Yash Bhardwaj

Intern (Next Radio Ltd.)

21/7/2023

Report Title: Indemnity in India: Protecting Rights and Managing Risks

Introduction

The word “indemnity” comes from the Latin word “indemnis” which stands for ‘free from a loss. 1 A
contract of indemnity is a bipartite contract where one party promises to save another from loss incurred
and would lead the other party harmless. The word indemnity means to render someone undamaged. It
fundamentally shifts the liabilities and burden from one party to another for the loss that is ancillary to the
specified contract. So, the party that gets the protection is called indemnity holder or the indemnified and
the party that saves from such loss is called indemnifier in these contracts. Risk allocation and mitigation
is a crucial aspect of contract drafting and negotiation. The most significant tools for risk allocation are
representation and warranties, positive and negative covenants, conditions precedent and subsequent, and
indemnity. Out of all these tools, indemnity is a risk allocation clause and hence, most intensely
negotiated between the parties.2

Generally, such contracts are not used separately but are combined in a clause with other instruments like
guarantees in sale purchase of goods agreements and bank and other financial transactional contracts. The
Indian law defines the contract of indemnity, its nature and the rights of the indemnity holder in Section
124 and 125 of Indian Contract Act respectively. 3 Provisions of Indian Contract Act dealing with the
Indemnity are not exhaustive on the law of Indemnity and hence the same equitable principles as courts in
England too.

UNEQUITABLE ENFORCEMENT OF INDEMNITY IN INDIAN COURTS

Indemnity in India suffers from the lack of equitable enforcement. The Supreme Court has held that the
cause of action to enforce indemnity only arises when the promisee is damnified. 4 The loss suffered must
be proved to claim recovery.5 This stance on indemnity is unequitable because in many cases indemnity is
1
Juan Pablo Santopinto, ‘Knock-for-Knock Indemnities and their Application in Oil and Gas Contracts in Argentina’
(2014) 7(28) <https://www.iicj.net/> accessed 04 October, 2021
2
James Wendell May, 'The Moroccan Souk and Your Commercial Contract Headaches: How Haggling for Trinkets
Relates to Limitations of Liability, Insurance, and Indemnity Clauses' (2016) 2016 Bus L Today 1 accessed 2 June
2020
3
Indian Contract Act, 1872, s. 124, s. 125
4
State Bank of Saurashtra vs. Ashit Shipping Services (P.) Ltd. and Ors. (2002) 4 SCC 736
5
Lala Shanti Swarup vs Munshi Singh & Ors (1967) AIR 1315
incorporated to provide the indemnified party with a recourse to save itself from incurring losses which
are incurable. For example, loss due to seizure of assets and property, closing of business, losing market
share etc. In such circumstances the requirement to suffer loss leaves the indemnity-holder in a
detrimental position even after being indemnified because the loss becomes irreparable. Hence, the
conceptual idea of indemnity of restoring to the position when no harm had occurred becomes futile.
Furthermore, identifying the crystallization point of accrued loss into actual loss can also be problematic
in many circumstances.

Though, some High Courts have held that section 124 and 125 are not exhaustive and have accepted
cause of action for enforcing indemnity on certainty of incurring losses, 6 the Supreme Court has not
departed from its stance of claiming indemnity only on evidence of loss suffered since 2002. 7 It also
eliminated the idea of ‘hold harmless’ from indemnity and stated that indemnification shall only occur to
the extent of loss suffered.

SOME COMMON INDEMNITY ISSUES IN INDIA

Indemnity Issues in India Description

Breach of Contract Indemnification for losses due to breach of agreements.
Intellectual Property Infringement Compensation for infringement of IP rights.
Misrepresentation Indemnity for losses resulting from false information.
Third-Party Claims Indemnifying against claims by non-contracting
parties.
Product Liability Indemnification for damages caused by defective
products.
Non-Compliance with Laws Indemnity for losses due to non-compliance with
regulations.
Data Breaches Compensation for losses arising from data breaches

THEORETICAL AND PRACTICAL APPROACH TO INDEMNITY IN CONTRAST WITH

DAMAGES FOR BREACH OF CONTRACT

6
Jet Airways India Limited Versus Sahara Airlines Limited & Others Lnind 2011 BOM 249; Gajanan
Moreshwar vs. Moreshwar Madan AIR 1942 BOM 302; Osmal Jamal & Sons Ltd vs. Gopal Purushotham [1928]
ILR 56 CAL 262; In K Bhattacharjee vs. Nomo Kumar 1899 26 CAL 241; Shiam Lal vs. Abdul Salal 1931 ALL
754; Khetarpal Amarnath v. Madhukar Pictures, AIR 1956 Bom 106
7
State Bank of Saurashtra vs. Ashit Shipping Services (P.) Ltd. and Ors. (2002) 4 SCC 736
Theoretically, the scope of risk events and protection covered under indemnity is broader than breach of
contract.8 Under breach of contract, only the party liable for the damage is liable to compensate, however
indemnity can also cover for losses caused by third parties. Ideally, causality, foreseeability and closeness
of the risk event with the incurred losses can be done away with under Indemnity. 9 Moreover, indemnity
can also be linked to the breach of any contractual obligation, representations and conditions made by the
indemnifying party.10 Thus it attempts to save the party from the lengthy, cumbersome, and costly
litigation process involved in recovering damages for breach of contract.

However, practically, it is highly unlikely that the parties mutually agree on non-causal, unforeseeable, or
remote losses.11 Even if agreed upon, usually, the indemnifying party either abstains from replying to an
indemnity notice or does not agree to indemnify the promisee. This is because conditions of enforcing
indemnity (e.g., Misrepresentations or breach of contractual obligations) are mostly ‘legal conclusions’
that involves defenses and evidence. As a result, the matter always reaches the courts, where the trend is
of an inequitable enforcement approach as reflected in the Bank of Saurashtra Case. (Court held that in
the absence of any fraud leave to defend should not be granted in cases of unconditional bank
guarantees)12 Moreover, section 124 identifies indemnity for losses incurred only from the conduct of the
promisor or a third party.13

As a result, a pragmatic examination of India's existing legal position on indemnity reveals that the
implications of enforcing indemnity under section 124 and a violation of contract under sections 73 and
74 are practically the same. The distinctions between the two are more subtle from an intellectual
standpoint, rather than a practical standpoint. Nonetheless, unlike breach of contract, the fact that
indemnification can protect an indemnity-holder from the actions of third parties and limit the
indemnifier's liability remains.

USE OF INDEMNITY IN COMMERCIAL CONTRACTS

A contracting party cannot control all aspects of contract performance. Most business contracts entail
some element of risk, and indemnification is a critical risk allocation tool. Regardless of the complexities
involved in the practical legal position of indemnity, from a commercial logic, indemnity provides a
8
Hadley v Baxendale (1854) 2 CLR 517; Wayne Courtney, ‘INDEMNITIES AND THE INDIAN CONTRACT ACT 1872’
(2015) 27(1) NLSI REV. accessed 29 May 2020
9
Wayne Courtney, Contractual Indemnities (Chapter 4 ’Scope of Indemnity’, Hart Publishing 2014)
10
Wayne Courtney, Contractual Indemnities (Chapter 10 ‘Breach of Contract by the Indemnifier’, Hart Publishing
2014);
11
James Wendell May, 'The Moroccan Souk and Your Commercial Contract Headaches: How Haggling for Trinkets
Relates to Limitations of Liability, Insurance, and Indemnity Clauses' (2016) 2016 Bus L Today 1 accessed 5 July,
2023
12
Supra 4
13
The Indian Contract Act 1872, s 124
considerable sense of security to the parties, particularly in cases of breach of contractual obligations and
high incurable risks. For instance, an investor in the course of due diligence discovers that a company has
not attained a very crucial license to conduct its business, or has not complied with a significant legal
compliance or has a financially risky litigation going on but because of the foreseeable flourishing profits
the investor wants to invest in the company. In such a scenario, indemnity gives reasonable confidence to
the investor to proceed with the investment. 14 Therefore, it is reasonable to have an indemnity clause in
cases of commercial contracts. However, the parties must be aware of the actual consequences and should
not place unrealistic expectations on the theoretical benefits of such a clause.

KEY POINTS TO CONSIDER FROM THE PERSPECTIVE OF AN INDEMNIFYING PARTY

The Indian Contract Act, 1872 does not specifically grant to an indemnifying party. The Act primarily
deals with the principles of Contract law in India and lays down the rules governing contracts such as
indemnity. The rights and obligations of the indemnifier are established through the terms of the contract
itself. The indemnity clause in the contract will specify the scope and extent of the indemnifier's liability
and the circumstances under which the indemnity will be provided. If there is a breach of the indemnity
contract, the indemnitee may have rights to claim compensation as per the agreed terms.

The concept of indemnity entails a wide scope of protection to the indemnity-holder. 15 It can also account
for indemnification of unforeseeable and remote losses. 16 Hence, in case there is lack of clarity on what
the triggering event is or if the scope of the triggering event is extremely wide, or, if the indemnity clause
does not limit to definite types and amount of loss, then the liability of the indemnifier extends to pay for
almost any or all losses incurred by the indemnity holder. 17 An indemnity-holder can also take indemnity
for granted and not be cautious towards the already known risks or not mitigate reasonably avoidable
losses.

Furthermore, if the indemnification clause does not limit its enforcement to a time period following the
occurrence of the risk event, the indemnifier may be obligated to indemnify at any time after such
occurrence and maybe even without knowledge of such occurrence. Likewise, if the contract of indemnity
extends to the conduct of third parties, then in case the third parties are not clearly specified, the liability

14
Mary K. Newman, Dinsmore & Shohl LLP, with Practical law Commercial Transactions ‘Indemnification Clauses in
Commercial Contracts (OH)’ (2018).
15
Wayne Courtney, ‘INDEMNITIES AND THE INDIAN CONTRACT ACT 1872’ (2015) 27(1) NLSI REV.
16
Wayne Courtney, Contractual Indemnities (Hart Publishing 2014
17
Elliott, William F, ‘Commentaries on the Law of Contracts: Being a Consideration of the Nature and General
Principles of the Law of Contracts and Their Application in Various Special Relations’ (Indianapolis, The Bobbs
Merrill Co, 1913)
of an indemnifier can extend to cover for losses incurred by the conduct of parties which he did not even
intend to indemnify for. As a result, indemnity amount, extent of losses and risk occurrences, parties, time
limits, notice requirements, and reasonable duties of the indemnity-holder are some essential aspects of
consideration from an indemnifier’s perspective, to avoid an unlimited liability. The usage of words must
be precise and clear with no scope of extending the liability of the indemnifier.

We can say the purpose of indemnity is to avoid the lengthy and time-consuming litigation process and to
have an efficient and effective remedy against certain risk events that the indemnified party does not want
to be burdened with while performing the transaction. Therefore, drafting an unambiguous and equitable
indemnity clause builds a possibility of an effective dispute prevention mechanism between the
indemnified and the indemnifying party.

DRAFTING AN INDEMNITY CLAUSE IN INVESTMENT AGREEMENTS

What is the Burden of Indemnity?

An indemnity clause in an investment agreement is usually linked to a breach of any representation,

condition, covenant, or any contractual obligation by the indemnifying party. In case through due
diligence, the investor finds out that the transaction involves a high risk, that risk is specifically made a
triggering event in the indemnity clause. For instance, a highly detrimental pending litigation should be
specifically added as triggering event for invoking the indemnity clause. Additionally, a tax indemnity is
commonly incorporated in investment agreements. It imposes a liability on the Target Company to
indemnify the investor for all losses it might have to incur because of paying taxes, which were payable
by the Target Company before the investor subscribed to the shares of the company.

Concerns of the Indemnifying Party (i.e., Target Company)

It is obvious that indemnification places a significant duty on the promisor to indemnify the promisee in
the case of a risk occurrence. As a result, while the indemnity-holder will always insist on broadening the
scope of an indemnity clause by making it inclusive, the indemnifier must guarantee that the indemnity
clause is inclusive. The indemnity clause is specific, unambiguous, and comprehensive.

(i) Clear and Limited Scope of the Clause

In a Share Subscription Agreement, the target company should aim towards agreeing upon an
unambiguous and limited liability so that the indemnity provided by it is not taken for granted by the
investor. The amount of indemnity should be fixed and limited to cover foreseeable losses incurred by
the direct causation of the risk events specifically agreed to be indemnified for. Qualifiers like
‘reasonable’, ‘foreseeable’, ‘directly incurred’ losses should be explicitly used to limit the liability of the
target company. Phrases like ‘any loss directly or indirectly arising out of/ in connection with’, should be
avoided to make the clause unambiguous.

An indemnity clause involving indemnification for the conduct of a third party, (e.g., a subsidiary, agent,
sub-contractors etc.) should specify such third parties along with the triggering events of these third
parties for which indemnity can be claimed. All necessary information regarding the claims against those
third parties shall be provided to the seller while invoking indemnity.18

The target Company should negotiate for the payment of only actual losses suffered or only on a definite
certainty of the occurrence of risk events. The indemnifier shall specify that the indemnity clause cannot
be invoked in case of a contingent liability and it shall only be applicable when the contingent liability
becomes due and payable. Any loss which the indemnifier has paid for but does not occur due to change
of circumstances, should be reimbursed to the target company.19

(ii) Conditional Enforcement of Indemnity

It is a common practice in Share Subscription Agreements to have a survival clause for indemnity (usually
6 years) which prohibits the enforceability of the indemnity clause after a particular time period. There
can also be a time limit on the applicability of the indemnity clause from the occurrence of that risk
event. The Target Company must always be notified within a reasonable time on the occurrence of the
triggering events. Although in Ranu Mallick & Ors. v. Gouranga Chandra Mallick & Ors. 20 the Calcutta
High Court held that an indemnity clause in a share subscription agreement can survive even after the
termination of the agreement. The court emphasized that the intention of the parties, as expressed in
the agreement, is crucial in determining the scope and duration of the indemnity clause.

21
In another case, Pinnacle Industries Ltd. v. Union Bank of India & Anr. (2019) the National Company
Law Appellate Tribunal (NCLAT) held that indemnity provisions in a share subscription agreement can
extend to cover future claims, liabilities, and disputes. The NCLAT emphasized the need for specific and
unambiguous language in the indemnity clause to determine its scope and applicability.

JUDICIAL PRONOUNCEMENT OF CONTRACT OF INDEMNITY

18
Att. Ecem Cetinyılmaz,’ Indemnity Clauses Under Share Purchase Agreements’ (2016) <
http://www.erdemerdem.av.tr/publications/law-journal/indemnity-clauses-under-share-purchase-agreements/>
19
Graham Turner and Tony Schweitzer and Annie Na, 'Tax Indemnity Clauses: Some Practical Considerations' (2001)
49 Can Tax J 1673 < https://heinonline.org/HOL/P?h=hein.journals/cdntj49&i=1785>
20
WPLRT/66/2023 [09.06.2023]
21
SCC Online ITAT 1209.
The contract of indemnity is wider in scope under English statute in comparison to India, as the English
law includes a promise of indemnity against all types of losses which arise from different causes such as
loss caused by fire, by accident along with loss caused by humans. But Indian law includes only those
losses which arise from human agency.22

 In India, the first case dealing with the contract of indemnity is Osman Jamal and Sons Ltd. v.
Gopal Purshotam23. In this case, the defendant and the plaintiff had entered into a contract in
which the plaintiff has to buy and sell the goods of the defendant upon which he gets the
commission and the defendant give assurance to the plaintiffs that they will indemnify it from all
the damages it suffers during the transaction. 24 However, when the goods were supplied, the
defendant refused to accept delivery of the same due to which the supplier had to resell the goods
at a price lower than the market price and ask the plaintiff to compensate him for the losses he has
suffered. The plaintiff has become bankrupt and sued the defendant for indemnity. But defendant
contended as the plaintiff had not paid any amount to the supplier, they were not entitled to claim
indemnity. Thus, the court held in favor of Plaintiff Company and observed that “Indemnity is not
necessarily given by repayment after payment. Indemnity requires that the party to be indemnified
shall never be call upon to pay”. And since the defendant has promised to indemnify him from
the losses, he has to pay for the loss.
 It also envisaged that indemnity can be ‘expressed or implied ‘. The instance of implied promise
has been better explained in the rulings of Privy Council in Secy of State for India in Council v.
Bank of India Ltd.25 In this case, the plaintiff (Gangabai) has the endorsement of a promissory
note for Rs. 5000 issued by the government. However, this promissory note was possessed by the
broker, which was given by the lady to him and forged the endorsement in his favor and then
gives it to the bank which accepted it in bona fide. The bank then applied to the Public Debt.
office to renew the promissory note in their name. The lady after being aware of fraud committed
by the broker sued him for the conversion of her property. The state was then had to compensate
the plaintiff who was the real owner and the court held that the state can recover the loss from the
bank as there was the implied promise of indemnity.26

CASE BRIEF OF LATEST JUDGEMENTS ON INDEMNITY

22
Gajanan Moreshwar Parelkar v. Moreshwar Mdan Mantri, AIR 1942 Bom 302
23
Osman Jamal & Sons Ltd. v. Gopal Purshotam, AIR 1929 Cal 208: 118 Ind Cas 882
24
Ibid
25
Privy Council in Secy of State for India in Council v. Bank of India Ltd., AIR 1938 PC 191
26
ibid
  Manmohan Nanda vs. United India Assurance Co. Ltd. and Ors. (2021)27

Name of the Parties: Appellant ' Manmohan Nanda v/s Respondent ' United Assurance Co. Ltd. And Ors.

Judges: Justice D.Y. Chandrachud and Justice B.V. Nagarathna.

Facts: The complainant Manmohan, had filed an appeal against the "National Consumer Disputes
Redressal Commission (NCDRC)" order, which had denied him to get indemnification for the medical
disbursements he had endured in San Fransisco, USA. Manmohan had obtained a foreign medical
insurance policy in order to attend his sister-in-law's wedding. He was only diagnosed for diabetes ' type
II (mellitus) when examined by the respondent, insurance company.

Manmohan fell ill on the day he reached USA and had to pay USD 2,29,719 for his recovery. The
appellant was not provided with the insurance, which was backed by NCDRC on the grounds of "non -
disclosure of material facts" as he had not mentioned about his issues regarding hyperlipidemia.
Manmohan was not pleased with the decision and thus filed an appeal in the Supreme Court.

Issues:

(i) Whether Manmohan had intentionally suppressed the material facts, which led to the respondent
having the authority to abolish the medical policy?
(ii) Whether the judgement passed by NCDRC was the right one?

Pleadings of Parties:

The appellant counsel pleaded that the abolishment of the policy on the grounds of non ' disclosure was
not the right option legally. The counsel mentioned that Manmohan was unaware of the fact that he was a
patient of hyperlipidemia, on the day he had submitted the required forms of the policy. The counsel
pressed on the point that the appellant is only obliged to disclose facts that he has the knowledge of,
which was not the case this time around. Another contention pointed out by this counsel was that the
policy form had no option to specify that appellant was a victim to that particular disease, and thus
persuaded that by no means the complainant could be denied indemnification as per the terms of the
signed medical insurance policy.

The respondent counsel on the other hand, were firm on their stand that the unforeseen attack at the
airport was down to the insured's history of hyperlipidemia. The respondents focused on the statement of
the doctor appointed for this case, who was confident that the complainant was taking the medication for
hyperlipidemia. The doctor's opinion helped the counsel stay close-grained on the violation committed by
27
Manmohan Nanda vs. United India Assurance Co. Ltd. and Ors. (06.12.2021 - SC): MANU/SC/1194/2021
the appellant on grounds of non ' disclosure of material facts, and thus the respondent was not entitled to
indemnify the insured anymore.

Ratio of Judges:

The judges provided that the material facts of each case would depend upon the unique circumstances.
Also, if a specific question is probed in the form, it is the duty of the insured to fill it up, and the duty of
the insurer to ensure that it has been filled up. The judges contended that any prudent insurer ought to
measure any probable danger the medical policy could come up with, and then accept the policy, which
requires proper structuring of the policy form.

Since the cardiac attack can arise due to the diabetes type ' II, the judges propounded that the insurance
policy was purchased in order to keep such illness at bay, and by the abrogation of the policy by the
respondent, the major purpose of purchasing the policy stands defeated. Thus, the cancellation of policy
on grounds of non ' disclosure is void, and the judges claimed that it was the duty of the respondents to
indemnify the complainant for the medical expenses incurred by the respondent, during his treatment in
USA.

Judgement:

The appeal of Manmohan was allowed. The judges gave the following orders:

(i) The insurer was ordered to indemnify the insured, with an interest of 6% per annum from the
date of the petition filed by the appellant before the NCDRC.
(ii) The insurer was also instructed to pay the respondent ₹ 1,00,000 as a compensation for the
litigation costs.

 Union of India and Another v. Millenium Delhi Broadcast LLP etc.28(2022)

Name of the Parties: Appellants ‘Union of India and anr. Vs. Respondent” Millenium Delhi Broadcast
LLP

Judge: L. Nageswara Rao, J.:

28
Union of India and Another v. Millenium Delhi Broadcast LLP etc., May 2, 2022 Civil Appeal Nos. 2332-2333 of
2008
Facts: In 1999, the Ministry of Information and Broadcasting, on behalf of the Government of India,
invited tenders for licensing private FM broadcasting services at 40 centers across India. The objective
was to open up FM broadcasting for entertainment, education, and information dissemination by
commercial broadcasters. The licensing process required a license fee to be paid every year by each
licensee, and failure to do so would result in forfeiture of the amount already deposited. The respondent,
Millenium Delhi Broadcast LLP, bid for allotment of a channel in Delhi and Chennai and was granted a
license to establish and operate FM Radio Broadcasting Stations within these cities on a non-exclusive
basis for a period of 10 years.

Issues: The main issues in this case were related to the invocation of a bank guarantee by the appellant
(Union of India and Another) due to the respondent's failure to operationalize the FM broadcasting
services within the specified timeframe. The respondent claimed that the conditions for invoking the bank
guarantee were not satisfied and sought relief from the court to prevent the encashment of the bank
guarantee.

Judgement: The Supreme Court, in its judgment delivered on May 2, 2022, upheld the decision of the
Telecom Disputes Settlement and Appellate Tribunal (TDSAT). The TDSAT had previously allowed the
respondent's petition and declared the invocation of the bank guarantee by the appellant as illegal. The
Court agreed with the TDSAT's interpretation that the conditions for invoking the bank guarantee were
not fulfilled by the appellant.

The Court observed that the license agreement between the parties specified that the license period would
be reckoned from the date of issuance of the Wireless Operational License (WOL) by the Wireless
Planning & Coordination Wing (WPC), Ministry of Communications. However, the WOL was never
issued by the WPC. The Court held that the Deemed Operational License, which the appellant claimed to
have issued, was not contemplated in the agreement. Therefore, since the conditions for invoking the bank
guarantee were not met, the Court upheld the TDSAT's decision to prevent the encashment of the bank
guarantee.

The Court also declined to entertain the respondent's request for a refund of the advance license fee, as it
was not argued before the TDSAT. In conclusion, the Supreme Court dismissed the appeals filed by the
appellant and upheld the TDSAT's judgment, allowing the respondent to retain the bank guarantee and
preventing its encashment.
  Sumitomo Heavy Industries Limited v. Oil and Natural Gas Corporation Limited.29

Name of the Parties: Appellant’ Sumitomo Heavy Industries Limited v. Respondent’ Oil and Natural Gas
Corporation Limited

Judges: R.M Lodha and D.B Bhosale, JJ

Facts: The arbitrators nominated by the parties could not give a consensual decision on the dispute
regarding tax liability. Therefore, the reference was entered before the Umpire. The Umpire gave his
award in favour of Sumitomo, direct- ing ONGC to pay Sumitomo a sum of Japanese Yen 129,764,463
together with inter- est at an annual rate of 4.50% from 15-5-1991 to the date of the award with costs and
other ancillary direction.

ONGC challenged the award under Section 30 of the Indian Arbitration Act, 1940, and the learned Single
Judge set aside the award passed by the Umpire, which gave rise to the present appeal.

Issues:

 Whether the Umpire's decision was bind- ing and final?

 Whether the learned Single Judge erred in setting aside the award passed by the Umpire?
 Whether the Umpire committed an error in arriving at the decision?
 Whether the learned Single Judge erred in respect of the applicability of section 44BB of the
Income Tax Act?

Arguments: Mr. Virendra V. Tulzapurkar, the learned senior counsel appearing for Sumitomo, argued that
the decision of the Umpire, whether right or wrong, could not be interfered with by the Court under
Section 30 of the Act of 1940. He further argued that the Court could not substitute its own view and set
aside the award as being contrary to its own view.

Mr. Milon K. Banerji, the learned senior counsel appearing for ONGC, argued that the learned Single
Judge did not commit any error in holding that there was no specific question of law referred as a
question of law to the arbitrators or the Umpire. He further argued that the Umpire was not justified in
holding ONGC liable for the amount paid by Sumitomo to its subcontractor-MII.

Decision: The Supreme Court held that the Umpire's decision was not binding and final as no specific
question of law was referred to the decision of arbitrators or the Umpire. The Court also held that the
learned Single Judge did not err in set- ting aside the award passed by the Umpire as there was total non-
29
2002 (2) BomCR 10, 2002 (3) MhLj 634
application of mind by the Umpire on the question of construction of clause 17.3 and that the construction
put by the learned Umpire on the terms of clause 17.3 of the agreement was impossible.

The Court further held that the Umpire com- mitted an error in arriving at the decision as the only
possible view on construction of all the clauses of the contract was that ONGC cannot be held liable
forreimbursement of the claim of tax liability made by Sumitomo's sub- contractor to Sumitomo. The
Court also held that the learned Single Judge did not err in respect of the applicability of section 44BB of
the Income Tax Act. Therefore, the appeal filed by Sumitomo was dismissed with no order as to costs