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Law of Contract- When is the contract of indemnity enforceable

Law of Contracts

Contract of Indemnity

  • When Contract of indemnity is enforceable? or
  • When does the liability of indemnifier commence? Explain

According to section 124 of the Indian Contract Act, a contract of indemnity means,” 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.”

In a contract of indemnity, the person who promises to indemnify is known as “indemnifier” and the person in whose favour such a promise is made is called “indemnified” or “indemnity holder”.

Section 125 of the Act defines the rights of an indemnity holder which are as under, the promisee is entitled to recover from the promisor (in a contract of indemnity, acting within the scope of his authority):

  1. Right of recovering Damages: All the damages that he is compelled to pay in a suit in respect of any mater to which the promise of indemnity applies.
  2. Right of recovering Costs: All the costs that he is compelled to pay in such suit if in bringing or defending it he did not contravene the orders of the promisor and has acted as it would have been prudent for him to act in the absence of the contract of indemnity or if the promisor authorised him in bringing or defending the suit.
  3. Right of recovering sums: All the sums which he may have paid under the terms of a compromise in any such suite if the compromise was not contrary to the orders of the promisor and was one which would have been prudent for the promisee to make in the absence of the contract of indemnity.

Sections 124 and 125 of the Indian Contract Act are not exhaustive, as such they have not specified the time from which the liability of the indemnifier starts. There is a conflict of opinion among the various Courts.
Some have held that the liability of the indemnifier commences only after the indemnified had discharge his liability. However, others have held that the indemnity-holder is entitled to be indemnified even before he has actually discharged his liability.

In Osman Jamal & Sons v. Gopal [(1728) ILR 56 Cal 262], the plaintiff was held entitled to recover from the Indemnifier before actually discharging his liability.

Plaintiff company agreed to act as commission agent for the defendant firm for purchase and sale of “Hessian” and “Gunnies” and charge commission on all such purchases and the defendant firm agreed to indemnify the plaintiff against all losses in respect of such transactions. The plaintiff company purchased certain Hessian from one Maliram Ramjidas. The defendant firm failed to pay for or take delivery of the Hessian. Then Maliram Ramjidas resoled it at lesser price and claimed the difference as damages from the plaintiff company.

The plaintiff company went into liquidation and the liquidator filed a suit to recover the amount claimed by Maliram from the defendant firm under the indemnity. The defendant argued that in as much as the plaintiff had not yet paid any amount to Maliram in respect of their liability they were not entitled to maintain the suit under indemnity. It was held negative and decided in plaintiff’s favour with a direction that the amount when recovered from the defendant firm should be paid to Maliram Ramjidas. [Osman Jamal & Sons Ltd. v Gopal Purushotham]

The Court observed:
"Indemnity is not necessarily given by repayment after payment. Indemnity requires that the party to be indemnified shall never be called upon to pay."

Again, similar observations were made in the case of Gajanan Moreshwar v. Moreshwar Madan 1942 BOM 302
Plaintiff (P) got a plot of land on lease from Municipal Corporation of Mumbai .At the request of the defendant the plaintiff agreed to transfer the benefit of the agreement for lease with the Municipal Corporation to the defendant. Thereupon the defendant entered into possession of the plot of land and commenced to erect a building thereon.

The materials for the construction of the building were supplied by one Keshavdas Mohandas (K.P). The defendant incurred debt of Rs.5ooo from building material supplier (K.P), twice. On both the occasions, at the request of the defendant, plaintiff mortgaged part of the land to K.P, twice. The defendant gave in writing to the plaintiff stating that in case the building is transferred by the plaintiff to the defendant's name, the defendant would be responsible for discharging the mortgages on the same.

Accordingly, the plaintiff, at the request of the defendant, wrote a letter to the Bombay Municipality asking them to transfer the plot of land to the name of the defendant. The transfer was duly sanctioned. The plaintiff thereafter, on several occasions called upon the defendant to release the plaintiff of the liability under the mortgage and the deed of further charge from Keshavdas Mohandas, but the defendant failed to do so. The plaintiff alleged in the plaint that the defendant is liable to indemnify the plaintiff in respect of all liability under the mortgage and the amount thereof exceeded Rs. 5,000.

The court observed -Therefore, if the indemnified had incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and pay it off.

From the above discussion, it would be realized that the latter view viz. indemnified or indemnity holder can compel the indemnifier to indemnify before he has actually discharged his liability is more logical and correct. This is also the view of English Courts as observed by Kennedy L.J. in the case of Liverpool Mortgage Insurance Co.

"To indemnify does not merely mean to reimburse in respect of money paid, but to save from loss in respect of liability against which the indemnity has been given. If it be held that payment is a condition precedent to recovery, the contract may be of little value to the person to be indemnified, who may be unable to meet the claim in the first instance."

However, the view that the liability of indemnifier commences only when the indemnified has actually suffered loss was held in cases like – Shankar Nimbaji v Laxman Sapdu / Chand Bibi v Santosh Kumar Pal.

The plaintiff filed a suit to recover Rs. 5,000/- and interest from defendant by the sale of a mortgaged property and, in case of deficit, for a decree against the estate of defendant 2 which was in the hands of his sons, the defendant 2 died during the pendency of the suit. It was held that plaintiff cannot sue the defendant in anticipation that the proceeds realized by the sale of the mortgaged property would be insufficient and there would be some deficit. [Shankar Nimbaji v Laxman Sapdu]

The defendant’s father while purchasing certain property covenanted to pay off mortgage debt incurred by the plaintiff and also promised to indemnify him if they were made liable for the mortgage debt. The defendant’s father failed to pay off the mortgage debt and plaintiff filed an action to enforce the covenant. It was held as the plaintiff had not yet suffered any damage, the suit was premature so far as the cause of action on indemnity was concerned. [Chand Bibi v Santosh Kumar Pal]

Thus, based on court’s decisions, either views are possible, viz

Indemnifier is not liable until the indemnified has suffered the loss.

Indemnified can compel the indemnifier to make good his loss although he has not discharged his liability.

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