Legal Aspects of Retail Business

INDEMNITY
Sushant Lalla || Roll no. 06-13-057

CASE 1: Lala Shanti Swarup v. Munshi Singh, 1967

FACTS:

The plaintiff-respondents (PR) mortgage their land to Bansidhar and Khub Chand (BK) for Rs. 12,000.
Half of this mortgaged property was then sold by the real owner (PR) to Shanti Saran(S) (defendant-
appellant, DA) at Rs. 16,000. As agreed, out of this, a sum of Rs. 13,500 was to be paid by S, as the
amount, due to the mortgagee (BK). S defaulted on payment, B-K filed a suit.

Court of 1st instance: ordered P-R to pay the whole mortgage due.

CONTENTIONS (DA):

A provision in a contract that S will pay off the encumbrance (Rs.13500) does not give rise to a
contract of indemnity. Accordingly Ar. 116 and not Ar. 83 is applicable. The suit is time-barred. The
claim of PR was a claim for compensation for breach of contract which was entered into by a regd.
document for which the period of limitation was 6 years from the date on which the breach of
contract had been committed (DA failed to pay Rs. 13500).

There was no express contract of indemnity in the sale deed

Even if there was a contract of indemnity the cause of action for the plaintiff arose when the final
mortgage decree was passed.

ISSUES:

Whether Ar. 116 (6yrs.) or Ar. 83(3yrs.) of the Limitation Act would be applicable? When did the
time actually start running for this purpose?

Whether or not there is a contract of Indemnity?

HELD:

SUPREME COURT (favoured PR)

1. Two separate causes of action may arise:

i. The failure of S to pay off the encumbrance (within reasonable time) enables the PR to sue S and
bring himself in a position to meet the liability which the S failed to meet. The deed being registered
Ar. 116(6yrs.) will be applicable.

ii. PR can bring a suit on the contract of indemnity (implied in this case) if as a result of the failure of
S to discharge the encumbrance the vendor incurs a loss. Here Ar. 83 will be applicable.

2. (w.r.t 2nd issue & 2nd contention of DA) There covenant was not one only to purchase the PR’s
property but also one to relieve the PR from the liability of the mortgage, and in that sense there
was an implied contract of indemnity in favour of the vendor.

3. (w.r.t 3rd contention of DA) The cause of action arises when the PR was actually damnified i.e. had
to mortgage ¾ of the half of the unsold land to fulfil the liabilities.

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Legal Aspects of Retail Business

CASE 2: Ramchandra B. Loyalka v. Shapurji N. Bhownagree, 1940

FACTS:

The plaintiff (P) was a sub-broker employed by the defendant broker (D) on 50% commission. P
introduced 6 constituents and became answerable to the broker for them. The constituents
defaulted which resulted in loss of Rs.16000. P asked for amount due under his brokerage from D
and agreed to make good Rs. 16000. D thereafter sued the constituents and compromised his claim
as against some of them by receiving amounts much smaller than what was due from them and
claimed the unrecovered amount. P sued to take accounts of the dealings between himself and D,
and as to the compromises arrived at by D with some of the constituents, alleging D had settled the
claims as against those constituents for lesser amounts without P’s (guarantor) consent. Therefore P
was discharged from his obligation to pay the debts of those constituents.

ISSUE: Whether contract of Guarantee or Indemnity

CONTENTIONS:

Plaintiff: P was a guarantor and D making a settlement without his (surety) had discharged him. By
the compromise made by D without P’s consent, with three of the constituents, his remedies against
those three parties are lost.

Defendant: It was a contract of indemnity because there was no specific amount which the plaintiff
had stood surety for and the requirement that, there should be three parties for guarantee was
absent. The deal was only between P & D.

The defendant was within his rights to negotiate and recover the best amounts he could and there
was no allegation of any mala-fide or wrong-doing in arriving at these settlements with the
defaulting customers.

HELD:

Trial Court: Contract of guarantee, favoured P

High Court (Bombay)

(w.r.t 1st contention of D Trial court verdict) The contract fell within the terms of the definition of
indemnity under S. 124. The promisor is agreeing to save the promisee from loss occasioned by the
conduct of the constituents introduced. A contract of guarantee involves three parties- the creditor,
the surety and the principal debtor (S.126). There must be a contract, first of all, between the
principal debtor and the creditor and between the surety and the creditor. But if those are the only
contracts, the case is one of indemnity. In order to constitute a contract of guarantee there must be
a third contract, by which the principal debtor expressly or impliedly requests the surety to act as
surety. S.145 provides that in every contract of guarantee there is an implied promise by the
principal debtor to indemnify the surety. This is not possible unless the principal debtor is privy to
the contract of surety-ship.

P was anyway liable to pay under the second agreement by which he expressly agreed to be liable
for the amounts mentioned in the document and hence D was entitled to the unrecovered amount.