THE INDIAN CONTRACT ACT, 1872

“The Indian Contract Act, 1872” is the key Act that regulates the legislation referring to contracts in India. It determines the circumstances by which the guarantees made by the events to a contract shall be legally binding or not. The Act as enacted initially had 266 Sections.

INDEMNITY IN THE INDIAN CONTRACT ACT, 1872

The time period “indemnity” actually means “security against the losses”. In the widest sense, indemnity primarily means to recompense or compensate for any loss or legal responsibility which an individual has incurred whereas fulfilling the obligation as per the necessities of an settlement, or in any other case. In common, an indemnity is a contractual obligation between events, the place one occasion to the contract agrees to avoid wasting, i.e., compensate and/ or pay for losses or damages or liabilities incurred by one other occasion, induced to him by the conduct of the promisor or some other individual. There are two events in an Indemnity Contract:

• ‘Indemnifier’ is the occasion/ one who guarantees to make good the loss incurred, whereas
• ‘Indemnified’ or ‘Indemnity holder’ is the occasion/ individual to whom the promise of indemnity is made. It is that this occasion’s loss/ legal responsibility that’s to be made good.

In India, it’s the Indian Contract Act, 1872[1] (“Contract Act”) that governs and lays down the Contract of Indemnity. (*124*) Section 124 of the Indian Contract Act, 1872 defines a “Contract of Indemnity”, Section 125 of the Act lays down the rights of an indemnified occasion.

ESSENTIALS REQUIRED FOR A CONTRACT OF INDEMNITY/ FEATURES OF A CONTRACT OF INDEMNITY

1. There should have been a loss that has occurred to a selected occasion to the contract, i.e., the indemnity holder.
2. The loss should have been induced both by the promisor or by some other individual.
3. There have to be two events to the Contract of Indemnity – the Indemnifier, and the Indemnity holder.
4. The Contract of Indemnity, like some other contract, should fulfill and comprise all the essential necessities of a legitimate contract as laid down in Section 10 of the Indian Contract Act, 1872. Section 10 of the Indian Contract Act, 1872 lays down the basis for the understanding of what type of agreements will be thought-about as contracts. In order to make the settlement “legally binding” and “enforceable by law”, components reminiscent of free consent, competency of events, lawful consideration, lawful object, and not expressly declared to be void by legislation are vital.
5. The Contract of Indemnity could also be categorical (i.e., made by phrases spoken or written) or implied (i.e., inferred from the conduct of the events or conditions surrounding the particular case) as per the settlement between the two events.
6. Contingent contracts are principally the type of contracts the place the promisor performs his obligation solely when specific situations are fulfilled. The Contract of Indemnity is one such instance of a contingent contract.
7. The promise should have suffered precise loss based on no matter phrases and situations are current in the contract. The indemnifier is thereby liable and makes good solely these losses.

DIFFERENCE BETWEEN POSITION OF INDEMNITY LAW IN ENGLISH COMMON LAW V INDIAN LAW

(*125*) the English Common Law system, the phrase “indemnity” occupies a a lot wider and bigger scope than that in the Indian Law. In the English Law system, the losses incurred by the indemnity holder contains loss arising from any trigger in anyway, whereas in case of Indian Law, it’s a a lot narrower scope. The definition offered by Section 124 of the Indian Contract Act confines itself to solely these losses induced resulting from the act of the promisor or resulting from the act of some other individual. Losses arising from a number of accidents reminiscent of fireplace, perils of the sea, and many others. will not be included below the purview of the Indemnity Law below the Indian Contract Act, 1872. The losses are restricted to the ones brought on by some human company solely.

SECTION 124 OF THE INDIAN CONTRACT ACT, 1872[2]

The definition of a contract of indemnity as laid down in Section 124 is – “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, is called a contract of indemnity.”

The Section 124 primarily defines what a Contract of Indemnity is. It states that there have to be a proper promise made by the indemnifier to the indemnity holder the place he guarantees to make good the loss that has been incurred by the indemnity holder. This loss should have been a consequence of the conduct of the promisor himself, or by the conduct of some other individual. By mentioning this explicitly, the Indian Contract Act, 1872 has restricted or confined itself to solely these losses occasioned resulting from the act of the promisor or resulting from the act of some other individual.

SECTION 125 OF THE INDIAN CONTRACT ACT, 1872[3]

The rights of the indemnified or indemnity holder when sued, as laid down in Section 125 — “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 could also be compelled to pay in any go well with in respect of any matter to which the promise to indemnify applies;

(2) all prices which he could also be compelled to pay in any such go well with if, in bringing or defending it, he didn’t contravene the orders of the promisor, and acted as it could have been prudent for him to behave in the absence of any contract of indemnity, or if the promisor licensed him to carry or defend the go well with;

(3) all sums which he could have paid below the phrases of any compromise of any such go well with, if the compromise was not opposite to the orders of the promisor, and was one which it could have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor licensed him to compromise the go well with.”

The Section 125 talks about the proper of an indemnity holder in case of a authorized go well with. The indemnity holder, i.e., the promisee in the contract of indemnity, can recuperate from the indemnifier, i.e., the promisor in the contract of indemnity :

1. All the damages which might be relevant to be paid with respect to the contract of indemnity.
2. All the incurred prices to be paid whereas bringing a lawsuit or throughout the course of of defending in that go well with.
3. All the sums that the promisor may need paid below the phrases of any compromise of any such go well with.

The rights of the indemnity holder as offered below Section 125 indicate that the promisee have to be damnified or should have incurred losses earlier than they’ll declare to be indemnified. It signifies that the indemnity holder is eligible to be compensated by the indemnifier solely when the indemnity holder has suffered any loss or has labored as per directions of the indemnifier, or has incurred any prices throughout lawsuit proceedings, or has paid any quantity of compromise throughout the go well with. Only after fulfilling all these essential situations, the indemnity holder is entitled to obtain compensation from the indemnifier.

PROBLEMS/ SHORTCOMINGS/ ISSUES IN THE INDEMNITY LAW PROVIDED UNDER THE INDIAN CONTRACT ACT, 1872

It is shocking to look at that ‘contract of indemnity’, an important and usually invoked instrument in mercantile fraternity, is roofed solely in two sections below the Indian Contract Act 1872, i.e., in solely Section 124 and Section 125 of the Indian Contract Act, 1872.

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There are some vital points which aren’t particularly addressed in the statutory framework below the Indian Contract Act, 1872, i.e., in the two sections talked about above. In addition to that, judicial interpretation and additional evolution of the legislation of indemnity give us an impression of little departure from the statutory language utilized in these two sections.

Some of these issues/ shortcomings/ points current in the current Indemnity Law are:

1. When analyzing the Section 124, the phrase “loss” will be seen as a key aspect in the Contract of Indemnity. There should have been a loss that has occurred to a selected occasion to the contract, i.e., the indemnity holder. This loss should have been induced both by the promisor or by some other individual. The English legislation definition of a contract of indemnity is that – “it is a promise to save a person harmless from the consequences of an act”. Thus, it contains inside its ambit the losses induced not merely by human company but additionally these brought on by accident or fireplace or different pure calamities.” On the different hand, the definition offered by Section 124 of the Indian Contract Act confines itself to solely these losses induced resulting from the act of the promisor or resulting from the act of some other individual. Losses arising from a number of accidents reminiscent of fireplace, perils of the sea, and many others. will not be included below the purview of the Indemnity Law below the Indian Contract Act, 1872. The losses are restricted to the ones brought on by some human company solely, and doesn’t cowl a promise to compensate for loss not arising resulting from human company [Gajanan Moreswar vs. Moreswar Madan[4]].

This is one of the the reason why the English Law is taken into account to have a a lot wider scope in terms of the Law of Indemnity. Hence, the Section 124 must be amended in order to incorporate the differing kinds of losses below it, and not simply the ones arising resulting from human company, as losses are unsure and can current themselves in any type.

• Another downside arising resulting from the very restricted and slender scope of Section 124 is {that a} contract of insurance coverage is to not be included below the ambit of the Indemnity Laws in India. This is as a result of insurance coverage contracts take care of losses brought on by accidents. Accidents will not be acknowledged with respect to losses in the Section.Hence, there have to be amendments made with a purpose to accommodate contracts of insurance coverage as nicely.

• Section 125 clearly states the rights of the indemnity holder when he’s sued. However, neither Section 124, nor Section 125 make provisions for the rights of the indemnity holder when he isn’t sued. It is imprecise and utterly depending on the particular contract in query, and steps have to be taken with a purpose to keep away from this.

• It will be simply famous from each Sections 124 and 125 of the Indian Contract Act, 1872 that there isn’t a point out of the rights of the indemnifier in any respect. This comes as a distinction when in comparison with Section 125, as this part lays down the rights of the indemnity holder when sued. Additionally, in Section 125, the phrase “entitled” is used, which signifies that indemnity holder has rights that can profit him. There must be an affordable safety laid down even for the indemnifier in the Act, and not just for the indemnified.

• It is understood {that a} Contract of Indemnity will be implied or categorical. But with respect to the approach Section 124 is codified, the statutory definition doesn’t allow the Contract of Indemnity to be implied. The phrase “promised” is utilized in the definition. This promise will be oral or written, however what the definition primarily means is that somebody should formally come and make a proposal, and lay down the phrases and situations. Express contracts are these which might be made by phrases, spoken or written, and therefore the definition solely caters to those. On the different hand, the contract of indemnity being implied is roofed solely via judicial interpretations and previous case legal guidelines. Hence, there may be absolute want for amendments to be made with a purpose to accommodate implied contracts in the Section as nicely.

• To add on to the different points, the Law Commission of India, in its Thirteenth Report, 1958, had additionally addressed the matter of vagueness and the narrowness of the scope of the exisiting Indemnity Laws in India. The Law Commission had proposed the inclusion of a brand new Section 125 A , after the Section 125 of the Indian Contact Act, 1872. However, that is nonetheless but to bear profitable implementation in the nation.

• Last however not the least, it may be noticed that the clauses of Section 125 have superfluous or surplus utilization of complicated phrases. There is scope for them to be shortened and defined in easier phrases.

CONCLUSION

In the case of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, it was held by Justice Chagla of the Bombay High Court that “Section 124 and 125 of the Indian Contract Act, 1872 are not exhaustive of the law of indemnity and the courts here would apply the same equitable principles that the courts in England do.” Here we see a transparent intent of the judiciary to present a broad studying to the legislation of indemnity.[5]

Even although the Law Commission of India, in its Thirteenth Report, 1958, has addressed the matter of vagueness and the narrowness of the scope of the exisiting Indemnity Laws in India, there was no implementation or modification to this point. The contract of indemnity is essential in the Law of Contracts in India, and the indisputable fact that there are solely two Sections offered for it’s shocking and disappointing. Hence, the lawmakers should look into these points, with a purpose to facilitate a extra complete framework in terms of indemnity in India.

Author :   Manya Manohar, in case of any queries please contact/write again to us through electronic mail to chhavi@khuranaandkhurana.com or at IIPRD

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[1] Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872 (India).

[2] Indian Contract Act, 1872, § 124, No. 9, Acts of Parliament, 1872 (India).

[3] Indian Contract Act, 1872, § 125, No. 9, Acts of Parliament, 1872 (India).

[4] Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri, (1942) 44 BOMLR 703

[5] Sara Jain, Through The Looking Glass: A Narrow View of the Indian Law of Indemnity, Indian Journal of Law and Legal Research, July 23, 2021