INDEMNITY CONTRACT SHORTCOMINGS AND SUGESSTIONS

SPECIAL CONTRACTS

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 INDEMNITY CONTRACT SHORTCOMINGS AND SUGESSTIONS

Contract of Indemnity: Shortcomings and Suggestions

INTRODUCTION
Millions of individuals nowadays have various types of insurance policies. This resulted in
the assignment of culpability to another individual (promisor). A contract is an example of
this. In this contract, the insurer agrees to compensate for any losses suffered by the entity
protected by the insurer, so transferring obligation to another party, the insurer. This duty
shift is a really difficult notion to understand. However, why would someone spend so much
money on insurance or assume liability to safeguard the promisee against an unforeseeable
loss caused by the promisee's actions? The indemnity contract governed by the Indian
Contract Act, 1935 shows this separate concept. This might be interpreted through the lens of
a well-known Mark Victor Hansen quotation, “Every liability is simply an advantage
lurking in plain sight.” The consideration that both parties hold is the asset in this
indemnification contract. Acceptance of indemnifier obligation by indemnity-holder is
motivated by the chance of obtaining anything in return.

Contracts for indemnity are governed by sections 124 and 125 of the Indian Contract Act,
1872. Section 124 defines “contract of indemnification” as “a contract in which one party
promises to protect the other from loss caused by the promisor's or another person's
action.”. Additionally, it should be emphasised that indemnification can apply outside of
contract settings in a number of circumstances, including an employer-employee relationship,
a principal-agent relationship, and so on. In some instances, even though the phrase
indemnification is not contained in the exclusive contract, the indemnity concept applies. As
a result, it becomes necessary to assess the extent of indemnification by highlighting the
ICA's deficiencies. As a result, the goal of this research is to examine the critical
indemnification provisions that are absent from the ICA, resulting in the ICA's inadequacy.
Additionally, this article examines Indian courts and numerous additional proposals and
points of view regarding the total extent of indemnification at various levels.

Examples:

A contract indemnifying B against the consequences of any legal action C may bring against
B in relation to a payment of 200 rupees. This is an indemnification contract.

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LOOPHOLES

 Rights of indemnifier absent

Indemnity is defined in just two parts of the Indian contract Act, 124 and 125; sec 124 defines
indemnity, while sec 125 establishes the indemnity holder's rights. Because the indemnity
holder's rights are fully protected, but the indemnifier's rights are completely ignored, it may
also be argued that the indemnifier has just liabilities and no rights, even though the contract
is bilateral.

To protect the indemnifier's interest, courts have applied various other concepts such as
“natural equity” to determine the indemnifier's rights, concluding that the indemnifier's rights
are analogous to the guarantor's rights under section 141 of the Indian Contract Act.
Additionally, courts have applied the “theory of subrogation” to determine the indemnifier's
rights, as Lord Cairns' ruling in the case of Simpson demonstrates. Indian courts have applied
the idea of subrogation in several instances. For example, in Union of India v. Alliance
Insurance Co, the court enlarged the indemnifier's rights to the degree that the theory of
subrogation was included into the concept of indemnity.

 Third part liability/ Act of God overlooked

Section 124 considers just one sort of indemnity: that arising from an indemnifier's pledge to
protect the indemnified against harm caused by the indemnifier's or another person's
behaviour. However, indemnifiers are not liable for loss caused by occurrences or incidents
that were not caused by the indemnifier's or any other person's behaviour.

The term “indemnity contract” has been used narrowly. The general law of indemnity
contracts is substantially wider than the Contract Act's definition of an indemnity contract.
Section 124 is not exhaustive, and "Courts would follow the same rules as English courts." A
contract of fire or marine insurance is always an indemnity contract, even if it falls within the
Contract Act's section 31, which defines contingent contracts.

Indemnity under the Marine Insurance Act cannot constitute indemnity under the Indian
Contract Act, as the loss in such a contract is not caused by the insurer's or any other person's
action.

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Even when construed narrowly, the range of indemnities contemplated under Section 124 is
far smaller than the English common law notion of indemnity. When read in conjunction with
Section 125, which governs actions taken against the insured party, the primary concern was
with indemnification agreements for third-party claims or obligations. This is relatively
predictable given the history of indemnity contracts. Even in the late nineteenth century, the
majority of published English decisions dealt with indemnities in this broad meaning or, more
precisely, indemnities against a promisor's violation of contract, which would almost
certainly result in a third-party claim against the promise.

The selection of activation events is perplexing from a theoretical perspective. Natural

catastrophe losses, which commonly constitute the subject of indemnity insurance policies,
are precluded by focusing on the behaviour of natural or juristic people. It is incorrect to
restrict the relevant actor to the promisor or a third party. It is completely possible for A to
indemnify B for damages sustained as a result of B's activities, albeit this is not common
outside the insurance sector. Concurrent sources of loss, such as the acts or omissions of A,
B, and others, may also be covered by an indemnity from A to B. The definition would
present some difficult characterisation issues.

Fortunately, because the act is not exhaustive, it does not appear as though these definitional
concerns have posed substantial impediments to the progress of Indian law. Additionally,
Section 124 of the Act applies exclusively to express offers of indemnification. Regardless of
the validity of such interpretive gloss, an implicit assurance of indemnification may occur in
an implied contract, but the two concepts must be differentiated.

 The Contract Excludes Damages Caused By The Indemnity Holder Himself.

According to section 124 of the Indian Contract Act, the indemnifier is solely liable for losses
or damages incurred by two parties.

Third-party damage or loss

he indemnifier's own loss or damage.

While indemnification's original definition is to protect the other person/party from losses or
damages incurred to him, section 125 of the Indian Contract Act omits a portion of
indemnity. The provisions of section 124 do not apply to losses or damages incurred by the

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indemnity holder as a result of an act committed by him. Due to this disadvantage, there must
be a particular phrase in the indemnification contract providing coverage for loss or harm
caused by the indemnity holder's error; if such a clause is omitted, there will almost certainly
be a disagreement and the parties will proceed to court. As a result, we may confidently infer
that the indemnity described in section 124 of the Indian contract Act does not reflect
indemnity in its genuine and comprehensive sense.

 The ICA's limited window of opportunity for claiming indemnification prior to the
incidence of the actual loss

The ICA uses the term “to save others from the damage incurred” in 124, implying that
one must first be damned before being compensated. It's worth noting that this legal position
is backed up by English law and was significantly more frequent in previous court rulings.

However, there are a number of scenarios in which the indemnity bearer lacks the financial
means necessary to either sustain the loss or establish that it occurred. For instance, if the
indemnity holder is hospitalised but has the funds to cover the costs, or if he is sued, he must
wait until the judgement is given before claiming indemnity. Later, as a result of these
circumstances, it appeared as though the indemnity bearer must be wealthy, which is arbitrary
and contradicts the widely accepted ideal of justice.

As a result, various legal fights erupted when equitable principles were established. Finally, it
is said that, in light of the new perspective, the indemnity's goal is far broader than a mere
monetary settlement. Chagla J. also held in the seminal case of Gajanan Moreshwar
Parelkar v. Moreshwar Madan Mantri that “indemnity is not bound under § 124 and 125
of the ICA, and that indemnity holders who have incurred an absolute liability have the
right to demand that the indemnifier save them by paying off that liability”

It is critical to emphasise that, in view of the Indian courts' current position, an express clause
is necessary to grant prophylactic indemnification. Otherwise, courts will adhere to the
language of the ICA's provisions and will award compensation only if actual harm has
occurred. Thus, while it is evident that the ICA is insufficient to compensate prior to the
occurrence of the actual loss, as previously stated, the ICA does play a critical role in certain
cases.

 No clarity on presence of consideration.

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While the facts and circumstances of each case vary, the key elements of a legal contract
must be present. A contract of indemnification is similar to any other contract in that it must
satisfy all of the contract's basic requirements. If a person agrees to indemnify another
without receiving anything in return, the agreement will be treated as a gift and not as a
genuine contract. For instance, a parent watching out for his kid and paying for his losses
without intending to create a contractual legal duty. Thus, in order for an indemnity contract
or any other contract to be considered legitimate and enforceable in court, it must meet all of
the key requirements of a valid contract. But innately no mention of consideration is given
and is left to the interpretation of the reader

 Missing Illustrations

Illustrations which act as the most essential elements of a bare act which help in better
understanding are missing, the ones that have been provided are very narrow in scope

SUGGESTIONS

In India, the scope of indemnity should be expanded by adding indemnifier rights and the
notion of subrogation as desired equity-based indemnity features. Due to the omission of
indemnifier rights, the indemnifier seems to have just obligations and no rights, which is
problematic. The Indian contract act takes a similarly cautious approach to indemnity,
refusing to reimburse the indemnity bearer for damage caused by his fault. Due to this
vacuum, the provision advocated by the Law Commission of India in its 13th report to
enlarge the scope of indemnity under the ICA should be introduced to provide for the
indemnification of losses caused by an occurrence that is not the fault of any of the parties or
any person. Additionally, the English legal position on this matter can be reviewed, which is
far wider. In English law, indemnification refers to a person's obligation to recompense for
losses caused by other parties or circumstances beyond his or her control. As a result, in
English law, indemnity can be applied to all insurance contracts except life insurance (as the
loss is not inevitable because the valuation of human life cannot be determined).

Additionally, because the ICA lacks an express provision requiring implied indemnification,
the ICA's scope of indemnity is much narrower than its actual implementation. To broaden it,
the Law Commission of India's recommendation to include implicit indemnification under
the definition of indemnity in Section 124 should be examined. Additionally, the ICA is
insufficient to compensate for losses occurring prior to the incidence of the actual loss; hence,

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an express provision authorising preventative indemnity should be inserted. The Indian Law
Commission then validated the deduction and recommended a specific amendment to the
ICA to safeguard indemnity holders. As Buckley LJ stated in one of his cases, the English
legal perspective can also be considered: “Indemnity is not always conferred upon
repayment following payment.” “Indemnity demands that the party seeking
indemnification never be required to pay in the first instance.

CONCLUSIONS

India is attempting to become a global economy with a robust business sector by opening up
to the rest of the globe. With so many indemnification contracts being entered into on a daily
basis, adequate codification is critical. As mentioned in Norendra Nath Sircar's lawsuit
against Kamalbasini Dasi “The fundamental purpose of codifying a particular branch of
law is that, on any subject particularly addressed, the law shall afterwards be determined
by the language employed in that legislation, rather than by the prior act.” The
accompanying explanation indicates that the ICA falls terribly short of presenting the concept
of indemnity's actual potential. Thus, it is critical to make the required modifications by
analysing the shortcomings and considering the proposals provided by the Law Commission
of India in its report (13th report, 1958, on the Indian Contract Act, 1872) as well as the
position of English law in this area. Amending the indemnification contract under the Indian
Contract Act, 1975, should be viewed as a need in order to keep our corporate sector and
people current with changing societal demands. As a result, it is plausible to argue that the
genuine meaning of indemnification is far larger than the interpretation offered by ICA.

REFERENCES

● PPT provided in the class

● Dr. Avtar Singh, Principles of Mercantile Law, 260 (8th ed., 2006).

● Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, Chagla J., (1942) 44

BOMLR 703.

● Jaswant Singh v. The State of Punjab, 1958 AIR 124.

● Law Commission of India, Contracts Act, 1872, Report no. 13, 50, ¶ 103 (February
2020).

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● Norendra Nath Sircar v. Kamalbasini Dasi, (1896) I.L.R., 23 Cal.

● Simpson v. Thomson, ([1877] 3 App. Cas. 279 at 284).

● Sarada Mills Limited v. Union of India, AIR 1966 Mad 381.

● Secretary of State v. Bank of India, (1936) 38 BOMLR 1205.

● Sakshi Agarwal, Contract of Indeminity in India & UK, Law Times Journal, (August
10, 2018).

● The Indian Contract Act, 1872, § 124.

● The Indian Contract Act, 1872, § 125.

● The Indian Contract Act, 1872, § 141.

● The Indian Contract Act, 1872, § 124.

● The Indian Contract Act, 1872, § 31.

● The Indian Contract Act, 1872, § 9.

● The Indian Contract Act, 1872, § 69.

● The Indian Contract Act, 1872, § 145.

● The Indian Contract Act, 1872, § 222.

● The Indian Contract Act, 1872, § 23.

● Union of India v. Alliance Insurance Co, AIR 1959 Cal 563

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