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Law of Contract II – Week 1

By: Nitin Gomber Esq.

+ INDEMNITY AND GUARANTEE
(Introduction)

n  While the concept of indemnity and guarantee differ on

several issues, they both remain modes of compensation with
overlapping principles.

n  Even though “Indemnity” and “Guarantee” are two sides of

the same coin principally, contracts of indemnity are
inherently different from contracts of guarantee.

n  Some notable points of difference: Number of Parties,

Number of Contracts, Liability, Recovery, among others
(These will be discussed in detail later while we’re covering
guarantee)
+ INDEMNITY
(Generally Speaking)

n  In a wider sense, the word “Indemnity” includes promises to

save the promisee harmless from loss caused by events or
accidents which do not or may not depend on the conduct of
any person.

n  In a wider sense, in fact, contracts of indemnity may include

all contracts of insurance, all contracts of guarantee etc.

n  However, in the Indian Contract Act, the expression “contract

of indemnity” has been used in a very narrow sense.

n  The Law Commission of India has recommended that this

definition be further expounded upon in its 13th Report.
However, no action has been taken yet.
+ INDEMNITY
(Definition as per ICA)

Section 124: 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, is
called a “contract of indemnity”.

n  Simply speaking, a contract of indemnity is a promise by one

party to save the other from loss, caused either by the
conduct of the promisor or any other person;

n  The person who is to be indemnified is the indemnity-holder.

n  The person who promises to indemnify is the indemnifier.

+ INDEMNITY
(Explanation)

n  Example: On February 01, 2016, A (a shopkeeper) and B (a

customer) enter into a contract for the sale of a TV which had
to be delivered to B on 25th February, 2016. However, on
February 02, 2016, C (another customer) came to A and
insisted on selling the exact same TV to him (C). C promised
to compensate A for any loss faced by him due to selling the
TV to him (C). Identify the indemnifier and the indemnity
holder?
+ INDEMNITY
(Explanation)

n  Note: The subject of contracts of indemnity is much wider than

what is given in this section. This section deals only with one
particular kind of indemnity which arises from a promise made
by the indemnifier to save the indemnified from the loss caused
to him by the conduct of any other person.

n  Note: A right to be indemnified may arise from either an express

contract or an implied one. It may also arise by the operation of
law (i.e. if it is provided in a legislation).

n  Example: A (an auctioneer) was given a diamond by B to be sold

at an auction. A followed B’s instructions and sold the diamond.
But, as it turns out, B was not the real owner of the diamond. The
real owner of the diamond sued A for damages etc. A in turn
sued B to be indemnified for the loss that he suffered. Can A
succeed in his action against B?
+
INDEMNITY
(Explanation)

n  Note: In the earlier example, A is likely to succeed provided

of course he is able to show his due diligence in the matter.

n  However, it is a set rule of law that whenever an act is done by

one person at the request of another, which act in itself is not
manifestly illegal/tortious to the knowledge of the person
doing it, and such act turns out to be injurious to the rights of
a third party, the person doing it is entitled to indemnity from
him who requested that it should be done.

n  The Law Commission of India in its 13th Report recommended

that a section reading “When contract of indemnity can be
implied” be added to the ICA. However, nothing has been
done till date.
+ INDEMNITY
(Explanation)

n  Now, Section 124 provides the following essential elements

for a contract of indemnity:

(1) Indemnifier promises the indemnity-holder to save him/her

from loss.

(2) There must be a loss. (Does this mean actual loss?)

(3) The loss must be caused either by the promisor or by any

other person.
+ CASES ON INDEMNITY

Gajanan Moreshwar v. Moreshwar Madan AIR 1942 Bom 302

Mortg
A ages
lease
(Lessee) right
s
Contract C
MC
for (Material supplier)
(Lessor) release
00
B R s . 50
+
(In possession) s . 5000
e sR
Ow
+ CASES ON INDEMNITY

Facts:

n  In 1934, Plaintiff entered into an agreement with Municipal

Corporation of Bombay for the lease of a plot of land for 99 years.

n  After sometime, Defendant requested that the benefit of lease be

transferred to him. Plaintiff did so.

n  Accordingly, Defendant got possession of this plot of land and

started construction on it.

n  One Mr. Keshavdas was the materials supplier for all the
construction going on the plot of land.
+ CASES ON INDEMNITY

n  Defendant now owes Rs. 5000 to Mr. Keshavdas. However,

Defendant has no money to pay to him.

n  Defendant requests the Plaintiff for help (he suggests

mortgaging the plot of land with Mr. Keshavdas). Plaintiff
obliges and deposits the deeds for the plot of land with Mr.
Keshavdas, for an agreement signed on January 14, 1937 to
pay all his debts by January 14, 1938.

n  Further Rs. 5000 become payable by the Defendant to Mr.

Keshavdas. Again the Defendant requests the Plaintiff for
putting a further charge on the said property. Plaintiff again
obliges and another agreement is entered into with the
payment date of January 14, 1938. However, this time, the
Defendant gave in writing to Plaintiff that he will be liable…
+ CASES ON INDEMNITY

n  … for discharging all mortgages / charges on the plot of land

officially leased out to the Plaintiff and accordingly, he would
execute another deed releasing Plaintiff of all claims from Mr.
Keshavdas.

n  On July 30, 1939, Plaintiff (on the request of the Defendant),
wrote to the Municipal Corporation of Bombay asking them to
transfer the lease of the said plot to the Defendant. This change
is approved by the MCB, but no formal lease is drawn up.

n  Thereafter, Plaintiff asked the Defendant to secure his release

from all claims that Mr. Keshavdas has, but, the Defendant failed
to do so. Accordingly, Plaintiff sues the Defendant for release.
+ CASES ON INDEMNITY

Argument of the Defendant:

n  Defendant argues that there is no cause of action yet and the
suit is premature. He insists that unless and until the
indemnity-holder (Plaintiff) has suffered a loss, he is not
entitled to sue the indemnifier (Defendant). The argument is
simply that under Section 124, the promisor promises to save
the promisee from the loss caused to him and not the loss
which may be caused to him. The argument is expanded
further by saying that until Mr. Keshavdas files a suit against
the Plaintiff and obtains a judgment which the Plaintiff is
compelled to satisfy, the Plaintiff is not entitled to sue the
Defendant.
+ CASES ON INDEMNITY

Issue:

n  Whether or not the indemnity-holder needs to suffer actual

loss before he could sue on his indemnity?

Decision:

n  The Court held in favour of the Plaintiff.

Rationale:

n  If the indemnity-holder is to wait till a judgment is

pronounced, and it was only after he had satisfied the
judgment that he could sue on his indemnity, it is clear that
this might under certain circumstances, throw an intolerable
burden upon the indemnity-holder.
+ CASES ON INDEMNITY

n  Accordingly, if the liability of the indemnity-holder has

become absolute*, then he is entitled either to get the
indemnifier to pay off the claim or to pay into Court sufficient
money which would constitute a fund for paying off the claim
whenever it was made.

n  Sections 124 and 125 of ICA are not exhaustive of the whole
law of indemnity. And equitable principles applicable in the
Courts of England will apply in this case.

*The existence of a clear enforceable claim.

+ CASES ON INDEMNITY

Shanti Swarup v. Munshi Singh, AIR 1967 SC 1315

A Mortgaged
B + C
(Owner of land)
Part of
Sold
purchase
half
money left
of
with D to
this
pay off
land
Mortgage
to B and C

D
(Buyer)
+ CASES ON INDEMNITY

Facts:

n  On May 09, 1914, the Plaintiff (owners of land) executed a

mortgage in favour of two people: Bansidhar and Khub
Chand for Rs. 12,000.

n  Thereafter, on February 09, 1920, a sale deed for half of this
land was executed by the Plaintiff in favour of Mr. Shanti
Saran for Rs. 16,000.

n  Out of Rs. 16000, Rs. 13,500 was left with the purchasers for
paying up the debt to Bansidhar and Khub Chand.
+ CASES ON INDEMNITY

n  Neither purchasers, nor the Plaintiff paid to the mortgagees.

n  The mortgagees brought suit against the Plaintiff and after
going through multiple court battles, the Collector ordered a
self-liquidation of mortgage for 3/4th of half of the land held
by the Plaintiff.

n  As a result, the Plaintiff had to part with a huge part of his
property. Accordingly, the Plaintiff filed this suit for the
recovery of loss that he suffered for the failure of the
Defendant to pay up.

n  The Defendant argues that there is no contract of indemnity!

+ CASES ON INDEMNITY

Decision:

n  The Court held in favour of Plaintiff.

Rationale:

n  The contract of indemnity need not be express. It could be

implied from the circumstances of the case, as well.

n  There was an implied contract of indemnity, given the

understanding between the parties whereby Rs. 13,500 was
left with the purchasers themselves.
+ Rights of an indemnity holder when sued

Section 125 of the ICA

n  The promisee in a contract of indemnity, acting within the scope

of his authority, is entitled to recover from the promisor:

(1) All damages which he may be ‘compelled to pay’ in any suit in

respect of any matter which the promise to indemnify applies;

(2) All costs which he may be compelled to pay in such suit if, in
bringing or defending it, he did not contravene the orders of the
promisor and acted as it would have been prudent for him to act in
the absence of any contract of indemnity or if the promisor
authorized him to bring or defend the suit;
+ Rights of an indemnity holder when sued

(3) All sums which he may have paid under the terms of any
compromise of any such suit, if the compromise was not contrary
to the orders of the promisor, and was one which it would have
been prudent for the promisee to make in the absence of any
contract of indemnity, or if the promisor authorised him to
compensate the suit.

------------

Summary: This section describes that the promisee (indemnity

holder) is entitled to recover from the promisor (indemnifier) the
damages, the costs and any amount paid by him in a suit that is
covered by the promisor’s (indemnifier) promise of indemnity. All
damages, costs and sums can be recovered only if certain
conditions laid down under this section are fulfilled.

Note: For costs and sums, this section contemplates that at each
stage, the indemnity holder applied for authority or orders of the
promisor. In the absence of such authority or orders from the
promisor, the indemnity holder has to act as a prudent man.
+ Rights of an indemnity holder when sued

n  Note: The words “compelled to pay” need not be construed as

‘already paid’; We’ve already learnt that liability of the
indemnifier arises as soon as the indemnity holder’s liability
becomes absolute.

n  Note: With respect to costs, reasonably incurred costs in resisting

or reducing or ascertaining the claim may be recovered.

n  Note: It is not necessary for the indemnity holder to give notice
of proceedings to the indemnifier. However, it is prudent to give
him notice so that he cannot challenge the decree passed against
the indemnity holder in an action initiated by a third party. Plus,
the indemnifier may also allege that more than reasonable costs
have been incurred by the indemnity holder and thereby
prolong proceedings. Accordingly, it is best to send him notice of
proceedings at least.
+ Rights of an Indemnifier

n  Note: There is no provision in the Indian Contract Act that

deals with the rights of the indemnifier! In the absence of
such a provision, principles of justice, equity and good
conscience come to the rescue the indemnifier. For example:
the indemnifier is not responsible to indemnify in case the
circumstances fall beyond the scope of the contract of
indemnity. Similarly, the indemnifier’s liability does not
extend to costs / sums that the indemnity holder might have
protected himself against.
+
Rights of an Indemnifier

Example: A (a farmer) wants to sell a particular property to B

(another farmer). B is hesitant to buy. To convince B, A offers to
enter into a contract of indemnity with B, according to which A
will bear all the costs of litigation if the title to the said property
is ever questioned. B agrees and buys the said property for Rs.
1 crore and signs the contract of indemnity as well. C sues B
over the title of the same property a year later. B hires Mr. Kapil
Sibal to defend this suit. At the end of litigation, B sues A to
recover Rs. 2 crore that he’s paid as fees to Mr. Sibal. Can B
recover this money?
+ Rights of an Indemnifier
Example: A wants to sell a particular property to B. B is hesitant
to buy. To convince B, A offers to enter into a contract of
indemnity with B, according to which A will bear all the expenses
if the title to the said property is ever questioned. B agrees and
buys the said property for Rs. 1 crore and signs the contract of
indemnity as well. C sues B questioning the title of the said
property. While the litigation is on, C’s lawyer suggests to B’s
lawyer to settle the matter for Rs. 50 lakhs. As soon as B’s lawyer
suggests this to B, B (thinking that he’ll anyway be indemnified of
the whole amount) asks his lawyer to accept the compromise. B
pays to C Rs. 50 lakhs. Can B recover Rs. 50 lakhs from A?
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Thank you!