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Contract of Indemnity defined (S.

124)

Sec. 124 defines a contract of Indemnity thus: “A


contract of indemnity is a contract whereby one party
promises to save the other from loss caused to him by
the conduct of the promisor or any other person.”

Illustration

– A contracts 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.

If B is not the Principal Debtor, but only A makes a


promise to the shopkeeper to pay, for instance, B tells
the shopkeeper ‘Let him have the goods, I will be your
paymaster’, it is contract of indemnity. - Birkmyr v.
Darnell, (1704) 1 salk, 27 at 28.

Essentials
There must be a loss.

The loss must be caused either by promisor or by any


other person.

There are two parties –


i. Indemnifier
ii. Indemnity-holder
Must contain all the essentials of a valid
contract.(Sec.10)

Contract may be expressed or implied.

It is a contingent agreement to make good the loss.

It is enforceable only when the loss occurs.

Promisee must have actually suffered a loss


according to the terms & conditions of the contract.

Indemnifier is liable only for the loss.

A Contract of Insurance is a contract of Indemnity


(although not clearly mentioned in sec.124)

. - G.Moreshwar v. M.Madan (1942)44 BOM LR 703.

 Sec. 124 sets out a case of an express contract of


Indemnity but there are implied contract too. –

Secretary of State v. The Bank of India Ltd.


AIR(1938) PC 191.
In an indemnity, the possibility of risk of any loss
happening is only contingent as against the indemnifier.

-Tarachand Ghanshyamdas v. Commissioner of


Income Tax, (1966) 59 ITR 378

Person who promises to make good the loss is called the


‘indemnifier’ and the person to whom the promise is made,
i.e., whose loss is to be made good is called the
‘indemnified’ or ‘indemnity-holder’.

POSITION IN ENGLISH LAW VIS A VIS INDIAN LAW

Under English Law, the word ‘indemnity’ carries a much


wider meaning than given to it under the Indian Contract
Act. It includes a contract to save the promisee from a
loss, whether it be caused by human agency or any other
event like an accident and fire. Under English Law, a
contract of insurance (other than life insurance) is a
contract of indemnity.

In ADAMSON v. JARVIS, [(1827)Bing 66], the plaintiff, an


auctioneer, sold certain cattle on the instruction of the
defendant. It was subsequently learnt that the livestock did
not belong to the defendant, but to another person, who
made the auctioneer liable and the auctioneer in his turn
sued the defendant for indemnity for the loss he had thus
suffered by acting on the defendant’s directions. The court
lay down that the plaintiff having acted on the request of
the defendant was entitled to assume that, if what he did,
was found to be wrongful, he would be indemnified by the
defendant.

SCOPE AND NATURE

Sec.124 is somewhat narrow in its scope. It refers to the


promises which cover situations where the loss to the
promisee may be caused by the behavior of the promisor
or by that of a third person. This definition in itself will not
include a contract of insurance since the insurance
contracts relate to losses caused by accidents. It is clear,
that the actual scope of contracts of indemnity is much
wider than the definition of Section 124.

English usage of the word ‘Indemnity’ is much wider than


this definition. It includes promises to save the promisee
from harm or loss caused by events or accidents which do
not, or may not, depend on the conduct of any person, or
by liability arising from something done by the promisee at
the request of the promisor; in the latter case, a promise of
indemnity may be inferred as a fact from the nature of the
transaction.

1.Unlike contracts of insurance, a contract of indemnity is


not uberrimae fides.
2.As defined in the Indian Contract Act, a contract of
indemnity would not include a contract of insurance
against loss or damage to the subject matter of the
insurance, and can be differentiated from the contracts of
insurance which protect the insured against liability to third
parties.
“The equitable doctrine is that the party to be
indemnified can call upon the party bound to indemnify
him specifically to perform his obligation, and to pay him
the full amount which creditor is entitled to receive, and
that whether having received it he applies it in payment
of that creditor or not is a matter with which the party
giving the indemnity is not concerned.” Buckley, L.J.
says in cases of - In re Law Guarantee Trust and
Accident Society Ltd.

Rights of Indemnity Holder (Promisee) when sued


(Sec.125)
The rights of the indemnity holder are dependent on the
terms of the contract of indemnity as a general rule. Sec-
125 of the Indian Contract Act, 1872 comes into play when
the indemnity holder is sued i.e. under specific situation.

All Damages – Sec.125 (1)


All Costs – Sec.125 (2)
All Sums – Sec.125 (3)

Note - Limitation Act – 3 years time limit for recovery

The indemnity holder is entitled to recover:

a) the damages that he may have been compelled to pay


in any suit in respect of any matter to which the promise of
the indemnifier applies.
For example, if A contracts to indemnify B against the
consequences of any proceedings which C may take
against B in respect of a particular transaction. If C does
institute legal proceeding against B in that matter and B
pay damages to C, A will be liable to make good all the
damages B had to pay in the case.

b) All the costs of the suit that he may have had to pay to
the third party provided he acted as a man of ordinary
prudence and he did not act in contravention of the
directions of the indemnifier or if he had acted under the
authority of the indemnifier to contest such a suit.

In the case of ADAMSON v. JARVIS (1827) 4 BING 66,


Adamson was entitled to recover the money he had to pay
to the true owner of cattle as well as any expenses
incurred by him to get a legal counsel, etc. Jarvis was
ordered to pay damages to Adamson.

c) All the sums that he may have paid under the terms of
any compromise of any such suit provided such
compromise is not contrary to the indemnifier’s orders and
was a prudent one or if he acted under authority of the
indemnifier to compromise the suit.

Note - The indemnity holder is also entitled to losses due


to change of law not foreseen by the parties when they
entered into such contract of indemnity.

Rights of Indemnifier
1.The contract act is silent about the rights of indemnifier.
2.Rights under doctrine of Subrogation.
3.To sue against third party after indemnifying the
indemnity holder.
4.Not to compensate for losses not covered under
Contract of Indemnity.

INDEMNITY IN CASE OF INTERNATIONAL


TRANSACTIONS

Indemnity clauses are debated deeply and focused upon


during negotiation of commercial contracts. Serious
consequences arise due to a poorly negotiated indemnity
clause.

It is important to understand whether common law


principals apply for interpreting indemnity clauses or is the
Contract Act self sufficient & exhaustive?

The Bombay High Court in Gajanan Moreshwar Parelkar


v. Moreshwar Madan Mantri [(1942) BomLR 704], while
interpreting indemnity provisions clearly held that the
Contract Act is not exhaustive and common law principals
are to be relied upon. Hence, unless there is a conflict with
the Contract Act or any judicial decisions rendered by the
Courts in India, the common law principals pertaining to
interpreting contracts will continue to be applicable to
indemnity provisions.

INDEMNITY BY GOVT. DURING INTERSTATE


TRANSACTION
State Government cannot levy the tax on inter-State
Transactions however all such transaction are
administered by the State Government that’s why
provisions relating to State’s VAT in many situations are
applicable even in such transactions.

As per section 8(1) (b) of CST Act 1956 sales tax liability
on inter-state sales is at the rate of 2 percent or ‘rate of tax
for sale within State’ whichever is lower, provided such
sale is affected to a registered dealer and goods are
covered in the registration certificate of the purchasing
dealer. Otherwise the rate of tax would be the rate which
is applicable on the goods sold within that State.

Thus CST rate at the rate of 2 percent (i.e. concessional


rate) can be claimed if:
(i) Sale has been made to registered dealer; and
(ii) Goods sold are covered in the registration
certificate (RC) of the buying dealer.