Contract Of Indemnity And Rights Of Indemnity Holder

 Contract Of Indemnity And Rights Of Indemnity Holder

Introduction
When we discuss the contract of indemnity at first we need to define it very clearly. The term "indemnity" literally means "security or protection against loss" or "compensation or restitution for loss." According to Indian law, a contract of indemnity only covers losses caused by the indemnifier or another person's actions; it does not cover losses caused by natural disasters. But according to English law, it is a guarantee made by one party to another to compensate for a loss incurred as a result of a specific incident known as the "trigger event." This definition of indemnity has nothing to do with the person who caused the event that gave rise to liability.  People used to be much more confident in their commitments. In comparison to Indian law, the definition of indemnity in English law is slightly broader. Now the question is when the concept of contract of indemnity was established in India? In the Past, people used to be much more confident about their commitments. Word of mouth was sufficient to establish trust. However, as trust dwindled, people preferred to have everything in writing. People also felt compelled to reduce risk in exchange for something. As this idea gained traction in society, it was thought to have a place in the law as well. As a result, the concept of indemnity was discussed in English law and legislation was enacted to address it. When the British first arrived in India and took control of our country, they enacted a number of laws. The Indian Contract Act of 1872 was one such statute. Because these laws were enacted by British legislators, they were heavily based on English laws with a cultural twist. The concept of indemnity was also addressed in the 1872 law. As the Indian Contract Act of 1872 was amended, there were some significant differences between the English and Indian legislations.

Definition Of Contract Of Indemnity
According to Section 124 of the Contract Act, 1872 a contract of indemnity is: “A contract of indemnity is a contract whereby one party promises to save the other party from the losses caused to him by the conduct of the promisor or any other person.

Example
a) 'A' purchases certain goods from 'B'. 'B' promises 'A' that he will deliver the goods at location of 'A' and that if the goods are damaged due to his or any other person's conduct, he will compensate him for an amount of 50,000. This is a contract of indemnity.
b) 'X,' a company shareholder, misplaced his share certificate. He applied for a duplicate certificate. The company agreed to issue it on the condition that X compensate the company (via an indemnity bond) in the event that any holder produces the original certificate. In this case, there is a contract of indemnity between X and the company.

c) Car insurance is one of the best examples of an indemnity contract. A car owner can purchase various types of insurance as an indemnity for various types of loss resulting from car operation, such as damage to the car itself or medical expenses following an accident.
In an agency context, a principal may be obligated to indemnify their agent for liabilities incurred while carrying out responsibilities under the relationship. While the events giving rise to an indemnity may be specified by contract, the actions that must be taken to compensate the injured party are largely unpredictable, and the maximum compensation is frequently expressly limited.

The contract of indemnity was first used in the case of Adamson v. Jarvis (1827). In this case, the plaintiff, an auctioneer, sold cattle on the orders of the defendant, and the cattle were later discovered to be owned by someone else. The owner filed a lawsuit against the plaintiff. The plaintiff then sued the defendant, who told him to sell the cattle. In this case, the verdict was in favor of the plaintiff. According to the Court, the person who instructed the auctioneer effectively indemnified the auctioneer and was thus held liable for the same under his liability as an indemnifier.
Thus, there are two parties in a contract of indemnity:

1)  Promisor (indemnifier)

2)  Promisee (indemnity holder or indemnified)|

1) Who Is An Indemnifier?
An indemnifier is a person who guarantees to pay for the loss suffered by the indemnity holder as a result of the occurrence of a specific event, whether done by the indemnifier themselves or by a third party. Liability matures when the loss to the indemnity holder is caused by the actions of the indemnifier or another party.
For example, A promises B that if any damage to his house is caused by human activity within the next two years, A will compensate him for all losses. If, in this case, a fire breaks out at B's house as a result of an event organised as part of a neighborhood activity, A is obligated to pay B for all damages incurred. In this case, A is the indemnifier because he has accepted responsibility for compensating B's losses and is obligated to do so under the terms of the agreement.

2) Who Is An Indemnity Holder?
An indemnity holder is a party who has been guaranteed by the indemnifier of future expenses and losses related to a specific item. The damage must have resulted from an incident for which the indemnifier or any other third party is liable.
As in the preceding example, A is the indemnifier. B, who has been assured of all damages, is the indemnity holder because he is the beneficiary party in their agreement.

Essential Of A Contract Of Indemnity
Certain conditions must be met in order for a contract of indemnity to be valid:
(i) Promise
(ii) Existence of Loss
(iii) Type of loss covered
(iv) Mode of contract of indemnity
(v) Compliance of section 10 of Indian Contract Act.
(vi) Number of parties to the contract

(vii) Number of contracts
All these essentials are briefly discussed below-
(i) Promise
The term 'promise' is defined in Section 2(b) of the Indian Contract Act of 1872. It states that "when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal when accepted, becomes a promise".

Thus, when one side makes a proposal and the other side accepts it, it results in a promise.
(ii) Existence of Loss
The "existence of loss" is required in a contract of indemnity. Unless the promisee has suffered a loss, he cannot hold the promisor liable under the indemnity contract.
(iii) Type of loss covered
The loss which is to be protected or compensated must be caused by the conduct of the promisor himself or by the conduct of any other person.

Thus, if the loss is caused by an accident, an act of God, or the conduct of the promisee (indemnity holder), there will be no indemnity.
(iv) Mode of contract of indemnity
Depending on the circumstances, the indemnity may be expressed or implied.
a) Express (oral/written)
According to Section 9 of the Indian Contract Act of 1872, "the promise is said to be expressed in so far as the proposal or acceptance of any promise is made in words."
b) Implied (by operation of law)
- In the case of a partnership, the firm is obligated to compensate the partner for any loss suffered as a result of the performance of a lawful act.
- According to section 69 of the Indian Contract Act of 1872, if a person pays money on behalf of another person (who is legally obligated to pay), he is entitled to reimbursement. Forex. If A is running a leased shop. When the landlord came to collect the rent, A was out of town, so B paid it on his behalf. A is now obligated to reimburse B.
- Implied contract between principal debtor and surety under which principal debtor makes an implied promise that in case the surety has to discharge the liability of the principal debtor, then the principal debtor shall indemnify the surety for the same.

(v) Compliance of section 10 of Indian Contract Act
The principles of general contract law contained in Sections 1 to 75 of the Indian Contract Act, 1872 apply to indemnity contracts. As a result, it must include all of the essential elements of a valid contract, such as free consent, lawful consideration, and the parties' competence to enter into a contract, among others.
For example, 'A' asks 'B' to beat 'C,' promising to compensate him for the consequences. A's promise cannot be enforced. If B beats C and is fined Rs. 1000, B cannot recover this amount from A because the agreement's object is illegal.
(vi) Number of parties to the contract

A contract of indemnity must have two parties
(a) Promisor or indemnifier, i.e. the person who makes the promise or provides the indemnity.
(b) Promisee, indemnified, or indemnity-holder, i.e. the person to whom the indemnity (promise) is given.

(vii) Number of contracts
There is only one contract in an indemnity contract, which is between the Indemnifier (promisor) and the Indemnified (promisee).
Thus,  it is clear that this contract is contingent in nature and is only enforceable when the loss occurs.

Rights Of An Indemnity Holder
Section 125 of the Indian Contract Act of 1872 grants the indemnity holder certain rights that must be upheld by the indemnifier. These rights include:
1)  Right to recover damages (Section 125(1))
2)  Right to recover the costs incurred (Section 125(2))
3)  Right to recover sums paid during compromise (Section 125(3))
In an indemnity contract, the Promisee is entitled to compensation from the Promisor if he acts within the scope of his authority —

1) Right to recover damages (Section 125(1))
“All damages which he may be compelled to pay in a suit in respect of any matter to which the promise to indemnify applies;”
Since 1873, the principle of damages paid in suit of providing indemnity to a person who had acted on the faith of another person has been established.

For example, suppose two parties, A and B, sign an indemnity contract in which A agrees to compensate B for any losses incurred if a ship used to transport commodities sinks due to human error. If the ship sinks due to a human error, A will be liable for compensating B for his losses, and B will have the right to sue A for those losses.

According to a judgment in Parker vs. Lewis, it would be prudent for the party being compensated who changed his position and was exposed as a result of that action to seek compensation and protection from a third party. If the insured loses a lawsuit and pays the money to the creditor to settle the dispute, the insurer is now obligated to defend the insured unconditionally.

In the case of Alla Venkataramanna vs. Palacherela Manqamma, the Court ruled that because the case involves an indemnified conclusively roped with, it has a binding effect on the indemnifier even if he is not a party to the contract.

It was decided in the case of Anwar Khan vs. Gulam Kasam that the amount of damages would be determined by how much the person had been indemnified.

2) Right to recover the costs incurred (Section 125(2))
“All costs which he may be compelled to pay in any such suit if, in bringing or defending it, did not contravene the orders of the promisor, and acted. It would have been wise for him to act in the absence of any indemnity deal, or if the Promisor had allowed him to bring or defend the suit.”

The indemnity holder has the right to recover all costs incurred in the suit of indemnity from the indemnifier. The main purpose of an indemnity contract is to mitigate the losses incurred by the indemnity holder, and if some costs relating to a suit to the subject matter arise, those costs must be borne by the indemnifier. However, in bringing up or defending such a suit, he must not go against the directives of the indemnifier and should act in such a way as he would have acted in the absence of the indemnity. Otherwise, the authorization to defend or bring up the suit is given by the promisor expressly. As long as these conditions are met, any costs incurred will be borne by the indemnifier.
Exceptions
a) When he has not acted like a prudent person (the way he might have acted in the absence of any contract of indemnity) in defending the suit against him.
b) When he acted against the order of the promisor (indemnifier).
For example, suppose two parties, A and B, entered into a contract in which A indemnified B for any damages caused by a specific shipment of products. Now, if a lawsuit is filed over an incident, such as an accident, that resulted in the loss of the shipment, the outcome may be critical to the case. If this is the case, the costs of the lawsuit will be recoverable from the indemnifier under the authority granted to the indemnity holder by Section 125 of the Indian Contract Act of 1872. However, he must follow the indemnifier's instructions and act as he would in the absence of the indemnity when bringing or defending such a lawsuit.
In the case of Gopal Singh vs. Bhawani Prasad, the Court ruled that only expenses that a prudent man would incur and that are reasonable in nature can be recovered.
In the case of Pepin vs. Chunder Seekur Mookerjee, the Court determined that costs incurred during claim reduction are covered by the rights granted to the indemnification holder and can thus be collected.

3)  Right to recover sums paid during compromise (Section 125(3))
“All the sums which he may have paid under the terms of any compromise of any such suit if the compromise were not contrary to the orders of the promisor and was one which it would have been prudent for the promise to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.”
The indemnity holder also has the right to recover all sums paid under the compromise of any suit if such a compromise did not violate any specific directions given by the indemnifier. Another requirement is that he acts in the same manner as he would have acted in the absence of the indemnity or authorization to compromise the suit provided by the promisor.
Exceptions
a) The compromise was contrary to the directions of the promisor.
b) The Indemnity holder must have acted prudently (in the same manner as he would have acted in the absence of any contract of indemnity) in making such a compromise.

For example, suppose A and B enter into a contract, and A indemnifies B for the completion of a task assigned to B by a third party. Now, if the task is not completed and the person who assigned the task to B files a suit, and subsequently, both parties compromise and B is required to pay a certain sum under this compromise, the sum paid is recoverable from A under the right to recover sums paid under a compromise subject to. However, in bringing or defending such a suit, he must not violate A's directives and must act in the same manner as he would have acted in the absence of the indemnity.

Illustrations
‘B’ has taken 50000/- from ‘C’. So, ‘A’ may contract to indemnify ‘B’ against the consequences of any proceedings which ‘C’ may take against ‘B’ in respect of a sum of 50000/- advanced by ‘C’ to ‘B’. ‘B’ fails to pay the amount to ‘C’ and ‘C’ files a case against ‘B’.

a) If ‘C’ wins the case and court order ‘B’ to pay 50000 + 10000 as interest and litigation cost to ‘C’ then ‘B’ can recover the same from ‘A’. These are called damages.

b) Further, expenses incurred by ‘B’ in defending the suit, like traveling, lawyer’s fees, document charges etc. can also be recovered by ‘B’ from ‘A’. These are called costs.

c) Further, if there is any compromise taking place b/w ‘B’ and ‘C’ either before the filing of case or during the case , the amount of compromise can also be recovered by ‘B’ from ‘A’. So, ‘B’ (indemnity holder) has the rights to damages, costs and sum of compromise from ‘A’ (indemnifier).

Related Case- Laws
According to the case of Commercial Bank vs. Bank of India AIR 1981, the Supreme Court ruled that courts should not issue injunctions preventing the performance of contractual obligations arising from a letter of credit or bank guarantee if the terms of the conditions have been met. It held that such letters of credit or bank guarantees impose an absolute obligation to pay on the banker.
In Mohit Kumar Saha vs New India Assurance Co AIR 1997, the Calcutta High Court ruled that the indemnifier must pay the full value of the vehicle lost to theft as determined by the surveyor. Any settlement at a lower value is arbitrary and unfair, and it violates Article 14 of the Constitution

When does the Commencement of liability arise?
According to the definition in section 124, an indemnity holder cannot hold the indemnifier liable until he has suffered an actual loss. This is a significant disadvantage for the indemnity holder when the loss is imminent and he is unable to bear the loss.
In the case of Gajanan Moreshwar vs. Moreshwar Madan, AIR 1942, The Bombay High Court observed that an indemnity contract had little value if the indemnity holder could not enforce his indemnity until he actually paid the loss. If a suit was filed against him, he had to wait until the judgment was rendered and pay the damages before suing the indemnifier. He may be unable to pay the judgment fees and thus cannot sue the indemnifier. Thus, if his liability had become absolute, he was entitled to have the indemnifier pay the amount.

Recent illustration

Recently, there was a conversation between Sandeep Maheshwari and Shwetabh Gangwar in a video released by Sandeep Maheshwari on his YouTube channel in which Sandeep Maheshwari orally indemnified Shwetab regarding the compensation demanded by a person in a legal suit. He stated that "because the Shwetabh is in financial difficulty, if he loses the legal squabble, the compensation demanded by the other party will be paid by Sandeep Maheshwari." Although this is not in writing, it is valuable and serves as an excellent example of how to interpret an indemnity contract.

Conclusion
In conclusion,The contract of indemnity or contract clause of indemnity has become an essential component of most commercial contract relationships and other contractual agreements. An indemnification agreement is a useful tool for protecting a party from damages. The indemnified party has an advantage in that they do not have to prove that an event was caused by the promisor's default or that it occurred near one. Simply proving that the event occurred is enough to establish damages. The parties may also seek compensation for contract violations that result in those damages. All of this has ensured that the indemnified party is protected from the effects of any harm-causing event.  As is clear, the rights provision allows for a broader interpretation in the interests of fairness and justice. In its recommendation (13th Report, 1958), the Law Commission argued that "the rights of the indemnity holder should be more completely defined, and the remedies of an indemnity holder should be mentioned even in circumstances where he has not been sued." As a result, expanding and changing the rights of the indemnity holder can help to protect their interests while also lowering the costs and risks associated with lawsuits and other third-party actions.

References
1. The Indian Contract Act (9 of 1872)
2. Dr. RK Bangia, Indian Contract Act, (7th Ed, ALA, 2017)
3. Dr. Jyoti Rattan, Bharat’s Contract Act (3rd Ed, 2020)
4. Avtar Singh, Law of Contract & Specific Relief (10th edn, Eastern Book Company 2010).
5. Rights of Indemnity Holder – Section 125 of the Indian Contract Act by Tazeen Ahmad 
6. Contract of Indemnity: Rights and Liabilities of Indemnity Holder by Mohit Mandloi
7. https://blog.ipleaders.in/rights-of-an-indemnity-holder/
8.https://www.lawcolumn.in/rights-and-liabilities-of-indemnity-holder/#:~:text=Section%20124%20of%20the%20Contract,promisor%20or%20any%20other%20person

AUTHOR CREDENTIALS
NAME: FARJANA AKTER
COURSE: LL.B
UNIVERSITY: LOVELY PROFESSIONAL UNIVERSITY
UNDER THE GUIDANCE OF: Dr. IRSHAD AHMED