NATIONAL UNIVERSITY OF STUDY AND RESEARCH

IN LAW, RANCHI

CONTRACT

CONTRACT OF INDEMNITY:

CASE ANALYSIS OF “D.M. ORIENTAL INSURANCE

CORPORATION LIMITED ORS. V. SWAPNA NAYAK AND
ORS.”
SUBMITTED TO: SUBMITTED BY:

MS. SONI BHOLA PIHA BIRLA

ASSISTANT PROFESSOR SEMESTER 2 (SECTION B)

NUSRL, RANCHI ROLL NO.: 1301

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TABLE OF CONTENTS

1. CONTRACT OF INDEMNITY 4
2. FEATURES OF CONTACT OF INDEMNITY 5
3. RIGHTS OF INDEMNITY HOLDER 6
4. DUTIES OF INDEMNITY HOLDER 6
5. RIGHTS OF INDEMNIFIER 7
6. COMMENCEMENT OF LIABILITY OF INDEMNIFIER 7
7. INSURANCE CONTRACT AND CONTRACT OF INDEMNITY 8
8. D.M. ORIENTAL INSURANCE CORPORATION LIMITED ORS. V. SWAPNA
NAYAK AND ORS. 9-13

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DECLARATION:

I, PIHA BIRLA, a second-semester BALLB student of National University of Study and

Research in Law, Ranchi, hereby declare that the project titled “CASE ANALYSIS OF
“D.M. ORIENTAL INSURANCE CORPORATION LIMITED ORS. V. SWAPNA NAYAK
AND ORS.” under the guidance of MS. SONI BHOLA, faculty of Law of Contract, is an
original work. I have made sincere efforts to complete this project and have not done any
misrepresentation of facts or data.

I declare that the statements made and the conclusions drawn are the bona fide outcome of
the research work. I further assert that, to the best of my knowledge and belief, proper
references have been given and do not contain any work that has been submitted to any other
university.

PIHA BIRLA

SEMESTER- 2

ROLL NUMBER-1301

NUSRL, RANCHI

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CONTRACT OF INDEMNITY
Insurance is one of the most frequently used legal terms in our daily lives. Hence, insurance
has been a standard social security measure to protect people from financial losses and keep
them out of any disadvantageous situation. In the modern-day contracts of trade, business,
and commerce, there is an increasing significance of insurance and indemnification contacts
due to the unpredictable nature of the transactions.

Section 124 of the Indian Contract Act defines a 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”.1

Indemnity means any form of protection against a probable loss. The contract of indemnity is
a contract where a promisor is promising a promisee to save him from any loss caused to him
by a contact of the promisor himself or by the conduct of a third party. Example: insurance
and tenancy.

According to English law, a contract of indemnity is a promise to take another from loss
caused as a result of a transaction entered into at the instance of the promise. According to the
ICA 1872, the loss must be caused by the conduct of the promisee or any other person, and
for the losses caused by accident, there would not be a contract of indemnity.

1
Section 124, Indian Contract Act, 1872

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FEATURES OF CONTRACT OF INDEMNITY
1. The contract is entered into for protecting the indemnity holder against any
anticipated or contingent (based on a future uncertain event) loss.

2. The purpose of the contract should be to make good a loss if any. The indemnifier's
liability begins when the loss is added to the indemnified. Actual loss is compensated
by indemnification.

3. There must be a contract between two parties. The contract may be implied and
expressed.

4. The source of the loss must be the promisor himself or any third party. It does not
include any loss caused due to a natural calamity beyond the control of humans.

2 PARTIES:
The person whose loss will be indemnified is called the Indemnity Holder. The person who
has made the promise to make good a loss is called the Indemnifier.

EXPRESSED:
The contract is entered into orally or in writing, or a combination of both.

IMPLIED:
The contract is not entered into by directly saying but it is derived from actions, conduct, and
circumstances.

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RIGHTS OF INDEMNITY HOLDER
Section 125 of the Indian Contract Act defines the rights of the indemnity holder.

The promisee acting within his scope of authority can recover the following from the
promisor:

1. DAMAGES:
If the individual suffers any loss or damage that he was compelled to pay in any suit
by the court.
2. COST:
The amount which he had to spend in connection with the indemnity contract on the
lawsuit he filed or defended. Eg: legal charges, court fees, advocate’s fees, etc. It has
to be the reasonable charges.
3. SUM:
The amount which he might have paid under the terms of a compromise with the third
party if the promisor has authorized him to compromise the suit.

The moment the indemnity holder suffers loss he will be compensated.

DUTIES OF INDEMNITY HOLDER

1. To act in a manner as a man of ordinary judgment would.
2. To bring all the facts into the knowledge of the indemnifier.
3. To act in accordance with the orders of the indemnifier.
4. To behave in a careful manner following the authorization of the insuring party.

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 RIGHTS OF INDEMNIFIER
1. The indemnity holder has a duty to perform his part of the contract.
2. Doctrine of Subrogation: It means that someone else (directly related to the contract)
can exercise my right in my place. In this one-party becomes entitled to the rights of
the insured person.
3. Compensation will only be for reasonable losses which fall within the framework of
the contract.

COMMENCEMENT OF LIABILITY OF THE

INDEMNIFIER
The ICA does not specifically mention the time of commencement of the liability of the
indemnifier. But different high courts have held:

1. Indemnifier’s liability will only begin when the indemnified has already suffered the
loss.
2. The indemnified can not force the indemnifier to make good a loss if he has not
discharged his liability.

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INSURANCE CONTRACT AND CONTRACT OF
INDEMNITY
India
It should be noted that section 124 only recognizes a contract of indemnity where there is a
promise to save another person from harm caused by the chronically infected by the conduct
of any other person; it does not cover a promise to compensate for loss not caused by human
agency, so a contract of insurance is not covered by the definition of section 124. It is
specified as a contingent contract in section 31. The Indian Contract Act does not specifically
provide that there can be an implied contract of indemnity. The privy council recognized an
implied indemnity contract according to the Law Commission of India's assessment, the
definition of a contract of indemnification in section 124 should be enlarged to cover
locations of damage caused by events that may or may not be dependent on the action of any
person, and it should also clearly state that the guarantee may be implied.2

England
The term indemnity has a much broader meaning in English law than it does in Indian law,
which includes any contract to protect the party against losses caused by human agency or
any other occurrence such as an accident or fire.

Under English law contract of insurance is considered a contract of indemnity however life
insurance is an exception to it. A contract of life insurance, for instance, may provide the
payment of a certain sum of money in case of death or expiry of the period of insurance. At
this time the question of the amount of loss experienced by the insured or indemnity for the
same does not arise. Firstly, death is inevitable so it is not a probable loss. Also, even if some
amount of sum is payable in the event of death, unlike property, the life of a person cannot be
evaluated in terms of any amount. Hence, life insurance is kept out of the coverage of contact
of indemnity.

2
Law of Contract II with Indian Partnership Act and Sales of Goods Act, by Dr. R.K Bangia, Vol 2.

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D.M. ORIENTAL INSURANCE CORPORATION
LIMITED ORS. V. SWAPNA NAYAK AND ORS.

Judges: J. Chelameswar and J. Abhay Manohar Sapre

Date of decision: January 23rd,2017

Court of Appeal: The Supreme Court of India

Appellants: DM Oriental Insurance Corporation Limited and others

Respondent: Swapna Nayak and others

Citation: AIR 2017 SC 692, (2017) 3 SCC 598, 2017 (121) ALR 254.

Facts of the case:

On 16/12/2006, Mathurananda Nayak [ a resident of U.S.A] along with his mother Jita Nayak
while coming from Cuttack met with an accident in which his car collided with a truck
coming from Panilolli. Mathurananda Nayak, his mother, and the driver of the car died in the
accident. So, the legal hires of the deceased filed two separate petitions for compensation:

1. Against the owner of the truck under Section 166 of the Motor Vehicle Act,1988.
2. Against the Insurer (Oriental Insurance Company Limited).

Issue:
Determination of the amount of compensation to be awarded.

Judgment:
The tribunal court held that the cause of the accident was the rash and negligent driving of the
truck driver. The said court awarded a compensation of Rs 4,36,95,740 to the claimants along

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with an interest rate of 7.5 % from the date of the application taking into account that the
deceased was aged 36 years and was a resident of the USA and earning Rs 43,68,624 per
annum. The court also awarded a compensation amount of Rs 1,29,500 with an interest rate
of 7.5 % per annum for Jita Nayak.

An appeal was filed before the H.C. by the Insurance company for reduction of the awarded
amount and by the claimant for enhancement of the compensation. The High court allowed
the appeal filed by the Oriental insurance company and thus reduce the compensation amount
of Rs 4,36,95,740 to Rs 3,75,00,000. Also, the claimant's appeal for enhancement of the
compensation amount was dismissed by the high court.

Both the parties again filed an appeal in the supreme court, Oriental Insurance company for
further reduction of the compensation amount and the claimant for enhancement of the
compensation amount awarded to them. The compensation awarded by the high court was
considered just by the Supreme Court and the appeal was dismissed. The supreme court
upheld the judgment given by the High court.

Case comment:
The accident occurred due to the rash and negligent driving of the truck and this fact is
undisputed, thus there is no doubt that the owner of the truck is responsible, and also as being
the insurer, the Oriental Insurance Company Limited is responsible for the compensation
amount awarded to the legal heirs of the deceased. The main issue for the appeal was the
amount of compensation to be awarded. If we reconsider the brief of the case.

In the accident with a truck, the deceased and his mother died. The claimants i.e, the wife and
son of the deceased filed a case under section 166 of the motor vehicle act, 1988 against the
owner of the truck and the insurance company for compensation. The tribunal court awarded
the compensation of Rs 4.36,95,740 for the deceased and Rs 1,29,500 for the death of the
mother of the deceased. Both and insurance company and the claimants filed an appeal before
the High court. The H.C. further reduced the compensation for the deceased to Rs
3,75,00,000. Again an appeal was filed before the Supreme Court by the insurance company
for reduction of compensation and by the claimants for enhancement of the awarded amount.
The appeal was dismissed and the High court judgment was upheld.

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 It is clear that what has been awarded to the claimant by the high court appeared to be just
and reasonable compensation within the meaning of section 166 of the motor vehicle act,
1988 and thus there appears no good ground for either, further enhancement or the reduction
of the compensation amount awarded. The said amount was determined and awarded after
considering all the facts i.e. age of the deceased, annual income of the deceased, number of
dependents, salary, etc. The amount awarded was not arbitrary and thus the supreme court
upheld the judgment of the H.C.

Section 166 of the Motor Vehicle Act (MVA), 1988:

Section 166 of the Motor Vehicle Act, 1988 deals with the question of the recipient of the
compensation in a tribunal due to a motor accident. As per the section a person can claim
compensation if he is the owner of the vehicle, he has sustained an injury, he is a legal
heir or representative of the person who died due to the motor accident or he is the agent
authorized by either the injured person or by the legal representatives of the person died
due to the motor accident. There is no prescribed limit for the application for compensation
to be filed but it should be claimed within a reasonable time.

According to section 165 (1) of MVA, 1988, the tribunal can award compensation in the
circumstances in which the accident involved death or injury to a person, or when the
accident involves loss of property of the third person, and when such accident occurred due to
the use of a motor vehicle. MVA, 1988 establishes a claim tribunal that lies below the high
court, where such compensation applications can be entertained. It is mainly established for
the speedy disposal of such cases3.

Determination of compensation amount:

In “National insurance company limited versus Pranay Sethi” the SC, through a constitutional
bench laid down guidelines for the determination of compensation by the tribunal court in
case of a motor accident for victims comprising of a person who is employed, unemployed,
receiving a fixed salary, etc.
3
Diganath Raj Sehgal, July 31, 2019, Road accident claim compensation, accessed on July 14, 2021,
https://blog.ipleaders.in/road-accident-claim-compensation/#:~:text=This%20liability%20is%20dealt
%20with,there%20is%20no%20joint%20liability.&text=The%20compensation%20that%20the%20claimant,in
%20case%20of%20permanent%20disability.

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It was also held that competition for determination should be just, fair, and reasonable
without any discrimination. The criteria that have been laid down by the court for awarding
compensation are:

1. If the deceased has a permanent job and he is

i. Below 40 years: Addition would be made according to 50% of the salary.
ii. Between 40 to 50 years: Addition would be made according to 30 % of his salary.
iii. Between 50 to 60 years: Addition would be made according to 15% of salary.
2. If the deceased was employed on a fixed salary or self-employed and he is:
i. Below 40 years: Addition would be made according to 40% of his income.
ii. Between 40 to 50 years: Addition would be made according to 25% of his
income.

Between 50 to 60 years: Addition would be made according to 10% of the income.

This amount was also held to be enhanced at the rate of 10% after three years4.

Types of claims:

In a motor accident, compensation can be claimed under three categories:

1- No-fault liability: A claim can be filed under this category only when the victim has
been permanently disabled or if he dies. There lies no obligation on the claimant to
prove the fault of the other party5.
2- Hit and Run: In such cases when the accused hit the victim and runs away instead of
helping him. It can be filed in a case where a person is injured or even in the case of
the death of the victim6.
3- Structured Formula Basis: It is dealt with within section 163 A of the motor vehicle
act. According to it, the claimant is not required to prove the fault of the driver instead
the owner of the vehicle or the insurer has to compensate the claimant for any loss or
damage that occurred7.
4- Fair Compensation: The SC in the case “Ramla and ors. vs National insurance
company limited and ors.”, held that compensation awarded is fair and just only based

4
Case analysis Ramla v. national insurance company Ltd., accessed on July 14, 2021,
https://www.mondaq.com/india/trials-appeals-compensation/801338/case-law-analysis-ramla-v-national-
insurance-company-limited.
5
Section 140, Motor Vehicle Act, 1988.
6
Section 161, Motor Vehicle Act, 1988.
7
Section 163, Motor Vehicle Act, 1988.

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 on the evidence produced. In this case, it was also held that the court can award
compensation even more than what is claimed by the victim or the legal
representative of the victim of a motor accident.

In “Ramla versus National insurance company limited”, the claimants claimed a

compensation amount of Rs. 25,00,000 but then in an appeal for enhancement of
compensation, the supreme court has increased the awarded amount to Rs 28,00,000, i.e
more than what was claimed as compensation by the claimants. The court can award an
amount that may or may not exceed the claimed amount as compensation for the victim
of a motor accident. Thus, there exists no restriction on the court to award the
compensation according to the amount that is claimed by the claimants8.

8
Supreme court states that there is no restriction per se in awarding compensation beyond the amounts as
claimed by the victims in motor accident claims, accessed on July 14, 2021,
https://www.reddyandreddy.org/supreme-court-states-that-there-is-no-restriction-per-se-in-awarding-
compensation-beyond-the-amounts-as-claimed-by-the-victims-in-motor-accident-claims/.

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