asks Hanma to collaborate and make cakes with a certain type of flour in the market called Arara and if he suffers losses because of changing his flour, Itadori will indemnify Hanma for all the loses he has suffered from due to changing his flour.

    In the first illustration, A will be the promisor/indemnifier and The Establishment called Foodhall will be the promisee or the indemnified. If someone else actually showed up asking for the same bag and was proved to be the true owner. A would be liable for the damages incurred by Foodhall which resulted from A taking away the bag without giving his badge.

    In the second example, Itadori will be liable as the promise was to indemnify Mr. Hanma from any losses. This can even mean the flour giving food poisoning to the customers and the customers who consumed the cake sued Mr.Hanma or An employee suffering from burns as the flour exploded in the oven which resulted in the said employee harming himself/herself.

    Under the Indian law, section 124 does not cover the insurance contracts and they are treated as contingent contracts as defined in section 31 of the Indian Contract Act,1872 which defines contingency contracts as, A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. —A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen[21]

Every sort of contract needs to have the elements required as per the Indian Contract Act, 1872. Thus, the following are the elements of an Indemnity Contract
  • In this contract, it is mandatory for two parties to be a part of the contract as one is going to indemnify the other.
  • The contract is a promise made by the indemnifier to the indemnified that he will take the burden of compensating the loss. Such a promise must have a lawful object as per the sections 1 to Section 75. A person cannot be held liable for the damages if something against the law is in play.
  • Basically, the elements of this contract should corroborate with all the requirements of a valid contract as stated in Section 1 to Section 75 of the Indian contract act.[22] For example, a minor or a person with an unsound mind cannot be a party to the contract and if the consent has been obtained by coercion, fraud, etc then the contract of indemnity is not valid.
Contracts are either expressed, which means that they need to in the form of a document or there needs to be some kind of proof which shows the existence of the contract, then there are implied contracts which are not recorded but the essence of those contracts can be seen in the way a person behaves. In Section 124, the scope of implied contracts has not been specified. However, In the case of Secretary of State v The Bank Of India, Justice Wright gave the judgement where the brief overview of the facts are:

A( not the true owner) of promissory note by the Government Of India endorsed it to a bank. Unaware, The Bank, applied, without any malice and was given the renewed promissory note from the PDO. B ( true owner) sued the SS. The SS sued the bank on the basis of implied indemnity.

Lordships are of opinion that the appeal should succeed, that the judgments of the Courts below should be set aside, and that it should be adjudged that the appellant recover from the respondents the proper amount under his claim and should also have the costs of this appeal and his costs in the Courts below. If the parties can agree what is the proper amount, it can be inserted in the Order in Council; if they cannot agree, the case must be remitted to the High Court at Bombay to assess the amount.[23]

Thus, they decided it is not mandatory for an express clause or contract to be present and indemnity as a contract can be implied, moreover it is very important for the circumstances of case to be of such a nature to give rise to implied nature if indemnity.

According to Section 124, the words Himself or any other person[24] just cover the actions of people in general or anything that arises out of them. It is very much possible for the promisee to levy losses because of something besides the literal meaning of person to be the cause of the damage. A person who has been indemnified by the agency he bought his house from will not be able to sue them or legally comply them to indemnify him the damages he has incurred because of a land slide, flood, or just to elaborate, A thunder bolt hitting a certain fuse and burning away his house.

The Rights of the of the indemnified/promisee are mentioned in the section 125 of the Indian Contract act. The sub sections of this act specifies what the promisee can recover from the promisor.

125 (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[25] This is is based on the principle that a judgement obtained after bona fide contest against the party indemnified in respect of the matter to which a contract of indemnity applies is conclusive against the indemnifier although the latter was no party to it because the claim against which indemnification has been promised has been conclusively established against the party indemnified.[26] In other words, when a third party sets out a case against the indemnified, it is the entrenched obligation to pay the last emerges for the indemnifier at the primary spot.

The damages would be the final product of the complete liability that he/she had to carry. A indemnity-holder has the privilege to recuperate from the indemnifier all harms which he might be constrained to offer in any suit in respect of any issue canvassed in the agreement of the indemnity contract. It is important to note that the measure of damages would heavily rely upon the limit to which a party has been indemnified, if it is unreasonable or higher than the amount, the indemnifier may refuse as well. . In Gokuldas v. Gulab Rao[27] the Court held that the promisor cannot claim that as a result of not being a party to the dispute between the promisee and the third party, he/she can shed the responsibility of indemnifying the promise. Damages are the end result of the total liability of the indemnity holder. Damages= Cost+ Sums

125(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.[28] In a case, where A lied to B about the ownership of certain goods and impersonated the owner, asked B to sell the goods to C. After the sale, D. the real owner sued B and after he had to pay the cost, B sued A to invoke this section and the judgement was held in his favour.[29]

125(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. The Indemnified/promisee, who is under a contractual agreement of indemnity, is entitled to recuperate all sums which he/she might have paid under the conditions of any compromise of any such suit, if, 1)The indemnifier/promisor authorised him to compromise the suit, or, 2) The compromise was not contrary to the orders of the promiser and the promise has acted in such a manner that would be considered as acted in a prudent manner if the current contract of indemnity didn’t exist. In a case, The High Court of Calcutta has stated 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 article 14 of the constitution.[30]

Commencement Of Liability And The Difference Between Indemnity And Damages

According to the Indian law of indemnity, suffering loss is elementary for a promisee to activate a contract of indemnity. On some levels, this beats the entire point of the risk shifting aspect of the indemnity contract. The following is an illustration to explain the same.

AJ and JT are the two parties in a contract of indemnity where, AJ is the promisee and JT is the promisor where, JT has agreed to indemnify AJ for all the losses he will sustain in AJ’s legal suit against AD. Now, AJ needs to sustain losses before he can claim the indemnity promised by JT, If AJ does not have any money to begin with, He would not have adequate amount to pay for the losses he sustains as well. Moreover, even if he wins/loses the case he needs to be patient enough for the court to come to a conclusion which could take months or even years. Thus, It beats the point of being indemnified by JT.

The above is elaborated in the case of Gajanan Moreshwar Parelkar vs Moreshawar Madan Mantri.[31] The following is the brief analysis of the case.

For simplicity, The plaintiff will be referred to as G and the defendant will be referred to as R

Facts
  • G and a certain relevant government authority made a deal with each in which, G got the possession of a certain land in Bombay for a period that extended to almost a millennium. G is not the possessor of the land
  • R asked G to transfer all the titles stating the title of the contract between G and the government Authority.
  • Hereafter, R, started the work of confecting a property on the said land.
  • R asked G to mortgage the said land to a dealer who supplied the materials used for the property’s work and the amount was more than five thousand rupees with interest. G complied and fulfilled his obligation.
  • R was even responsible to pay another sum of the same amount with same interest and asked G to mortgage another bit of the land to the dealer. G obliged.
  • Later on, R contracted with G and this was an expressed contract in which he proposed that G should transfer the property to the name of R and on doing so, R will contract with the dealer and form another contract of mortgage, liberating G of any liabilities attached to G with respect to the said property. G agreed
  • R failed to perform his obligation when G asked him to indemnify him. G issued a writ against R for the same in the Bombay High Court.
Here, the main issue at hand was about the liability of R is making good the loss of G before G even suffered from any loss.

The argument made by the counsel representing R was that the law as mentioned in the Section 124 to 125 of the Indian Contract Act, 1872, clearly states that the risk does not shift from the promisee to the promiser unless and until the promisee has suffered from the liabilities arised. The counsel pointed out to the judgement passed by Calcutta High Court in the case of Shankhar Nimbaji v. Laxman Supdu,[32] in which it was held that:
The contract being one of indemnity the plaintiffs' claim against defendant No.2 must be held to be premature. It is clear from Section s 124 and 125 of the Indian Contract Act and Article 83 of the Indian Limitation Act that under a contract of indemnity the cause of action arises when the damage which the indemnity is intended to cover is suffered, and a suit brought before the actual loss had accrued must be thrown out as premature. The plaintiffs cannot sue the appellant[33] The bench, to be brief, stated that, No Loss= No compensation from the promisor due the prematurity of the Contract.

Justice Chagla in the present case held that:
The order that I will make will, therefore, be that the defendant be ordered to procure from the mortgagee a release of the plaintiff from all liability under the deed of mortgage and further charge. I give him three months' time to do so. In default of his doing so, the defendant to pay into Court the amount required to pay off the whole amount due to the mortgagee under the mortgage and further charge and that the amount so brought into Court to be utilised for the purpose of paying off the said mortgage and further charge.[34]

The court said that, Indemnity under the Indian Law, is not only the part of the sections where it is defined and where the rights of the promisee are mentioned. The court needs to adjudicate as a holistic approach to the law of indemnity rather the inflexible and stringent interpretation of Section 124 and 125 of the Indian Contract Act and further stated that, The Indian Contract Act is both amending as well as consolidating Act and is not exhaustive of the law of contract to be applied by the courts in India[35]

Often, Indemnity is misunderstood as damages. However, under the Indian law, these two terms are separate with respect to the rights one enjoys.[36] Indemnity does not get activated because of the violation of the contract as compared to damages that cannot exist alone and only have meaning when the violation occurs. In the case of Purangir v. Bhawanigir, it was held that A minor girl working in a company by the consent of her mother, failing which the mother and daughter would compensate the company for the loss suffered by it, in lieu the money was for the damages for breach and not indemnity. Thus, it was not a contract of indemnity.[37]

The following is a table stating the difference between right to indemnity and right to claim damages
 
Indemnity Damages
Section 124 of the Indian Contract Act defines Indemnity as, A contract of indemnity is a contract by which one party promises to save the other from the loss caused to him by the conduct of the promisor himself or by the conduct of any other person[38] Section 73 of the Indian Contract Act, defines damages as When a contract has been broken, the party who suffers by such breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.[39] Even though damages are not defined exclusively in the ICA, the meaning can be interpreted from the above.
In indemnity, the promisee is indemnified of all the losses and costs he suffers from from the party he is contracted to as well as others. A party can only claim damages from the persons who violates the contracts which in turn makes the former suffer from losses.
Breach- Not elementary Breach- Necessary
The main principle behind indemnity is to put a person back into the place he was before the loss occurred. Hence when a person is indemnified, he will never make a profit or a loss out of it, he will be restored to his original position[40] whereas in case of monetary damages, award may be awarded more than the actual loss occurred or less than the actual loss occurred.

Special Cases Of Implied Indemnity

Agency And Indemnity:

a person employed to do any act for another or to represent another in dealing with third persons.[41] The above is the definition of an Agent under Indian Law which can be illustrated as follows:

Mr. Khami has many has authorised a person, Morri, to buy some a bundle of poles on his behalf, here, Morri is the Agent of Mr. Khami.

The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.[42] Thus, it can observed that there is no contract of indemnity between the parties as such, it is based on the principles which evade the principal from getting away after burdening the agent of his responsibilities.

Let’s consider in the above illustration that, Mr. Khami is the one who supplies more the poles to Morri for him to sell to a willing buyer. Morri contracts the buyer and now is bound to send him the poles. Mr. Khami does not send the poles to Morri and now the buyer sues Morri for breaching the contract. Again, Mr. Khami asks Morri to fight the suit. Regardless, of victory or defeat, Mr.Khami is mandated by the law to indemnify Morri of all damages he may incur.

Indemnity And Guarantee

A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the surety; the person in respect of whose default the guarantee is given is called the principal debtor, and the person to whom the guarantee is given is called the creditor.[43] The above can be illustrated as follows

Loki applies for a loan in a bank for a sum of rupees 600 thousand. However, the bank does not agree to lend the said and Loki approaches Simoni who agrees to vouch for Loki and assures the bank that if Loki is not able to pay the money, She will instead of her.

In the above illustration, Loki is the principal debtor as he borrowed the money from the bank who is the Creditor on the word and guarantee of Simoni, who is the creditor in this case.

In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully.[44]

Let’s consider in the above illustration that, Simoni is sued by the bank for not paying the money, She will have to pay the balance as well as other costs and thus Loki needs to indemnify her with all the damages and costs, thus paid by Simoni with respect to being the Surety of Loki

Indemnity and Guarantee can often be confused as the same, The main point of distinction are the number of parties involved in each, which is 3 for the latter and 2 for the former.

Reimbursement Of The Interested Party And Indemnity

A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.[45] Which means that, any payment by someone who has ulterior motives in paying the share of another who is bound by the law to pay for some reason, the person bound by the law will indemnify the person who pays for him instead.

Peter is a zamindar. He has leased his land to John, a farmer. However, Peter fails to pay the revenue due to the government. After sending notices and not receiving the payment, the government releases an advertisement for sale of the land (which is leased to John). According to the Revenue law, once the land is sold, John’s lease agreement is annulled.[46]

English Law Of Indemnity

Although, most of the Indian law of indemnity which has been analysed in the previous chapters is based on the English law. There are a few points of distinguishment between the English Law of Indemnity and the Indian Law. It can be said that the English Law is a universal set and the Indian Law of Indemnity is its sub-set.

A certain maxim used in the English law gives an overview of what it actually means according to the English law. You Must Be Damnified Before You Can Claim to Be Indemnified[47] So it is therefore derived from the above that the English law mainly focused on the loss rather than focussing on covering the loss. It can be said that unless and until you have broken a bone, you cannot expect the doctor to fix it, this analogy best explains the English law’s aspect of indemnity. According to English Law, an indemnity is a promise to save a person harmless from the consequences of an act. Such a promise can be express or implied from the circumstances of the case.[48]

The illustration of indemnity according to the Indian Law would be as follows:
Norkel, visits a library in which he keeps his bicycle in a the cycle zone, where the keeper allots a place for his cycle in d-12 and gives Norkel a token which he is supposed to return while claiming his cycle back. After completing his work at the library Norkel comes to claim his cycle back and tries finding the token for his cycle, he tells the keeper that he has misplaced the token. The keeper asks him to sign a contract of indemnity, in which if someone else claims the cycle Norkel has claimed and the cycle zone suffers any sort of losses, Norkel will have to indemnify the cycle zone of any such losses.

According to the English law, unless and until, the cycle zone does not suffer any loses on someone claiming the cycle Norkel claimed, be it legal costs, damages etc. Even so, the court has not come to a conclusion and the cycle zone still are at the same place as before, which is before Norkel claimed the cycle, then, Norkel is not liable to pay/indemnify for any losses which the cycle zone may have to suffer from.

The above explained aspect and interpretation indemnity by the English Law resulted in a dilemma for the judges and the courts to give a verdict which is fair in the cases where the promisee was incapable of handling the losses which he was promised by the indemnifier to not worry about as it was his responsibility to take care of. Later on along with development of new law by the Equity judicature, the maxim did not mean much and the tables were turned in the favour of a promisee who no longer had to experience any loss first hand.

Buckley, L.J, in the case of Richardson Re, ex parte The Governors of St. Thomas Hospital has said the following:
Suppose A has a claim upon B, but in respect of that claim, B has a right of indemnity from C.B. goes bankrupt. Is Bs' trustee in bankruptcy in a position in which he can force to pay the amount of the claim to him and then can use the money so obtained for distribution amongst the creditors gonerally, whereas he only pays a dividend upon the claim which A has against the bankrupt ? Indemnity is not necessarily given by repayment after payment. Indemnity requires that the party to be indemnified shall never be called upon to pay.[49]

Buckley L.J even reasoned the above as, if such sum were distributed among the creditors generally, the creditor whose claim the debtor was indemnified against would only get a dividend and would have the right to a further dividend if further assets came in; against this claim, the debtor would have no right of indemnity left, and, therefore, his indemnity against such creditor would not be complete, as it had been intended to be.[50]

Kennedy LJ, in the case of Liverpool Mortgage Insurance Co’s Re has stated the following, That indemnity does not merely mean to reimburse in respect of the moneys paid, but to save from the loss in respect of the liability against which the indemnity has been given because otherwise indemnity may be worth very little if the indemnity-holder is not able to pay in the first instance[51] This basically means that indemnity loses its original meaning if the indemnified has to go through the loss which he was promised to be saved from.

The other peculiar characteristic of indemnity under English law is that it facilitates the claims of indemnity on the basis of damage done by phenomenon other than people as stated in the act. Thus in, English law, the contract of indemnity is a universal set of contract of insurance where the Ven Diagram used to display the above would be a circle in another larger circle of indemnity. The phenomenon involves damages done by thunder bolt leading to fire, a fire in general, or unnatural accidents, etc.

However, In the case of Regional Manager Oriental Fire And General Insurance Company Madras Vs. Savoy Solvent Oil Extractions Ltd,

It was held that Life insurance contract is, however not a contract of indemnity because in such a contract, different considerations apply. A contract of life insurance, for instance, may provide the payment of a certain sum of money either on the death of a person, or on the expiry of a stipulated period of time (even if the assured is still alive). In such a case, the question of amount of loss suffered by the assured, or indemnity for the same does not arise. Moreover, even if a certain sum is payable in the event of death, since, unlike property, the life of a person cannot be valued, the whole of the amount assured becomes payable. For that reason too, it is not a contract of indemnity.[52]

Law Commission Of India, 13th Report

Ever since the enactment of the Indian Contract,1872 the jurisprudence has changed and there is a shift in the expertise and problems of the lawyers as one’s asset was only considered to be land before and the solution to every hurdle was approached with the same mindset. Justice was not elementary for the advocates, but since the last 100 years, the mindset has changed and with the changing times the jurisprudence too shall change.

The main aim of this report was to trace the Indian Contract Act since its origins and along with it the improvisations and other aim was the revision of the Act along with the Contract of Indemnity.

The Law Commission is of the view that the Indian Law of Indemnity as defined in Section 124 of the Indian Contract Act is not adequate as it does not define the multiple aspects of indemnity and the same was viewed over Section 125 of The Act, where the Indian Law again, lacks in addressing the rights of the proimsee. The courts, quite often have to rely on the common law of India which in this respect, is identical with the law of England.[53]

The Commission is of the view that, indemnity as explained in the English law as a promise to save the promisee from loss caused by events or accidents which do not or may not depend on the conduct of any person, or from liability arising from something done by the promisee at the request of the promisor. A right to Indemnity may be created by express contract or by implied contract.[54] Which basically widens the scope of implied contracts in indemnity where the conduct of a person on the demand of another harms a 3rd person, the one who demands shall indemnify the one who complies.

The commission later cites the case of Sheffield Corporation v. Barclay in which Lord Davey states the following, .Where a person invested with a statutory or common law duty of a ministerial character, is called upon to exercise that duty on the request, direction or demand of another, (it does not seem to me to matter which word you use), and without any default on his part acts in a manner which is apparently legal but is, in fact illegal and a breach of the duty, and thereby incurs liability to third parties, there is implied by law a contract by the person making the request to keep indemnified the person having the duty against any liability which may result from such exercise of the supposed duty. And it makes no difference that the person making the request is not aware of the invalidity in his title to make the request, or could not with reasonable diligence, have discovered it.[55]

The Commission is of the view that the contracts with such characteristics need to be called quasi-contractual and then referred to the statement made by a certain jurist which said, The redress was given not only upon express promise of indemnity by the debtor, but also upon implied obligation which would nowadays be classified as quasi contractual[56] This gave rise to the commission in suggesting the addition of a Section- 72(A) under The ICA, 1872.

The commission further states that Section 125 of The Act is incomplete as the rights of a promisee as mentioned in this Section are not inclusive of the many rights, the promisee possesses. The view that the promisee can exercise his right to indemnity and be relieved of all the liabilities by the promisor even bore he has suffered any actual loss has been supported by a few courts and judicature whereas some have opposed the same. However, the Law Comission supports the said view. The courts that supported the view have followed the English Law of Indemnity and the Commission with the intention of further explaining the concept has cited the following.

In equity, the rules of which now prevail in all Courts, even in the absence of such a special agreement, the person entitled to the indemnity may enforce his right as soon as his liability to the third party has arisen, and, therefore, he may obtain relief before he has actually suffered loss. He may, therefore, in an appropriate case, obtain an order compelling the promisor to set aside a fund out of which the liability may be met or to pay the amount due directly to the third party, even, when the promisor is under no liability to the third party, as is the case in contracts of mere indemnity, to the promisee himself. Nor is the party indemnified precluded from obtain ing relief by the fact that his liability to the third party cannot be effectively enforced against him[57]

The Additions Suggested By The Law Commission

The Commission is of the view that the definition as stated in Section 124 of The Indian Contract, act must be improvised and altered in such a way that includes the other sort of indemnity where the even damages caused by natural phenomenon, accidents, etc and includes implied indemnity as a concept.

The following is the suggested addition to Section 124
A Contract by which one party promises, expressly or impliedly, to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person or by any event not depending on such conduct, is called a Contract of Indemnity.[58]

As stated above, addition of completely new section called Section 72 A

72A. When Contract of Indemnity may be implied. When an act is done by one person at the request of another, and the act, not being in itself manifestly tortious to the knowledge of the person doing it, turns out to be injurious to the rights of a third party, then, in the absence of express agreement to the contrary, the person doing it is entitled to be indemnified by the person at whose request it is done[59]

With the View of the Law Commission on the rights stated in Section 125 of The Act, the following is suggested:

125A Rights of Indemnity-holder.
  1. The promisee in a Contract of Indemnity acting within the scope of his authority may, where a liability has arisen against him in favour of a third party, obtain against the promisor, in an appropriate case, a decree compelling the promisor to set apart a fund out of which the promise may meet such liability or directing the promisor to discharge such liability himself.
  2. The promisee may institute a suit under this section even where no such suit as is referred to in section 125 has been instituted, and irrespective of whether any actual loss has been sustained by the promise or not. Explanation - The promisee is not precluded from obtaining relief under this section merely on the ground that the promisee‟s liability to the third party cannot be effectively enforced against him.[60]

Conclusion And Analysis
Indemnity under Indemnity is well developed although it lacks in some aspects where the legislature stated in the Indian Contract Act, 1872 has many gaps with respect to the indemnity’s characteristics.

Secction 124 of the Indian Contract Act, 1872, which defines what indemnity means under the Indian law only focuses on one sort of indemnity and fails to direct what the judicature should focus on in cases where the other types of indemnities such as the one’s arising from the conduct of phenomenon such as thunder giving rise to a fire or earthquakes etc and fails to include the implied form of indemnity which the High Court later clarified in its decision in the case of Secretary of State vs. The Bank of India.

The above is the reason why insurance contracts are not included under contract of indemnities.

In the English law however, the definition and the legislature include all sorts of indemnities and implied indemnities as well. However, In the English law, Life insurances are not treated as indemnities.

The Indian Law of indemnity while defining and allotting the rights to the promisee lacks in such a way that it beats the entire point of indemnity as one cannot claim the indemnity till one has not suffered from any loss stated in the contract. This is a major dilemma for the courts and state of helplessness for the promisee who cannot possibly pay for the losses in his/her own capacity. This has been rooted from the English Law which is again the same when it comes to rights of the promisee and follows the maxim stating damnification before indemnification. However, it was later cleared by the equity courts in England and even in the Indian Law, but not as a change in the statute but only, in the form of a case law of Gajanan Moreshwar Parelkar vs. Moreshawar Madan Mantri.

The Law Commission of India has recognised both the above-mentioned problems in its 13th report and elaborated the same before suggesting an amendment to the Indian Contract Act, 1872. The Commission Suggests that In the Section 124 which defines indemnity should consist the words that states both the expressed and implied nature of Indemnity as well as state the indemnity that arises out of the conduct of things other than third persons

The Law commission even suggests the addition of a completely new Section 72(A) which puts indemnity under quasi-contracts.

Finally, it suggests the amendment of Section 125 to include the necessary language as to state the liability of the promisor which not only arises when the promisee suffers from loss.

Even Though the Indian law and English law are different than each other but they are similar in some aspects. Although, not enough to call them the two sides of a same coin.

Both have gaps in their statutes about the true nature of indemnity. However, the along with the jurisprudence and the hearings in the courts, these gaps are being filled according to the needs.

The reports such as the Law Commission Report are important for contributing in the development of the concepts of law and the improvisation of the current ones

The Indian Courts should enforce the English Law and its provisions but not so much as to be completely influenced by the same.

End-Notes:
  1. Sakshi Agarwal, Contract of Indemnity in India & UK, Law Times Journal (Aug.10 2018) http://lawtimesjournal.in/contract-of-indeminity/
  2. Henry Campbell Black, Black’s Law Dictionary, 1427 (J.R. Nolan,St. Paul: West Publishing Co., 1990)
  3. Alexander V. Syatchikhin, Indemnity (Compensation For Losses) And Liquidated Damages: The Difference Of Institutions In English Contract Law, 1 Russian Law: Theory And Practice 68, 69 (2020)
  4. The Indian Contract Act, 1872, Section 124, No. 9, Acts of Parliament, 1872 (India)
  5. Singh Jigisha, Concept of consideration in contracts : A study with reference to law of indemnity and guarantee, Shodhganga (2017) http://hdl.handle.net/10603/245806
  6. Charles Hamilton, Hedaya, 35 (Preliminary Discourse, London 1791).
  7. Id. at 35
  8. Atul Chandra Patra, HISTORICAL BACKGROUND OF THE INDIAN CONTRACT ACT, 1872, 4(3) Journal of the Indian Law Institute 373, 373 (1962).
  9. The Charter of 27 march, 1669
  10. Id. at 375
  11. Muhammad Muthir Khan v. Sayud Abdul Hakim (1832) 5 S.D.A Rep.226
  12. Atul Chandra Patra, Supra note 8, at 391
  13. Id. at 393
  14. Id. at 394
  15. The Indian Contract Act,1872, Section 2, Acts of The Parliament (India)
  16. The Indian Contract Act,1872, No.9 of the Acts of The Parliament (India)
  17. Indian Partnership Act, 1932, No. 9, Acts of Parliament, 1932 (India).
  18. Sales of Goods Act,1930, No. 5, Acts of the Parliament, 1930 (India).
  19. Avtar Singh, Law of Contract and Specific Relief, (Eastern Book Company, Lucknow, 9th edn. 2005)
  20. The Indian Contract Act, 1872, Section 124, No.9, Acts of The Parliament, 1872 (India)
  21. The Indian Contract Act,1872, Section 31, No. 9, Acts of The Parliament, 1872 (India)
  22. The Indian Contract Act,1872, No. 9, Acts of The Parliament, 1872 (India
  23. The Secretary Of State vs The Bank Of India Limited, (1938) 40 BOMLR 868
  24. The Indian Contract Act,1872, Section 124, No. 9, Acts of The Parliament, 1872 (India)
  25. The Indian Contract Act,1872, Section 125, No. 9, Acts of The Parliament, 1872 (India).
  26. 2 R Yashod Vardhan & Chitra Narayan, The Indian Contract & Specific Relief Acts 1269-70 (15h Ed. 2017)
  27. AIR 1926 Nag 108
  28. The Indian Contract Act,1872, Section 125, No. 9, Acts of The Parliament, 1872 (India)
  29. Adamson v Jarvis, 4 Bing 66
  30. Mohit Kumar Saha vs New India Assurance Co, AIR 1997
  31. Gajanan Moreshwar Parelkar vs Moreshwar Madan Mantri, (1942) 44 BOMLR 703
  32. Shankar Nimbaji Shintre vs Laxman Supdu Shelke, (1940) 42 BOMLR 175
  33. Shankar Nimbaji Shintre vs Laxman Supdu Shelke, (1940) 42 BOMLR 175
  34. Gajanan Moreshwar Parelkar V. Moreshwar Madan Mantri, 1942 SCC OnLine Bom 29
  35. Gajanan Moreshwar Parelkar V. Moreshwar Madan Mantri, 1942 SCC OnLine Bom 29
  36. Krishnaswani Iyer v. Thathia Raghavian chetty, AIR 1928 Mad 43
  37. Ankita Toppo & Sanchita Tiwari, Contract of Indemnity Case Laws, 6(5) International Journal of Scientific Engineering and Research 30, 31 (2018)
  38. The Indian Contract Act,1872, Section 124, No. 9, Acts of The Parliament, 1872 (India)
  39. The Indian Contract Act,1872, Section 73, No. 9, Acts of The Parliament, 1872 (India)
  40. S.S. Rana & Co. Advocates, India: Indemnity Vs Damages, Mondaq (Jan.16 2020) https://www.mondaq.com/india/contracts-and-commercial-law/664102/indemnity-vs-damages
  41. The Indian Contract Act,1872, Section 182, No. 9, Acts of The Parliament, 1872 (India
  42. The Indian Contract Act,1872, Section 222, No. 9, Acts of The Parliament, 1872 (India).
  43. The Indian Contract Act,1872, Section 126, No. 9, Acts of The Parliament, 1872 (India)
  44. The Indian Contract Act,1872, Section 145, No. 9, Acts of The Parliament, 1872 (India)
  45. The Indian Contract Act,1872, Section 69, No. 9, Acts of The Parliament, 1872 (India)
  46. Toppr, https://www.toppr.com/guides/business-laws/indian-contract-act-1872-part-ii/quasi-contract/( last visted Nov. 20th 2020)
  47. Academia, Contract of Indemnity & Guarantee, https://www.academia.edu/9012692/Contract_of_Indemnity_and_Guarantee (last visited Nov.23rd,2020
  48. Wayne Courtney, Indemnities And The Indian Contract Act 1872, 27 National Law School of India Review 66, 68 (2015)
  49. (1911)2KB 705, 715 (CA)
  50. (1911)2KB 705, 715 (CA)
  51. (1914) 2 Ch 617, 638: (1914-1915) All ER Rep 1158 (CA)
  52. Academia, Contract of Indemnity & Guarantee, https://www.academia.edu/9012692/Contract_of_Indemnity_and_Guarantee (last visited Nov.23rd,2020)
  53. Secretary of State v. The Bank of India, AIR 1938 P.C 191 (192)
  54. Law Commission of India 13th report, at 49
  55. Sheffiel Corporation v. Barclay, (1905) A.C 399
  56. Winfield, Law Of Quasi-Contracts,116-117 (London: Sweet & Maxwell, 1952)
  57. 16 Quintin Hogg Hailsham of Saint Marylebone, Halsbury: Laws of England 15 (London Butterworth [u.a.] 6th edi. 2005)
  58. Law Commission of India 13th report, at 84
  59. Law Commission of India 13th report, at 83
  60. Law Commission of India 13th report, at 84

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