Contractual indemnity can be wider than the Indian Contract Act

Introduction

The method to allocate one’s liability is not a modern concept, and it was practised even before the 2nd century BC[1]. In the modern world, the prominence of the relocation of risk has increased copiously, and indemnity is a prominent way to relocate one’s risk[2].  The term indemnity has been coined from the Latin root ‘indemnis’ which denoted something undamaged or harmless[3]. In general terms, it indicates the contracts under which one party promises the other party to undertake the obligation to save the latter from losses; and these types of contracts include two parties, i.e. indemnifier (the person who undertakes the obligation) and indemnity holder (the person who is being indemnified)[4].


Furthermore, the term indemnity is very comprehensive, and it can also be used in many senses[5]. Sometimes on the broader sense, the contract of insurance and guarantee may incorporate under it[6]. However, the ICA does not provide such a broad definition of the indemnity, and the scope of the term indemnity has dwindled under the ICA. 

It should also be noted that there may be many circumstances (like an employer-employee relationship, principal-agent relationship et al.) where indemnity can go beyond the contract cases[7]. In some scenarios, the indemnity concept applies even without using the word indemnity into the exclusive contract[8]. So, it has become essential to revisit the whole idea of indemnity by focusing on the shortcomings presented under the ICA. 

Thus, this paper mainly emphasises those essential fragments of indemnity that are absent under the ICA and owing to which the ICA turned out to be paltry. Furthermore, this paper also deals with the recommendations and perspectives laid down by the Indian courts at different stages regarding the whole concept of indemnity, along with an analogical comparison between the Indian and the English law regarding indemnity. 

Shortcomings under the ICA 

As it is known, the usage of the concept of indemnity is much more far-reaching, in contrast to whatever is laid down under the sections of the Indian contract [9]; and based on such applications, following are some of the irregularities under the ICA, which left the space open for the alterations in the current definition of the indemnity and which can amplify the scope of the ICA: 


(i.) Limitation of the concept of indemnity up to the liabilities originated due to the acts of the promisors or third parties 

As per §124 of the ICA, indemnity holder can claim for compensation only when the loss will occur due to: 

(a) the conduct of the indemnifier; and, 
(b) the conduct of any third party (not including indemnity holder)[10].

It evidently oversights status quo where the loss may be befallen due to any accident or occurrence freestanding from the control of any person and the situation where the loss may arrive due to the act done by the indemnity holder on the request of the indemnifier[11]. Since everything is subject to unforeseen impairment outside the control of the ordinary human being[12], many contracts are formed in the commercial world that are collateral to the accidents and events, which are outside the capacity of the ordinary persons. 

Furthermore, it should be noted that the English law position on this topic is much broader, and the definition of indemnity includes the obligation towards losses caused by any person or the events outside the control of human being[13]. Thus, it can be said that under English law indemnity can embrace all the insurance contracts except the life insurance (as the loss is not inevitable because the valuation of human life cannot be determined)[14].

However, it is unfortunate that sections dealing with indemnity under the ICA are inadequate for such contracts. Nonetheless, it should be noted that the ICA does not endure absolute silent on this issue as §31 of the ICA permits those contracts which are collateral to the unforeseen events[15]. Regardless of this, it is essential to note that indemnity cannot be considered as a contingent contract due to the fact that as per §124, indemnity covers only those losses which are caused due to actions which are under the control of the parties. So, it led to creating muddle regarding the actual status of the indemnity under the ICA. By taking such positions into account, the Law Commission of India has proposed to inflate the scope of indemnity under ICA by inserting provisions for the indemnification of those losses, which arises due to an event not depending on conducts of any of the parties or due to the conduct of any person[16].

Thus, it is evident that the provided sections of the indemnity under the ICA do not embody the real position of indemnity. 


(ii.) The omission of the rights of the indemnifier 

The ICA, under §125, expresses only about the rights of the indemnity-holder and not that of the indemnifier [17],which primarily gives the impression that the indemnifier has only liabilities and no rights. However, since indemnity is recognized as a bilateral contract and required a set of reciprocal promises [18], it must provide rights and obligations equally to both the parties[19]. Here, it should also be noted that English law also has the provisions for the indemnifier’s rights, which is parallel to the surety’s rights under §141 (i.e. the right of a surety to get the benefit of creditor’s securities)[20][21].

Although the ICA does not provide any overt idea about the right of the indemnifier, the courts are in favour of using the principle of natural equity to establish the rights of the indemnifier which is akin to the rights of the guarantor under §141 of the ICA[22]; which means that as per the current position, indemnifier is entitled to discharge his liability up to the extent by which indemnity holder protected himself form the loss. 

Moreover, by extending the aforementioned discussion, it is significant to note that there are many cases where the courts apply the doctrine of subrogation for upholding the rights of indemnifier [23].Such an application is endorsed through the judgement of Lord Cairns in the case of Simpson v. Thomson, where it was held that in the cases, where one party indemnify other for the losses then the person who indemnified “[…] is entitled to succeed to all the ways and means by which the person indemnified might have protected himself against the loss […]”[24].

Furthermore, it should be noted that the abovementioned doctrine, i.e. subrogation flows from the contract of indemnity, is also accepted by the Indian courts[25]; and the cases like Union of India v. Alliance Insurance Co.[26] are some of the examples where the court had stretched the right of Indemnifier up to such extent that it included the doctrine of subrogation under the concept of indemnity[28]. Moreover, since the rights of indemnifier and the doctrine of subrogation, are enunciated from §141 of the ICA, and no provision under the ICA prohibits the application of subrogation under the concept of indemnity. It can be said that the principle of subrogation may be applicable under the concept of indemnity. 

However, such interpretation has been severally criticised based on the fact that the principle of equity, which becomes the basis of introducing the subrogation under the indemnity, does not require the presence of a third party, which indeed is an essential requirement for the subrogation as it involves borrowing the shoes of the third party. Equity may apply in cases where two or less than two people involved[29]. Also, in some of the cases like Sarada Mills Limited v. Union of India, the court goes with the subsequent interpretation and prohibits submitting subrogation under the indemnity[30].

Thus, even if the position of courts is not well settled regarding this matter, it is evident that in regard with the recent judgements, it appears that the Indian courts are looking forward to expanding the scope of indemnity by introducing the rights the indemnifier and the doctrine of subrogation as a desirable feature of indemnity based on equity. 


(iii.) Lack of a provision regarding the implied indemnity 

Implied indemnity has an imperative role in the modern commercial transactions (like in cases of accommodation bill of exchange, employment, guarantee, et al.) and it is also well recognised under the English law, especially in the cases where the third party suffers a loss due to the act done by indemnity holder on the request of the indemnifier[31].

Nonetheless, §124 of the ICA, which defines the indemnity, deals with only expressed indemnity[32]. However, the dispute has arisen through §9 of the ICA, which validates the concept of implied contracts under the ICA [33]. Likewise, there are some cases, for example, Secretary of State v. The Bank of India Ltd, where the court has given its judgments by relying upon the validity of the implied indemnity concept[34].

Moreover, it can be said that the ICA, in itself, has provided the way to justify the cases of the implied indemnity through interpreting §69 (if one person, due to self-interest, pays for another person who is legally bound to pay, former must be compensated),[35] §145 (the debtor must indemnify the guarantor for the amount paid towards the guarantee)[36] and §222 (the right of the agent to indemnified for the expense made by him/her in place of principal) as implied indemnity[37].

Such positions have raised the debate whether the ICA requires expressed provision dealing with the implied indemnity; even after the recognition of implied contracts through other provisions under the ICA as mentioned above. The response to such questions should be affirmative; since, at the present situation, the case of implied indemnity may or may not be allowed, based on the mercy of the judiciary[38]. However, it is essential to recognise it as a separate concept under the indemnity due to its commercial significance[39]. In view of such scenarios, the Law Commission of India has recommended introducing implied indemnity under the definition of indemnity as per §124[40].

Finally, as per the current position of Indian courts, it is essential to note that the implied indemnity can only be applied in those cases where such application does not go against the validity of §23 of the ICA. 

Hence, by considering the absence of an explicit provision of implied indemnity, it can be said that the scope of indemnity under the ICA is much narrower than its actual application. 


(iv.) The limited scope of the ICA for claiming the indemnified amount before the actual loss 

The ICA uses the expression “to save others from the loss caused” under §124, which gives an impression that the one must be damnified before indemnified[41]. It is important to note that this position of law is justified through the English Laws, and it was much more prominent into use in the earlier judgements of the courts[42].

However, several situations arise where the indemnity holder does not have sufficient means even for suffering the loss or showing that he has suffered the loss. For example, the indemnity holder’s scenarios are hospitalised but do not have sufficient money to pay off the bills; or the scenarios where a suit is filed against the indemnity holder, he has to wait till the pronouncement of the judgement for claiming indemnity. Later on, due to these scenarios, it appeared that it had become necessary for the indemnity holder to be wealthy, which is in itself arbitrary and against the established principle of equity. 

Consequently, when the equitable principles triumphed, lots of clashes took place between the courts; and finally, under the new viewpoint, it is argued that the purpose behind the indemnity is much broader than mere settlement in respect of money, and in the landmark case of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, Chagla J. held that that indemnity is not bound under §124 and §125 of the ICA and in the cases, where indemnity holder incurred a liability, which is absolute in nature, he has the right to make demands from the indemnifier to save him by paying off that liability[44]. Subsequently, the Law Commission of India has also validated such derivation and also recommended specific addition in the ICA to save indemnity holders.

Here, it is significant to note that as per the current position of the Indian courts, it is essential to have an expressive clause for allowing preventive indemnity; otherwise, the courts will go with the language of sections under the ICA and allow the compensation only after the actual loss incurred. Thus, it is evident that the ICA is insufficient to allow the compensation before the actual loss incurred; which indeed has a significant role to play under specific situations as already mentioned above. 


 Conclusion 

From the above discussion, it is clear that the concept of indemnity is a very comprehensive concept, with nonpareil importance in the commercial world. The above discussion also substantiates that the ICA is utterly deficient in showing the real potential of the concept of indemnity, due to which the Indian courts are endeavouring to bring the mislaid parts into the Indian legal system by using various principles and several precedents from other common law jurisdiction, especially the UK. Thus, it can be validly said that the real concept of indemnity is much more far-reaching than its scope provided under the ICA. 


Author
- Tushar Krishna
WBNUJS

References:

[1] Lambert M. surhone, Marima T.Teneoe & Susan F. Hensonow, Treaty of Tempe, (3rd ed., 2015). 

[2] William J. McKenna & John C. Bartler, Developments In The Law Of Indemnity, 1 The Forum (American Bar Association. Section of Insurance, Negligence and Compensation Law), Vol. 1, 7 (1965). 

[3] Black’s law dictionary (12th ed., 2009). 

[4] S.C. Mitra, Law of Contracts, vol. 2, 1918-1919 (2nd ed., 2005). 

[5] Nilima Bhadbhade, The Indian Contracts and Specific Relief Acts, Vol.2, 1335 (14th ed., 2013). 

[6] Sarah Sinclair, The Difference Between a Guarantee and an Indemnity, 415 Auk U L. Rew. (1988). 

[7] K.P. Rm. Kuppan Chettiar Alias v. Sp. R.M. Rm. Ramaswami Chettiar, AIR 1946 Mad 472, ¶ 6. 

[8] M/S Sumitomo Heavy Industries Ltd v. Oil & Natural Gas Company, (2002) 3 Mah LJ 34. 

[9] Tropical Insurance Co. v. Zenith Life Insurance Co., AIR 1941 Lah 68. 

[10] The Indian Contract Act, 1872, § 124. 

[11] Dugdale v. Lovering, (1875) All ER Rep 545. 

[12] Vladimir Njegomir, The Role and Importance of Business and Suppl Chain Interruptions, Management 20 (77), 55 (2015). 

[13] Dr. Avtar Singh, Principles of Mercantile Law, 260 (8th ed., 2006). 

[14] Barry Chedlow, Chitty’s Merchantile Contract, 601(1st ed., 2005). 

[15] The Indian Contract Act, 1872, § 31. 

[16] Law Commission of India, Contracts Act, 1872, Report no. 13, 50, ¶ 103 (Februraray 2020). 

[17] The Indian Contract Act, 1872, § 125. 

[18] Tina L. Stark, Negotiation and Drafting Contract Boilerplate 265 (1st ed., 2003). 

[19] Wayne Courtney, Indemnities And The Indian Contract Act 1872, 1 NLSIR, Vol. 27 (2015). 

[20] The Indian Contract Act, 1872, § 141. 

[21] Bhadbhade , supra note 5, 1352. 

[22] Justice Mallick, Commentaries on Indian Contract Act, 900 (2nd ed., 2012). 

[23] Halsbury’s Laws of England [25] ¶ 523-524 (4th ed., 1994). 

[24] (1877) 3 AC 279 (per Lord Cairns). 

[25] Hindustan Corporation v. M/s. United India Fire And General, AIR 1997 AP 347, ¶ 17. 

[26] AIR 1964 Cal 31, ¶ 3 (per R. Bachawat J.). 

[27] Maharana Shri Jasvaisingji Fatesingji v. Secretary of State for India, ILR (1890) 14 Bom 299, (per Jardine J.). 

[28] Philip S. James, The Fallacies of Simpson v. Thomson, 2 The Modern Law Review, Vol. 34, 151 (1971). 

[29] AIR 1966 Mad 381, ¶10. 

Reynolds v. Doyle, (1840) 133 ER 536. 

[30] The Indian Contract Act, 1872, § 124. 

[31] The Indian Contract Act, 1872, § 9. 

[32] AIR 1938 P.C 191. 

[32] The Indian Contract Act, 1872, § 69. 

[33] The Indian Contract Act, 1872, § 145. 

[34] The Indian Contract Act, 1872, § 222. 

[35] Sakshi Agarwal, Contract of indemnity in India & UK, L. T. Journal (2018). 

[36] Courtney, supra note 19, 67. 

[37] Law Commission of India, Contracts Act, 1872, Report no.13, 50, ¶ 103 (February 2020). 

[38] Avtar Singh, Law of Contracts & Specific Relief Act, 201 (7th ed., 2019). 

[39] Shankar Nimbaji Shintre v. Laxman Supdu Shelke, AIR 1940 Bom 161, ¶ 10 (per Lokur J.). 

[40] In Re Law Guarantee Trust and Accident Society Ltd. (1914) 2 Ch. 617 (per Buckley). 

[41] AIR 1942 Bom 304, ¶ 7 (per Chagla J.). 

[42] Law Commission of India, Contracts Act, 1872, Report no.13, 50, ¶104 (February 2020).

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