Interpretation Of Statues ASSIGNMENT

TOPIC:

“Section 124 Of Indian Contract Act : INDEMNITY IN CONTRACT”

SUBMITTED TO:

Ms. Sarita Ranga

USLLS

SUBMITTED BY:

Name: Pragya Singh

Batch: BA-LLB

Enrolment Number: 04816503820

 INTRODUCTION:

A contract of indemnity is one of the most important forms of commercial contracts. The
Phrase
Indemnity means “Security against loss or damages”. In common parlance ‘indemnity’ is
often used as a synonym for compensation or reparation. To indemnify something basically
means to make good a loss. In other words, it means that one party will compensate the
other in case it suffers some losses.

Section 124 of the Indian Contract Act, 1872 defines Contract of Indemnity as:

‘A contract by which one party guarantees to save the other person from loss caused to him
by the action of the guarantor himself, or by the action of any other person.’

For example, A promises to deliver certain goods to B for Rs. 2,000 every month. C comes in
and promises to indemnify B’s losses if A fails to so deliver the goods. This is how B and C
will enter into contractual obligations of indemnity.

A contract of indemnity recognizes the parties, and it characterizes the types of losses or
damages covered and explain whether legal expenses in the filing of the suit or contesting the
suit are included or not. Generally, the contract also specifies the “triggering event”;
happening of which will make the indemnifier responsible. The “triggering events” are
defined with aids of terms like “arise out of”, “in connection with”, or “occasioned by”,
“acts or omissions” or “negligence”. A Contract of Indemnity is required because a party
may not be able to command all visible features of the performance of a promise. The party
can be sued for the actions of another where the circumstances of performance were out of
his authority and control. Indemnity is considered as a sub-class of compensation and
Contract of Indemnity as a class of contracts. The contract of indemnity is an actionable
claim provided it is not against public policy or unlawful to be valid. A right of indemnity
lies where one party is required to make good certain losses experienced by the other party.
No third person or an intruder to the agreement of indemnity cannot bring legal charges
against the indemnified due to the standard of secrecy of contract as settled in the case of
NATIONAL PETROLEUM COMPANY vs. POPAT LAL by the Bombay High Court.
There are two parties involved in the Contract of Indemnity. The two parties are:

1. Indemnifier: Someone who protects against or compensates for the loss of the
damage received.
2. Indemnified/Indemnity-holder: The other party who is compensated against the
loss suffered.

An example of contract of indemnity is the case of:

‘Gajanan Moreshwar Parelkar v. Moreshar Madan Mantri.’

In this case, G. Moreshwar got a piece of land in then Bombay at lease for a long period. He
transferred the lease to M. Madan for a limited period. M.Madan started development over
the above-mentioned plot and ordered his supplies from K D Mohan Das. When Mohandas
asked for the payment for the material he provided, the accused could not pay up. Upon
request of M Madan, G Moreshwar prepared a mortgage deed in favour of K.D. Mohandas.
The Interest rate was agreed upon, and G. Moreshwar put a charge over his possessions. A
date was pre-decided for the return of principal amount. M. Madan had decided to repay the
principal amount along with interest and to get the mortgage deed released before a particular
date. But M. Madan as per his assurance did not pay anything to K.D. Mohan Das, and G.
Moreshwar had to pay some interest. When after several requests and intimations, M. Madan
did not pay the principal amount along with interest and also didn’t get the mortgage deed
released, G. Moreshwar legally prosecuted M. Madan for indemnity. The Privy Council held
that if indemnity holder has incurred responsibility and the responsibility itself is absolute and
without limits, the indemnity holder can ask the indemnifier to take care of the liability and
pay it off. Thus, G. Moreshwar was designated to be indemnified by M. Madan against all
debt under the loan agreement and deed of charge.

Nature Of Contract of Indemnity:

Indemnity clauses are very common in accords between dwellers and property owners.
Dwellers agree to indemnify the property owners from costs or damages associated with
being injured on the property while the property owners take the responsibility to anything
which could probably be hazardous or troubling. For e.g., the property owner stands
indemnified from damages if the dweller gets injured in the property accidentally but if some
part of the property is dangerous and is quite probable to cause some damages and injuries to
the occupant and the owner is intimated time to time about the same; a minor indemnity
clause will not prevent the dweller from suing if such disrepair caused the mishap.

Definition of a contract of indemnity sets out both express promises as well as implied
promises. An example of implied indemnity is the decision of the Privy Council in Secy of
State for India in Council v. Bank of India Ltd. in which, a forged note endorsement was
given to a bank which was received in good faith and for the value. It was later received by
the Public Office for renewal in their name. The compensation was recovered by the true
owner of the note from the State and was allowed to recover from the bank on a promise of
indemnity on implied.

Indian Contract Act’1872 bargains with cases of implied indemnity under Sec. 69, Sec. 145
and Sec. 222.

1. Under Sec.69 if a party who is interested in payment of money which another is

destined by law to pay and therefore himself pays it, he is designated to be
indemnified.
2. Under Sec.145 a party is provided with the right of the surety to claim indemnity
from the principal defaulter for all sums which he has lawfully paid towards the
guarantee.
3. Section 222 provides for liability of the principal to indemnify the agent in respect
of all amounts paid by him during the legitimate exercise of his power.

Fundamental Essentials of Contract of Indemnity:

• It is an absolute promise to reimburse for defined loss or injury used to ensure that
an aggrieved party has a precise remedy to correct bugs or defects in goods or
services delivered under the Contract.
• It is an assurance to make restitution for or safeguard against damage, loss or
injury.
• Broadly it includes all contracts of protection, security, guarantee, etc. It is not a
secondary but an independent contract.
• It is a tool for assigning risks contingent responsibility.
• Indemnity clauses must be clear, to the point, wherever possible it should impose
the circumstances under which the compensation will arise. It should be
considered

in light of any expulsion of liability clauses found anywhere in the agreement and
should state what damages will be payable in the occurrence of the clause being
favourably conjured.

Enforcement of Indemnity Contract:

• A contract of indemnity can be invoked according to its terms like the express
promise.
• Damages, legal costs of judgement, the amount paid under the terms of the
agreement are some of the claims which Indemnity holder can include in its
claims.
• A Portion of losses or injuries is the extent to which the promise has been
indemnified.
• Indemnifier should ideally be informed of the proper account.
• There is no burden to show breach or actual losses or damages.
• Indemnity may be invoked where the claimant has a pre-existing condition that
caused a loss of use of a member of the body and there is proof that the loss of use
is sufficiently pronounced that an ordinary person could discover it.

• In accordance with developed practice, it is proposed that any indemnity is limited

to exclude losses caused by the accountable body’s negligence and that the
indemnity can only be invoked once the accountable body has made reasonable
endeavours to recover any reclaimed grant from the relevant project manager,
which may include taking legal action.
• Included procedures, terms and conditions in the contract to be followed for
invoking the indemnity by the customer.
• A letter of indemnity, on the other hand, permits a misrepresentation and, in
consequence, it should not be invoked against consignees or third parties and, if
 used against them, it should have no effect. The misrepresentation must, of course,
be directly related to the loss or damage complained of.
• A letter of indemnity is a corollary to a fraud on a third party and cannot be
invoked against a third party in good faith who, on the contrary, may use the letter
as evidence of the bad order and condition of the goods.

Situations Where Contract of Indemnity Can Be Enforced:

In the United Kingdom, under common law, it is necessary for an indemnity holder to first
pay for the losses, injuries or damages and then claim for the indemnity. But in India, there is
no clear-cut provision which states that when a contract of indemnity is implemented. There
have been conflicting legal conclusions throughout. First Indian case where the right to be
indemnified was identified was of OSMAL JAMAL & SONS LIMITED vs. GOPAL
PURUSHOTHAM [1728]. But at present, a general agreement is formed in favour of the
opinion of the equity courts. In K. BHATTACHARJEE vs. NOMO KUMAR [1899],
SHYAM LAL vs. ABDUL SALAL [1931] and G. MORESHWAR vs. M. MADAN cases,
it was decided that the indemnified can constrain the indemnifier to place him in a position to
meet liability that may be built upon him without waiting until the indemnified has cleared
the same.

Indemnity requires that the party who will be indemnified shall not at any time be called upon
to pay. Therefore, the liability of the indemnifier starts the moment the loss or damages in the
form of liability to the indemnified becomes absolute and without limit.

Legitimacy of Contract of Indemnity:

A contract of indemnity is one of the varieties of contracts. The principles appropriate to

contract in general are also pertinent to such contracts so that rules like free approval or
consent, the legality of object, etc. are equally relevant. As in the case of general agreement
consent to an agreement shouldn’t be by coercion, fraud, misrepresentation otherwise the
contract will voidable at the option of the party whose consent was so caused; the same
applies to contract of indemnity also. As per the need of the Contract Act, the element or
object of the agreement must be legitimate.

Consequential or Remote/Indirect Losses Coverage Under Indemnity:

A demand for damages under the Contract Act only allows looking for compensation for any
loss or damages ‘which the parties knew; when they made the contract, to be likely to result
from rupture or breach of it’ at the time of formation of contract; which is usually termed as
the ‘Principle of Contemplation of Damages’ between the parties. Reasonable
foreseeability is deduced as the genuine possibility of happening of loss and is frequently
used for the test for damages or losses. Additionally, the damages claimed should be
moderate, and thus damages may not be tenable for loss of profit or opportunity costs.

But, an indemnity claim is not bounded by such limits. Section 124 of the Indian Contract
Act specifies that a request for damages or losses is accountable to the ordinary rules of
remoteness mentioned above, but a claim for indemnity is not subjected to same rules. So all
consequential, remote, indirect and third party losses can be claimed by the indemnified party
until and unless notably excluded from the indemnity clause.

Damages on Breach of Indemnity Contract:

I. Damages on breach of contract under section 74 of Indian contract Act 1872 are as
under:

(1) Compensatory Damages - money to reimburse for costs to compensate for your loss.

(2) Consequential and Incidental Damages - money for losses caused by the breach that
were foreseeable. Foreseeable damages means that each side reasonably knew that, at the
time of the contract, there would be potential losses if there was a breach.

(3) Attorney fees and Costs - only recoverable if expressly provided for in the contract.

(4) Liquidated Damages - these are damages specified in the contract that would be payable
if there is a fraud.

(5) Specific Performance - a court order requiring performance exactly as specified in the
contract. This remedy is rare, except in real estate transactions and other unique property,
as the courts do not want to get involved with monitoring performance.
(6) Punitive Damages - this is money given to punish a person who acted in an offensive and
egregious manner in an effort to deter the person and others from repeated occurrences of
the wrongdoing. You generally cannot collect punitive damages in contract cases.

(7) Rescission - the contract is cancelled and both sides are excused from further
performance
and any money advanced is returned.

(8) Reformation - the terms of the contract are changed to reflect what the parties actually
intended.

II. Damages on breach of contract of indemnity under section 125 of Indian contract Act
1872 is as under-

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 to
which the promise to indemnify applies;

(2) all costs which he may be compelled to pay in any 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
authorised him to bring or defend the suit;

(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 authorized him to compromise the suit.

Can a Party Invoke Indemnity on Demand?

In Mary Coleiro v The State of NSW and Others case,

Mary Coleiro sued The State of NSW in District Court proceedings for injuries she alleged to

have sustained as a result of an incident which occurred on 5 September 2000.Ms Coleiro

was a cleaner employed by Hydaree Pty Limited, a wholly owned subsidiary of Tempo

Services Limited (“TSL”). TSL entered into a contract for the provision of cleaning services

of public schools with the State Contracts Control Board (on behalf of the State of NSW

Department of Education). Whilst on the school premises, the plaintiff alleged to have tripped

and fallen on a raised section of concrete. She was not performing cleaning duties at the time,

but was on her way to do so. The State of NSW (“The State”) filed a cross-claim against

TSL, alleging that it was obliged to indemnify it under the terms of a service contract. Service

providers can take some comfort from the case of Coleiro which supports the view that a

temporal connection between the performance of the service and the loss sustained is

insufficient to invoke an indemnity clause.

In Tanksley v. Gulf Oil Corp. this court held that an oil company cannot invoke an

indemnification agreement with a contractor after settling an injured worker's claims because,

by settling, the oil company foreclosed its opportunity to have a court determine that it was

free from fault.

From the above case decisions, it can be inferred that indemnity can be invoked on

demand.
Legislative and judicial enactments of contract of indemnity under Indian

law

In India, a contract of indemnity started for the situation Osman Jamal and Sons Ltd v/s
Gopal Purshottam in which the offended party is a partnership that goes about as a
commission specialist for the respondent. The litigant firm was occupied with purchasing and
selling Hessian and Gummies, and the offending party firm had consented to repay the
respondent firm in case of a misfortune.

The offended party organization bought Hessian from Maliram Ramjets, yet the litigant
organization can’t pay and get the Hessian. Thus, Maliram Ramjets offered a similar item to
others at a lower cost. Maliram Ramjets sued the offended party for the misfortune, however,
the offended party was currently slowing down and requested that the litigant remunerate
them. However, the defendant declined to pay the damages, claiming that he was unable to do
so because of the complainant.

HELD- The defendant is liable to indemnify the complainant, according to the court, because
he agreed to do so.

Rights incurred by an indemnity holder

Section 125 of the Act describes the right of an indemnity holder:

• Any fee he was forced to pay in a matter or a suit to which the indemnifier’s
guarantee extends will be recoverable by the indemnity holder. For example, A
and B will agree that if C sues B in a specific matter, A will indemnify B. For
example, A and B will agree that if C sues B in a specific matter, A will indemnify
B.
• C has now filed a lawsuit against B, and B has been forced to make a settlement.
According to the contract, A would be responsible for all payments made by B to
C in connection with that matter.
• Any costs that the indemnity holder may have to pay to a third party are also
recoverable. However, the indemnity holder should have behaved prudently and in
accordance with the indemnifier’s instructions.
 • Any amounts charged under any suit or compromise, as long as it was not against
the indemnifier’s orders, are also recoverable by the indemnity holder.

Rights of an indemnifier

Despite the fact that the Act mentions the indemnity-privileges, the Indian Contract Act of
1872 excluded indemnifier rights.

In Jaswant Singh v. the State, it was concluded that the reimburse advantages are like those of
a guarantee under Section 141, where the person who indemnifies gains the advantage of all
protections held by the loan boss against the vital borrower, regardless of whether the
foremost account holder was worried about them.

On the off chance that an individual chooses to reimburse, he will be named as having
prevailed to the entirety of the structures and means which the individual who was initially
reimbursed may have ensured himself against any misfortune or harms; or haggled for pay
for his misfortune or harms.

When the indemnifier pays for the misfortunes or harms, he at that point moves into the shoes
of the reimburse, giving him the entirety of the advantages that the first indemnifier needed to
shield himself from misfortune or mischief.

Conclusion

In an indemnity deal, one party is responsible for any harm or loss incurred by the other party
as a result of the promisor’s or other party’s actions. A simple indemnity provision in a
contract does not necessarily resolve liability issues because the law discourages people from
attempting to transfer their own liability onto others or attempting to escape liability. Liability
problems will never be solved by a simple indemnity clause. The law is not on the side of
those who wish to avoid liability or seek a waiver of responsibility for their conduct. The
fundamental reason is that a careless party should not be able to completely shift all claims
and damages made against him to another, non-negligent party.