By Sumit Kumar Suman, CNLU
Indemnity can be treated as a sub-species of compensation and a Contract of Indemnity is a species of contracts. The obligation to indemnify is a voluntary obligation taken by the Indemnifier. The mere possibility of loss occurring will not make the indemnifier liable. The loss to the indemnity holder is essential, otherwise, the indemnifier cannot be held liable. Plus, the loss must arise due to the conduct of the indemnifier or any other person related. Strictly speaking this does not cover the acts of God; otherwise, various insurance transactions will be rendered untenable. Under Indian law, the definition of contract of indemnity is restricted to cases wherein the loss is caused by human agency. Losses from other causes are covered in other chapters of the Indian Contract Act, 1872.
Contract of Indemnity should have all the essentials of a valid contract like free consent, the legality of an object, etc. Consideration, in this case, can be anything done, or any promise made which serves as a motivation behind the contract. It is sufficient inducement that the person for whom the indemnifier has promised indemnity has received a benefit or that the indemnity holder has suffered an inconvenience of doing what the indemnifier asks. A contract of indemnity is one of the species of contracts.
So, we can say that if one person promises to save other from the loss caused to him by the conduct of the promisor himself or by the conduct of any other person subject to the condition if promisee (indemnity holder) work within the scope of the promisor. But in the case of Agency, Agency is a special type of contract. The concept of agency was developed as one man cannot possibly do every transaction himself. Hence, he should have the opportunity or facility to transact business through others like an agent. So, in agency one person employs another person to represent him or to act on his behalf, in dealing with the third person.
Concept of indemnity
The general meaning of indemnity is ‘protection against losses’ It means it is security or compensation against loss. So, we can say that if one person promises to save others from the loss caused to him by the promisor. It means “The obligation resting on one person to make good any loss or damage another has incurred or may incur by acting at his request or for his benefit, or a right which inures to a person who has discharged a duty which is owed to him but which, as between himself and another, should have been discharged by the other.”
The term indemnity defined under ‘section 124’ of the Indian Contract Act, 1872- “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”. So, we can see this provision incorporates a contract where one party promises to save the other from the loss which may be caused, either:
1. By the conduct of the promisor himself; and
2. By the conduct of any other person.[i]
1. There must be a contract between the parties;
2. There must be two parties;
3. There must be a promise to save the other party from some loss: This is the most important element of a contract of indemnity. One party must promise to save the other party from any loss which he may suffer;
4. The loss may be due to the conduct of the promisor himself or any other person.
We have to refer to Section 124 of the Contract Act; the indemnity may be for the loss which a party may sustain due to the conduct of the promisor himself or of any other person. As stated earlier, this provision restricts the scope of contracts of indemnity as it covers the loss caused by a human agency only, i.e., by the conduct of the promisor or of any other person. However, the general definition of the contract of indemnity is much wider and it also covers the losses caused by the acts other than human beings. In other words, the losses, arising from accidents or events which do not losses arising from accidental fire, perils of the seas, etc. Thus, the contracts of fire insurance and marine insurance also fall in the category of the contract of indemnity.[ii]
Rights of indemnity-holder:
The rights of the indemnity-holder are dependent on the terms of the contract of indemnity as a general rule. Section 125 of the Indian Contract Act, 1872 comes into play when the indemnity holder is sued i.e., under a specific situation.
The indemnity holder is entitled to recover the: if the act of indemnity holder is within the scope of indemnifier or according to him-
All the damages that he may have been compelled to pay in any suit in respect of any matter to which the promise of the indemnifier applies.
For example, if a contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a particular transaction? If C does institute legal proceeding against B in that matter and B pays damages to C, A will be liable to make good all the damages B had to pay in the case.
All the costs of suits that he may have had to pay to the third party provided he acted as a man of ordinary prudence and he did not act in contravention of the directions of the indemnifier or if he had acted under the authority of the indemnifier to contest such a suit.
In the case of Adamson vs. Jarvis[iii]1827] 4 BING 66, Adamson was entitled to recover the money he had to pay to the true owner of the cattle as well as any expenses incurred by him to get a legal counsel, etc. Actually, in this case, Adamson was an auctioneer who was given cattle by Jervis. Adamson followed the instruction of Jervis and sold the cattle. But, Jervis was not a real owner of that particular cattle. And thereafter the real owner filed a suit against Adamson.
Held– It was held that the defendant was liable for loss of plaintiff and compel to compensate him as per Section 125 of the 2nd rule.
All the sums that he may have paid under the terms of any compromise of any such suit provided such compromise is not contrary to the indemnifier’s orders and was a prudent one or if he acted under the authority of the indemnifier to compromise the suit.
Rights of indemnifier
The rights of the indemnifier have not been mentioned expressly anywhere in the Act. In Jaswant Singh vs. Section of State,[iv] it was decided that the rights of the indemnifier are similar to the rights of a surety under Section 141 where he becomes entitled to the benefit of all securities that the creditor has against the principal debtor whether he was aware of them or not.
Where a person agrees to indemnify, he will, upon such indemnification, be entitled to succeed to all the ways and means by which the person originally indemnified might have protected himself against loss or set up his compensation for the loss.
The principle of subrogation i.e., substitution is founded in equitable principles. Once the indemnifier pays for the loss or damage caused, he will step into the shoes of the indemnified. Thus, he will have all the rights with which the original indemnifier protected himself against loss or damage. The principle of subrogation is applicable due to both the ICA, 1872 itself and principles of equity.
Contract of Indemnity, when enforceable
In England, under common law, it was essential for an indemnity holder to first pay for the losses and then claim indemnity. With time, Court of Equity softened the law and in 1911 with the RE: RICHARDSON, EX PARTE THE GOVERNORS OF ST THOMAS HOSPITAL case, indemnity before payment by the indemnity holder was made the norm. Further in 1914, in the case of RE: LAW GUARANTEE & ACCIDENTAL case, it was stated that ‘to indemnify does not mean merely to reimburse with respect to the money paid but to save from loss with respect to liability for which indemnity has been given’. A Contract of indemnity would serve little purpose if the indemnity holder was made liable in the first instance.
In India, there is no specific provision which states when a contract of indemnity is enforceable. There have been confliction judicial decisions throughout. In Osmal Jamal & Sons Ltd vs. Gopal Purushotam,[v] was amongst the first Indian cases where the right to be indemnified before paying was recognised. But now, a consensus of sorts has been formed in favour of the opinion of Equity Courts. In K Bhattacharjee vs. Nomo Kumar[vi], Shiam Lal vs. Abdul Salal,[vii] and Gajanand Moreshwar,[viii]case, it has been decided that the indemnified may compel the indemnifier to place him in a position to meet liability that may be cast upon him without waiting until the promisee (indemnified) has actually discharged it.
Indemnity requires that the party to be indemnified shall never be called upon to pay. Thus, the liability of the indemnifier commences the moment the loss in form of liability to the indemnified becomes absolute.
Concept of Agency
The nature of agency –
Agency- A relationship that exists when one party represents another in the formation of legal relations;
Agent– a person who is authorized to act on behalf of another;
Principal– a person who has permitted another to act on her or his behalf.
Agency by agreement:
Agency normally involves the principal authorizing an agent to act on her behalf and the agent agreeing to do so in return for some fee;
Actual authority – the power of an agent that derives from either express or implied agreement;
Apparent authority – the power that an agent appears to have because of conduct or statements of the principal.
Agency by estoppels:
An agency relationship created when the principal acts such that third parties reasonably conclude that an agency relationship exists.
Agency by Ratification:
An agency relationship created when one party adopts a contract entered into on his or her behalf by another who at the time acted without authority.
Agent and principal defined
An “agent” is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the “principal” [section 182].
WHO MAY EMPLOY AN AGENT
Any person who is of the age of majority according to the law to which he is subject, and who is of sound mind, may employ an agent. [section 183]. – – Thus, any person competent to contract can appoint an agent.
WHO MAY BE AN AGENT
As between the principal and third persons any person may become an agent, but no person who is not of the age of majority and of sound mind can become an agent, so as to be responsible to his principal according to the provisions in that behalf herein contained. [section 184]. – – The significance is that a Principal can appoint a minor or person of unsound mind as an agent. In such a case, the Principal will be responsible to third parties. However, the agent, who is a minor or of unsound mind, cannot be responsible to the Principal. Thus, Principal will be liable to third parties for acts done by Agent, but the agent will not be responsible to the Principal for his (i.e. Agent’s) acts.
CONSIDERATION NOT NEC@ESSARY
No consideration is necessary to create an agency [Section 185]. Thus, payment of agency commission is not essential to hold the appointment of Agent as valid.
Duties of Agent
1. Must perform in accordance with the principal’s instructions, or failing instructions, then performance must meet the standards of the industry;
2. Fiduciary duty – a duty imposed on a person who has a special relationship of trust with another
Duties of Principal
1. pay the agent a fee or percentage for services rendered;
2. assist the agent in the manner described in the contract;
3. reimburse the agent for reasonable expenses; and
4. indemnify against losses incurred in carrying out the agency business.
Indemnity in agency
Section 222 talks about indemnity in the agency-
Agent to be indemnified against consequences of lawful acts- The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in the exercise of the authority Conferred upon him.
i) B, at Singapore, under instructions from A of Calcutta, contracts with C to deliver certain goods to him. A does not send the goods to B, and C sues B for breach of contract. B informs A of the suit, and A authorizes him to defend the suit. B defends the suit, and is compelled to pay damages and costs, and incurs expenses. A is liable to B for such damages, costs and expenses.
ii) B, a broker at Calcutta, by the orders of A, a merchant there, contracts with C for the purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil, and C sues B. B informs A, who repudiates the contract altogether. B defends, but unsuccessfully, and has to pay damages and costs and incurs expenses. A is liable to B for such damages, costs and expenses.
In the case of Adamson vs. Jarvis[ix]1827] 4 BING 66, Adamson was entitled to recover the money he had to pay to the true owner of the cattle as well as any expenses incurred by him to get a legal counsel, etc. Actually in this case Adamson was an auctioneer who was given cattle by Jervis. Adamson followed the instruction of Jervis and sold the cattle. But, Jervis was not a real owner of that particular cattle. And there after the real owner filed a suit against Adamson.
Held– It was held that the defendant was liable for loss of plaintiff and compel to compensate him.
After all, we have seen in this present project Simply put, indemnity requires that one party indemnify the other if certain expenses spoken of in the contract of indemnity are incurred by him. For example, car rental companies stipulate that the person hiring will be responsible for damage to the rental car caused by his reckless driving and will have to indemnify the rental company.
Most attention of late has been given to the development of indemnity contracts in the IT industry. There are some circumstances in which the existence of an indemnity would make a significant difference while in others, a contract of indemnity will have little or no role to play. Another new concept called ‘Indemnity Lottery’ can be found in the law of contract that implies that in civil cases of indemnity results can never be predicted. Brazilian jurist Leonardo Castro is credited for coining the term.
A simple indemnity clause is not the answer to liability issues. The law leans disfavouably towards for those who try to avoid liability or seek exemption from liability of their actions. The underlying reasoning is that a negligent party should not be able to completely shift all claims and damages made against it to another, non-negligent party. For example, many a times a ticket to an amusement park may claim that a person entering the park will not hold the management liable. Rarely will such a defense work in a court of law because it is not based on a contract. Most people hurt on an amusement park ride are able to sue for damages quite successfully.
Formatted on February 20th, 2019.
[i] Bangia R.K., ‘Contract-II’, Allahabad law agency; Allhabad: 2009, P.1.
[iii] (1827) 4 Bing 66: 5 LJ (os) (CP) 68: 29 RR 503.
[iv] 14 BOM 299.
[v]  ILR 56 CAL 262.
[vi] 1899 26 CAL 241.
[vii] 1931 ALL 754
[viii] A.I.R. 1942 Bom, 302, at 304.
[ix] (1827) 4 Bing 66: 5 LJ (os) (CP) 68: 29 RR 503.