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TRANSCONTINENTAL ASSURANCE: EXPLORING INCEPTION AND INTERSECTIONS OF INDEMNITY CONTRACT

INTRODUCTION:

The contract of indemnity at its fundamental level aims to act as a protective device for parties in a contract by allocating the risks to a particular person while saving the other from losses. The fundamental understanding can quickly be derived from the meaning of the original Latin word “Indemnis” which is to render someone undamaged. The rationale is to restore the person suffering loss to the same position before the loss was caused. The genesis of indemnity is common law, notably in the case of Adamson v. Jarvis[1]. In the Indian context, two sections of the Indian Contract Act[2] have been attributed to the concept of indemnity, these being Section 124[3] and Section 125[4]. According to the former, an indemnity contract is a legal agreement whereby one party guarantees the other against losses caused by the promisor’s or any third party’s conduct. It is usually inserted as a clause in a contract[5]. The party in the contract of indemnity receiving the compensation is called the indemnity holder and the party promising to give the compensation and save the party from losses is called the indemnifier. Although Indian law has sourced the laws of indemnity from common law, the nitty-gritty of it is markedly different from what the English follow.

SCOPE OF THE LAW:

An auctioneer carries out a person’s instructions to sell specific items. Later, the genuine owner held the auctioneer accountable for the goods once it was discovered that they did not belong to the person who had initially instructed the sale; following this, the auctioneer filed a lawsuit against the defendant, demanding damages for the injuries he had sustained. This is the origin of indemnity in the United Kingdom since it was determined that the plaintiff was entitled to indemnification from the defendant while he was carrying out the defendant’s commands because the plaintiff had suffered losses as a result of the defendant’s actions. Thus, this case tried to develop the scope of indemnity. Firstly, it showed that the promise of indemnity need always be expressly conveyed, it may also be implied, which was the case here[6]. The English Court had even relied on this broadened scope of indemnity even in the case of Dugdale v. Lovering[7], whereby indemnification was made enforceable on the ground of implied promise[8]. Secondly, the case outlined the commencement of liability of the promisor only when the promise is damnified, which established the maxim “You must be damnified before you can claim to be indemnified”[9]. Section 124 of ICA[10], drafted in correspondence with the English laws, says “one party promises to save the other” which creates rather ambiguity regarding whether the promise of indemnity needs to be expressed or may be implied as well. While “promises” may indicate the need for a prior express promise of the promisor to protect against any loss or damage, the case of Secretary of India v. Bank of India Ltd.[11] did enforce an implied promise of indemnity. However, this was not the first ever case of indemnity in India. It was Osman Jamal and Sons Ltd. v. Gopal Purshotam[12], where the plaintiff company and defendant commission agent agreed to buy and selling of goods and the defendant promised to repay the plaintiff in case of any loss, which was the first of its kind contention in the Indian jurisdiction. The court upheld the indemnification because there was an express promise to indemnify, following the wording of Section 124. The next question is regarding the commencement of liability in the Indian scenario. When the promisee assumes absolute liability and the indemnity contract covers that liability, the indemnity holder is legally permitted to sue the indemnifier for precise fulfilment of the contract even before any damages materialize. Therefore, in this case, the Indian Court modified the underlying common law to permit the enforceability of an absolute promise of indemnity, departing from it. The Indian judiciary thus recognized that if the indemnity holder is not allowed to execute the pledge before actual loss, the promise of indemnification will become meaningless. It appears that the court has recognized a circumstance in which the indemnity holder is unable to cover damages without first receiving indemnification. The foundation of this is equity. The same reasoning was given by the Court of Equity in cases like Richardson Re[13]., and Liverpool Mortgage Insurance Co.[14] where in fact, courts have made observations on the same lines, upholding the importance of the promise of indemnity in saving the indemnity-holder from losses. So far we have observed that Indian law on indemnity has mostly followed the same trajectory as the UK. Then what has birthed the popular notion that common law on indemnity is broader than what the Indian Contract Act, of 1872 envisages? This brings us to the third aspect that draws a clearer contradiction between the two. Indemnity under English law aims to save or protect one harmless from the result of any act[15]. The word ‘act’ is open to wide connotations, thus, indemnity can be promised to save a person from losses arising out of any accident, like fire or any other detrimental consequence of human action. On the contrary, the Indian provision requires the loss to arise only as a consequence of the action of the indemnifier or any other third party, failing to safeguard against exorbitant losses that result from accidents. Thus, only those losses that involve human agencies can be recovered in Indian law whereas no such dependents have been demarcated in English law. English law thus, includes insurance (except life insurance), unlike Indian law.[16]

CONCLUSION:

Over the years, several interpretations have been made about the two sections appended to indemnity, i.e., Section 124[17] and Section125[18] of the Indian Contract Act, which has significantly expanded its scope in terms of liability, rights of the indemnity-holder, and nature of loss. The significance of the promise of indemnity has been upheld to save the indemnity holder from suffering losses that are caused by external factors independent of his actions. Indian courts have found that these sections are not exhaustive, for example, the case of Gajanan Moreshwar Parelkar vs Moreshwar Madan Mantri[19]has accrued a modified right that neither section had identified originally. In conclusion, what is noteworthy is the recommendation of the 13th Law Commission Report[20] regarding the inclusion of the terms “express” and “implied” to describe the nature of the promise of indemnity made to solve the ambiguities as did the case of Adamson v. Jarvis.[21]

The idea of making such developments is to keep the Indian Contract Act and its sanctity preserved in governing commercial transactions and protecting the rights of parties.

Author(s) Name: Asmita Sen (Symbiosis Law School, Pune)

Reference(s):

[1]Adamson v Jarvis [1827] 4 BING.66:29 R.R 503

[2] The Indian Contract Act, 1872

[3]The Indian Contract Act,1872, s. 124

[4]The Indian Contract Act,1872, s.125

[5] Nida Tahever Khan, “The Twilight of Contract of Indemnity in the Indian Contract Act, 1872 : A Critical Analysis” [2022] JCLJ 509, 511 <https://www-scconline-com.eu1.proxy.openathens.net/Members/MySCCOnlineFolderView.aspx> accessed 06 February, 2024

[6] Avtar Singh, “Contract and specific relief” (EBC, 13th Edition, 2021)

[7]Dugdale v Lowering [1875] 32 LT 155

[8] Shriya Srivastava, Analysis of Contract of Indemnity and Guarantee, [2022] JCLJ 94, 98

https://www-scconline-com.eu1.proxy.openathens.net/Members/MySCCOnlineFolderView.aspx

[9] Nitesh Ranjan, Case Comment : Gajanan Moreshwar Parelkar vs Moreshwar Madan Mantri, [2022], JCLJ 1427, 1432 <https://www-scconline-com.eu1.proxy.openathens.net/Members/MySCCOnlineFolderView.aspx> accessed 06 February, 2024

[10]The Indian Contract Act,1872

[11]Secretary of India v Bank of India Limited [1938] 2 WLR 1028

[12]Osman Jamal and Sons v Gopal Purushottam [1928] AIR 1929 Cal 208, 118 Ind Cas 882

[13]Re Richardson, Ex. Parte The Governors of St Thomas Hospital Case, [1911] K.B. 2

[14] Re Law Guarantee Trust ,and Accident Society Ltd., Liverpool Mortgage Insurance Co.’s Case, [1914] 2 CH 617]

[15]Niraj Pandey, “Contract of Indemnity” [2019] scribd <https://www.scribd.com/document/423006753/CONTRACT-OF-INDEMNITY-1-docx> accessed 7th February, 2024

[16] Pollock and Mulla, The Indian Contract and Specific Relief Acts, (Lexis Nexis, 16th ed, 2022),

[17]The Indian Contract Act,1872, s.124

[18]The Indian Contract Act,1872, s.125

[19]Gajanan Moreshwar Patellar v Moreshwar Madan Mantri [1942] 44 BOMLR 703

[20]Law Commission of India, Contract Act, 1872 (Law Comm. No. 13 1958) 

<https://lawcommissionofindia.nic.in/1-50/Report13.pdf> accessed 08 February, 2024

[21] Nida Tahever Khan, “The Twilight of Contract of Indemnity in the Indian Contract Act, 1872 : A Critical Analysis” [2022] JCLJ 509, 511 <https://www-scconline-com.eu1.proxy.openathens.net/Members/MySCCOnlineFolderView.aspx> accessed 06 February, 2024