Contract- II

Special Contracts

Loganayaki. P
 Contract of Indemnity
Indemnity – to make good the loss
Compensate for the losses
Promise to save a person without any harm
from the consequence of an act
Eg. ‘A’ contracts to indemnify ‘B’ against the
consequence of any proceedings
-which ‘C’ may take against ‘B’
- in respect of a certain sum of Rs.200/-
A promise to save another from the
consequences of a proceeding
Which may be commenced against him
It is a contract of Indemnity
The person who gives the indemnity –
Indemnifier
The person for whose protection it is
given – Indemnity holder / Indemnified
Adamson v Jarvis
The plaintiff an auctioneer sold certain cattle,
on the instruction of defendant
Turned out that livestock did not belong to
defendant
But to another person who made the
auctioneer liable
Auctioneer in his turn sued the defendant for
indemnity
For the loss he had suffered
By acting on defendant’s directions
The Court held that plaintiff acted on the
request of the defendant
Was entitled to assume that, if what he did
turned out to be wrongful
He would be indemnified by the Defendant
In English Law Indemnity means:
 a promise to save a person
From the consequences of an act
The promise may be express or implied
Based on the circumstances of the case.
English definition of indemnity is wide
enough
To include a promise of
indemnity against loss
From any cause whatsoever
Loss caused by any accident
Every contract of insurance – COI
Not life insurance
The scope of Indemnity is restricted
To cases where there is a promise to indemnify
against loss
Loss caused by the promisor himself or by any
other person
Definition excludes fire accidents or perils of
sea
Loss must be caused by human agency
All insurances other than life and personal
accident insurance – COI
The insurer’s promise to indemnify is absolute
Ifindemnity holder incurred liability
And if the liability was absolute
He would be entitled to call
Upon the indemnifier to save him
From that liability by paying it off
Section 124 in The Indian Contract Act, 1872

A contract by which one party promises to

save the other from the 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”
 Two parties involved:
Indemnifier : someone who protects against or
compensate for the loss or the
damage received
Indemnified/ Indemnity holder: The other
party who is compensated
against the loss suffered
 Extent of Liability
Sec. 125 Rights of Indemnity holder when
sued
The promisee in a COI , acting within scope of
his authority, is entitled to recover from the
promisor –
1. All damages – 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- any suit
 In bringing or defending it
 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 COI
 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
suit
If compromise was not contrary to the
orders of the promisor
Which would have been prudent for the
promisee
To make in the absence of any COI
Or if the promisor authorized him to
compromise the suit
 Mohit Kumar Saha v New India Insurance Co Ltd,
AIR 19 97
 A motor vehicle – truck was under indemnity insurance
 For Rs. 2,00,000/-
 It was stolen with no chances of recovery
 It was held that the proper amount of indemnity was fixed by
surveyor
 At Rs. 1,87,492/- , it was payable with 18 percent interest
for the delay period
 The settlement of claim at a lesser amount by insurance
authorities
- was arbitrary and unfair under Art. 14 of the
Indian Constitution
 Commencement of Liability
When does the indemnifier become liable to pay? or
When is the indemnity holder entitled to recover his
indemnity?

- the original English rule was that :

Indemnity was payable only after the indemnity
holder had suffered actual loss
By paying off the claim
The maxim was ‘ you must be damnified before you
can claim to be indemnified’
 Law now is different
 The process of transformation is well explained by
J.Chagla
 In Gajanan Moreshwar Parelkar v Moreshwar Madan
Mantri
 True under English Law – no action could be maintained

- until the actual loss had been incurred.

 It was soon realized that an indemnity might be worth
very little indeed
- if the indemnified could not enforce his indemnity
- till he had actually paid the loss.
Ifa suit was filed against him, he had to wait till the
judgment was pronounced.
And it was only after he had satisfied the
judgment
He could sue on his indemnity.
It is clear that this might throw an intolerable
burden upon the indemnity- holder.
He might not be in a position to satisfy the
judgment
And he could not avail himself of his
indemnity till he had done so.
The Court of Equity held that if his liability
has become absolute
Then he was entitled either to get the
indemnifier to pay off the claim
Or to pay in court sufficient money
Which would constitute a fund for aying off
the claim whenever it was made
This principle was expounded in Richardson
re,
Where Buckley LJ observed:
- Indemnity is not necessarily given by
repayment after payment
- Indemnity requires the party to be
indemnified shall never be called upon to
pay.
In Osman Jamal and Sons Ltd v Gopal purshttam:
The same principle was followed –
A company was acting as the commission agents of
the defendant firm
In that capacity bought certain goods for the
defendants
The defendants failed to take
The supplier became entitled to recover from the
company certain sum of money
- as damages for breach
The company went into liquidation before
paying the claim
It was held that the Official Liquidator could recover
the amount
Even though the company had not actually paid the
vendor
The Court directed, that the amount should be set
apart
So that it is used in full payment of the vendor
In respect of those contract the company had
incurred liability.
The High Courts of Allahabad, Madras and
Patna
- have all expressed their concurrence
in the principle
- that as soon as the liability of the
indemnity holder to pay becomes clear and
certain
- he should have the right to require the
indemnifier to put him in a position to meet the
claim.
 Specified time for Notice
An insured motor vehicle was lost by theft
The insurance policy required the assured to send
notice to the insurer
- immediately after theft or any other criminal
act
The assured made police report of the theft
immediately after the incident
But informed the insurer after one month.
The question was whether this could be
regarded as a notice given immediately?
The Court said that the ex pression immediately
implies notice to be given
- with promptitude avoiding unnecessary
delay.
Immediate police report showed the bona fides of
the assured in the matter.
Report to the insurer after one month could not be
regarded as unreasonable
Indemnification could not be denied.