Section 124: Contract of Indemnity

Indian Legal System > Civil Laws > Indian Contract Act, 1872 > Section 124: Contract of Indemnity

The distinctive feature of Contract Law, as compared to other branches of law, is that in the former the parties make law for themselves within the broad framework of the Contract Law. The importance of the contract in regulating business and other social and economic relations is so great that Dot only private enterprise, but public enterprise units and the Government have resorted to contract as an instrument of participating in their country’s market economy. In this article, we shall study the meaning of indemnity, the contract of indemnity under the Indian Contract Law, 1872.

Indemnity Under English Law:

The word indemnity means security or protection against a financial liability i.e. it is a security or protection against loss. In a contract of indemnity one party – i.e. the indemnifier promise to compensate the other party i.e. the indemnified against the loss suffered by the other. It is one of the most important forms of commercial contracts. Several industries, such as the insurance industry, rely on these contracts. These contracts basically help businesses in indemnifying their losses and, therefore, reduce their risks. The objective of entering into a contract of indemnity is to protect the promisee against unanticipated losses. Contract of indemnity is really a kind of contingent contract.

The English law definition of a contract of indemnity is – “it is a promise to save a person harmless from the consequences of an act”. Thus it includes within its ambit losses caused not merely by human agency but also those caused by accident or fire or other natural calamities.

In Adamson v. Jarvis, (1827) 4 Bing 66, case, Adamson (the petitioner) was an auctioneer who was given cattle by Jarvis (the defendant) to be sold at an auction. Adamson followed the instructions and sold the cattle. But Jarvis was not the owner of the cattle. The real owner of the cattle sued Adams for conversion and was successful. Adamson had to pay damages and he then sued Jarvis to be indemnified for the loss that he suffered by way of damages to be paid to the real owner. The Court held that Adamson carried out Jarvis’s instructions and was entitled to presume that if anything went wrong as per instructions, he would be indemnified. Jarvis was ordered to pay damages to Adams.

In Betts v. Gibbins, (1834) 2 Ad. & E. 57, case the Court held that an undertaking or promise to indemnify may be implied.

In Toplis v. Grane, 5 Bing. N. C. 636 case, Tindal C.J. observed that when an act has been done by the plaintiff under the express directions of the defendant which occasions an injury to the rights of third persons, yet if Such an act is not apparently illegal in itself but is done honestly and bona fide in compliance with the defendant’s directions, he shall be bound to indemnify the plaintiff against the consequences thereof.

In Dugdale v Lovering, (1875) LR.10 CP196 case,  the plaintiffs were in possession of certain trucks, which were claimed by the defendant, and also by the proprietors of the K. P. Colliery. A correspondence took place between the plaintiffs and the defendant, in which the plaintiffs asked for an indemnity if they should deliver up the trucks to the defendant. The defendant, without giving any answer as to the indemnity, wrote requiring the plaintiffs to send the trucks back to him, which they thereupon did. The K. P. Colliery proprietors then brought an action against the plaintiffs for the conversion of the trucks, and their claim proving well-founded, the plaintiffs were obliged to pay a sum of money, in settlement of the action, which they sought to recover from the defendant upon a contract of indemnity. The Court held that the doctrine laid down in Betts v. Gibbins, (2 Ad. & E. 57) and Toplis v. Grane (5 Bing. N. C. 636), that there was, under the circumstances of the case, evidence of implied promise.  The Court also held that the principle upon which in such cases a contract of indemnity is implied is not confined to cases of principal and agent, or employer and employed

In Sheffield Corp. v. Barclay, 1905 AC 392 case, a corporation, having registered a transfer of stock on the request of the banker, was held entitled to recover indemnity from the banker when the transfers were discovered to be forged.

In Starkey v. Bank of England, (1903) AC 114 (HL) case, a stockbroker innocently acted upon the power of attorney on which one out of three signatures were forged. The court allowed the bank to recover indemnity from an agent who presented the document.

Indeminity Under the Indian Contract Act:

Section 124 of the Indian Contract Act defines a contract of immunity.

Section 124: “Contract of indemnity” defined

A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”.

Illustration

A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

Section 124 starts with the word ‘contract’, hence the contract of immunity should have all the ingredients of a valid contract. There are generally two parties in indemnity contracts.   The person who gives the indemnity is called an ‘indemnifier’ and the person for protection it is given is called ‘indemnity holder’ or said to be ‘indemnified’.

For example, X promises to deliver certain goods to Y for Rs. 20,000 every month. Z comes in and promises to indemnify Y’s losses if X fails to so deliver the goods. This is how Y and Z will enter into contractual obligations of indemnity. In this case Z is indemnifier and Y is indemnity holder.

It is kind of contingent contract whereby one promises to save another harmless from the result of the conduct of the promisor or of any other person. Hence to invoke contract of indemnity, there must be a loss to promise.

Compare to English definition of ‘indemnity’, the Indian definition is narrower. The English definition of indemnity is wide enough to include a promise of indemnity against loss arising from any cause whatsoever, e.g., loss caused by fire or by some other accident. Thus as per this definition every contract of insurance, other than life insurance, is contract of indemnity. As per Section 124 of the Act the loss must have been caused either by the conduct of the promisor or any other person, it does not include loss caused by natural factors, not involving human factors.

Essential Elements of Contract of indemnity:

• It should be a valid contract. The principles of the general law of contract contained in Section 1 to 75 of the Indian Contract Act, 1872 are applicable to them. 
• There should be two parties to such a contract. There must be two parties, namely, promisor or indemnifier and the promisee or indemnified or indemnity-holder.
• It is a promise to compensate for or security against damage, loss or injury. The loss may be caused due to the conduct of the promisor or any other person.
• Every contract of insurance, other than life insurance, is a contract of indemnity.
• It is not a collateral but an independent contract.
• It is a tool for allocating risks contingent liability.
• To activate the contract of indemnity, the loss to promise is essential.
• The contract of indemnity may be express (i.e. made by words spoken or written) or implied (i.e. inferred from the conduct of the parties or circumstances of the particular case).
• Consideration and objects of such contract must be lawful.
• Indemnity clauses, amongst other things, in such contract must be clear, specific, where possible stipulate the circumstances under which the indemnity will arise

Enforcement of Contract of Indemnity:

• A contract of indemnity can be enforced according to its terms and measure of damages could be up to the extent to which the promisee has been indemnified
• Claim of Indemnity holder can include: damages, legal costs of adjudication, amount paid under the terms of compromise.
• Indemnifier should ideally be informed of the legal proceedings or should be joined as third party.
• There is no onus to show breach or actual loss.

In Gajanan Moreshwar Parelkar V. Moreshwar Madan Mantri, AIR 1942 Bom 302 case, the plaintiff transfers a plot of land to BMC and BMC agreed to keep the plot on lease for 999 years. Now the defendant wanted to construct a building on the piece of land and the owner allowed to do so. Now the plot was in the possession of the defendant but the owner was the plaintiff. Construction materials were supplied by a Keshavdas Mohandas. At one point of time, there was a due of Rs. 5000 but the defendant was unable to pay. So the defendant requested the plaintiff to a mortgage. So the property was mortgaged to Keshavdas Mohandas and as a result, now Rs5000 and 10% interest were payable. Again Rs. 5000 was demanded on supply by Keshavdas Mohandas. The defendant requested now on the same property charge was put to Keshavdas Mohandas. A date was set for the return of the principal amount. The defendant had agreed to pay the principal amount, the interest and to get the mortgage deed released before a certain date. Now the property was too transferred to the plaintiff, but the title deed was with Keshavdas Mohandas and he did not give. The owner now sued for indemnity as he wanted title deeds as consideration for land transfer. The Stance of the Defendant was that the plaintiff had suffered no loss and thus could not claim anything under Sections 124 and 125. The Court held that an indemnity holder has rights other than those mentioned in the Sections above. If the indemnity holder has incurred a liability and the liability is absolute, he can turn to the indemnifier to take care of the liability and pay it off. Thus, the plaintiff was entitled to be indemnified by the defendant against all liability under the mortgage and deed of charge.

In K.P Ram Kuppam Chettiar v. Sp. Ram swami Chettiar, AIR 1946 Mad 472 case, the Madras High Court laid down the principle that if an act done by A at the request of B which is not apparently tortuous to the knowledge of A but turns out to be injurious to right of C and A is held liable to pay C, A is entitled to be indemnified by B.

Indian Legal System > Civil Laws > Indian Contract Act, 1872 > Section 124: Contract of Indemnity