CONTRACT TO INDEMNITY

Section 124 of the Indian Contract Act’1872 defines Contract of

Indemnity as a contract by which one party guarantees to save the
other person from loss caused to him by the action of the guarantor
himself, or by the action of any other person.
For, e.g. X can agree to stand as a guarantor for his son Y, a student so that if Y is
unable to pay his monthly expenses and rent to Z(a PG); X will be required to pay
on behalf of Y, thereby compensating for the losses that Z acquired because of
action of Y

Indemnifier: The promisor, who promises to make good the loss caused to the
other party, is called as Indemnifier.

Indemnified: The person who is assured to be compensated for the loss caused
(if any) is called as indemnified or indemnity holder.

IN ‘GAJAN MORESHWAR vs. MORESHWAR MADAN’ 1942 case G.Moreshwar got

a piece of land in then Bombay at lease for a long period. He transferred the lease
to M.Madan    for a limited period. M.Modan started development over the
above-mentioned plot and ordered his supplies from K D Mohan Das. When
Mohandas asked for the payment for the material he provided, the accused could
not pay up. Upon request of M Madan, G Moreshwar prepared a mortgage deed
in favour of K.D. Mohandas. The Interest rate was agreed upon, and G. Moreshwar
put a charge over his possessions. A date was pre-decided for the return of
principal amount. M. Madan had decided to repay the principal amount along
with interest and to get the mortgage deed released before a particular date. But
M. Madan as per his assurance did not pay anything to K.D. Mohan Das, and G.
Moreshwar had to pay some interest. When after several requests and
intimations, M. Madan did not pay the principal amount along with interest and
also didn’t get the mortgage deed released, G. Moreshwar legally prosecuted M.
Madan for indemnity. The Privy Council held that if indemnity holder has incurred
responsibility and the responsibility itself is absolute and without limits, the
indemnity holder can ask the indemnifier to take care of the liability and pay it off.
Thus, G. Moreshwar was designated to be indemnified by M. Madan against all
debt under the loan agreement and deed of charge

Right of the indemnity holder – (Section 125)

An indemnity holder (i.e. indemnified) acting within the scope of his authority is
entitled to the following rights –

1.              Right to recover damages – he is entitled to recover all damages which he

might have been compelled to pay in any suit in respect of any matter covered by
the contract.

2.              Right to recover costs – He is entitled to recover all costs incidental to the
institution and defending of the suit.

3.            Right to recover sums paid under compromise – he is entitled to recover

all amounts which he had paid under the terms of the compromise of such suit.
However, the        compensation must not be against the directions of the
indemnifier. It must be prudent and authorized by the indemnifier.

4.            Right to sue for specific performance – he is entitled to sue for specific
performance if he has incurred absolute liability and the contract covers such
liability. The promisee in a contract of indemnity, acting within the scope of his
authority, is entitled to recover from the promisor-

(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

(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
It is important to note here that the right to indemnity cannot be claimed of
dishonesty, lack of good faith and contravention of the promisor’s request.
However, the right cannot be negatived in case of oversight. [Yeung v HSBC]

Right of Indemnifier –

Section 125 of the Act only lays down the rights of the indemnified and is quite
silent of the rights of indemnifier as if the indemnifier has no rights but only
liability towards the indemnified.

In the logical state of things if we read Section 141 which deals with the rights of
surety, we can easily conclude that the indemnifier’s right would also be same as
that of surety.

Where one person has agreed to indemnify the other, he will, on making good the
indemnity, be entitled to succeed to all the ways and means by which the person
indemnified might have protected himself against or reimbursed himself for the
loss. [Simpson v Thomson]

Principle of Subrogation is applicable because it is an essential part of law of

indemnity and is based on equity and the Contract Act contains no provision in
contravention with [Maharaja Shri Jarvat Singhji v Secretary of State for India]

Difference between Indemnity and Guarantee:-

In a contract of indemnity there are two parties i.e. indemnifier and indemnified.
A contract of guarantee involves three parties i.e. creditor, principal debtor and
surety.

An indemnity is for reimbursement of a loss, while a guarantee is for security of

the creditor.

In a contract of indemnity the liability of the indemnifier is primary and arises

when the contingent event occurs. In case of contract of guarantee the liability of
surety is secondary and arises when the principal debtor defaults.

The indemnifier after performing his part of the promise has no rights against the
third party and he can sue the third party only if there is an assignment in his
favour. Whereas in a contract of guarantee, the surety steps into the shoes of the
creditor on discharge of his liability, and may sue the principal debtor

Charter Reinsurance Co Ltd v Fagan and Others: HL 24 May 1996      -]

Charter Reinsurance Co Ltd v Fagan and Others: HL 24 May 1996

The re-insurers appealed against a finding that they were liable to make payment
under a contract which required them to pay ‘sums actually paid.’ They said that
the company having become insolvent, no payment would in fact be made.

Held: The contract had to be construed as a whole. Under the contract, the sum
became payable when the insurance claim itself became payable and not only
when it was actually paid out. The complex layering arrangements envisaged by
the contract required this interpretation.

Lord Hoffmann said: ‘I think that in some cases the notion of words having a
natural meaning is not a very helpful one. Because the meaning of words is so
sensitive to syntax and context, the natural meaning of words in one sentence
may be quite unnatural in another. Thus a statement that words have a particular
natural meaning may mean no more that that in many contexts they will have that
meaning. In other contexts their meaning will be different but no less natural.’

Lord Mustill said: ‘If . . the words ‘actually paid’ can only as a matter of language
and context mean what the syndicates maintain, I would hesitate long before
giving them any other meaning, just because the result would be extraordinary’
and ‘Subject to [the use of a specialist vocabulary] the inquiry will start, and
usually finish, by asking what is the ordinary meaning of the words used.’ and
‘This is . . an occasion when a first impression and simple answer no longer seem
the best, for I recognise that the focus of the argument is too narrow. The words
must be set in the landscape of the instrument as a whole. Once this is done the
shape of the policy and the purpose of the terms become quite clear.’
and: ‘There comes a point at which the court should remind itself that . . to force
upon the words a meaning which they cannot fairly bear is to substitute for the
bargain actually made one which the court believes could better have been made.
This is an illegitimate role for a court

CONCLUSION

Indemnity is a legal discharge from the penalties or liabilities incurred by any

course of action. In simpler words, indemnity needs that one party should
indemnify the other if certain costs mentioned in the contract of indemnity are
acquired by another party.    For example, car rental companies lay down that the
person hiring the car will be responsible for the damage or losses caused to the
car because of reckless or negligible driving by the person himself and he or she
will have to indemnify the car rental company.

Recently, indemnity contracts are being executed quite frequently in the IT

industry. There are some conditions or situations in which continuation of an
indemnity does make a meaningful change for some whereas for other it does
make little changes or no changes at all. A new concept known as “Indemnity
Lottery” can be found in the law of contract that states that in civil cases of
indemnity, results can never be predicted.

A simple indemnity clause can never be an answer to liability issues. The law leans
disfavour ably towards for those who try to prevent liability or look for
dispensation from liability for their actions. The fundamental reason is that a
careless party should not be able to completely shift all claim and damages made
against him to another, non-negligent party. For e.g. A ticket to an amusement
park claims that a person entering into park can’t hold management responsible
for any accident of his/her due to malfunctioning of rides or any other events. But
seldom, such a defense works in the court of law because it is not based on a
contract.