Author- Kanvi Gupta
Section 124 of the Indian Contract Act defines the Contract of Indemnity. The term indemnity refers to protect someone from losses and harm. As defined in Section 124, a Contract of Indemnity is a contract in which the Indemnifier, the promisor, promises to protect the indemnity holder from the losses caused to him either by the indemnifier himself or by any other third party. The person making the proposal is known as the promisor and the person accepting the proposal is known as the promisee.
Essentials
- There should be a loss then only the contract will be enforceable.
- As stated in the definition of contract of indemnity, the loss must be caused either by the indemnifier or any other third party.
- There must be two parties: indemnifier and indemnity- holder.
- It should contain the essentials of a valid contract. There should be free consent and lawful objective.
- It is a contingent contract as the indemnifier will be liable to pay for the loss if the loss occurs.
Tarachand Ghanshyamdas v. Commissioner of Income Tax.
- Indemnifier is liable to pay for the loss as mentioned in terms and conditions of the agreement. The loss caused by an act of God, accident, etc. is not considered in this. There should be human intervention.
Rights of Indemnifier
Contract Act is silent about the rights of Indemnifier. In Jaswant Singh vs The State on 15 July 1965, it was held that the rights of indemnifier are the same as the rights of surety. After paying all damages the indemnifier takes the position of indemnity holder and has right over the property. He is required to indemnify promisee up to the amount of losses as mentioned in terms and conditions of the contract. He takes the position of the creditor after settling all his claims.
- Right to sue the third party.
As soon as the indemnifier has indemnified the indemnity-holder against the damages and amount of the property, he is entitled to have full rights over the property and has the right to sue the third party for that property too. Before paying damages to the indemnity holder, he cannot sue the third party.
For example- A has promised B to indemnify him in case he suffers damage to his car because of C. Afterwards when B suffers the damage because of C and asks for money from A, A indemnifies him and gets the right over the car. Now A has a right to sue C and claim damage.
- Compensate losses which are covered in the deed.
The indemnifier has a right to pay for only those losses which are covered in the contract of indemnity. In Ramaswami Vs Muthukrishna High Court ordered the indemnifier to pay the plaintiffs only for a sum of Rs. 1236/- which was the actual loss suffered by him. The further appeal filed in Supreme Court to recover more amount from the defendant was dismissed.
- Right under Doctrine of Subrogation.
According to surety’s subrogation rights, after settling the claims of the former creditor, the surety steps into the shoes of the creditor and in certain cases is entitled to receive the whole amount from the debtor. Similarly, indemnifier also has rights in some cases to recover the money or possession.
Duties of Indemnifier
The duties of indemnifier are the rights of indemnity-holder. Section 125, states the rights of indemnifier when sued by the third party to recover the damages, cost and all the sums as payable by him in any suit of any matter in which indemnifier promised him to indemnify him and he acted same as he was expected to act in case of absence of a contract of indemnity. The indemnifier has duties against indemnity holder to:
- Indemnify promisee for all damages.
It is the duty of indemnifier to pay for all damages which he has promised to indemnify in any suit in respect of any of the matter. The promisee should prove that he was compelled by law to pay damages (Duffield v. Scott). There is no need to prove that the loss incurred is direct or indirect in nature.
In Nallappa Reddi vs Vridhachala Reddi And Anr. the court ordered that it’s the duty of the indemnifier to provide the damages to the promisee. The duty arises as soon as the decree is passed against the promisee.
In Gokuldas vs. Gulabrao, the court said that the indemnifier cannot request that he was not the party to the suit and has the liability to indemnify the promisee.
In Toplis v. Grane, the court observed that when the act is done with the lawful objective by the promisee and the act violates the rights of any other person, the indemnifier has to indemnify the plaintiff against the consequences of the act thereof.
- Indemnify promisee against all the costs.
It is the duty of the Indemnifier to pay all the costs which indemnity-holder is compelled to pay in a suit where he did not have breached the orders of the promisor. The indemnity-holder is entitled to recover reasonably incurred costs that arise while reducing or ascertaining or resisting the claims. The promisee is entitled to receive all expenditure which he has incurred during the case proceedings.
In Adamson V. Jarvis, Jarvis gave his cattle to Adamson for auction. Adamson didn’t know that Jarvis was not the real owner of cattle. As soon as the owner came to know about the auction, he claimed his cattle and Adamson had to pay the amount of money to the real owner. Adamson suffered damage and sued Jarvis. Court-ordered latter to pay Adamson the amount of damage he suffered and also the cost as he was unaware of the fact that Jarvis was not the real owner of cattle and thought that Jarvis had an implied authority.
- Indemnify for the amount payable by the promisee in case of compromise.
If the promisee did not act contrary to the orders of the promisor and has paid all sums under the terms of compromise in a suit, he is entitled to receive the money from the indemnifier.
In Kali Charan vs Durga Kunwar And Ors. Court ordered to recover the amount paid as a compromise from the indemnified. In Venkatarangayya Appa Rao Vs Varaprasada Rao Naidu court said that the indemnity holder is entitled to receive all of the sums in case of compromise if certain conditions are being fulfilled that is the compromise should have been done in a bona fide manner, there should be no collusion in the process of settlement and it should not have been charged as an immoral bargain.
Conclusion
Contract of Indemnity is a promise between two parties where one promises to make good to the loss suffered by the other. The indemnifier has a right to get the title of the goods after the settlement and has the right to sue the third party claiming the damages. It is the duty of indemnifier to indemnify promisee against damages, cost and all sums in any suit of a matter where the former promised the latter to indemnify him.
Kanvi Gupta is a first-year law student at Amity Law School, Lucknow campus.
