DEFINITION OF INDEMNITY IN ENGLISH LAW:

An illustration in English Law of the meaning and effect of a contract of indemnity is to be found in the facts of Adamson v. Jarvis:1 The plaintiff, an auctioneer, sold certain cattle on the instruction of the defendant. It subsequently turned out that the livestock did not belong to the defendant, but to another person, who made the auctioneer liable and the auctioneer in his turn sued the defendant for indemnity for the loss he had thus suffered by acting on defendants directions. The Court laid down that the plaintiff having 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. Thus indemnity in English law means a promise to save a person harmless from the consequences of an act. The promise may be express or it may be implied from the circumstances of the case. The English definition of indemnity is wide enough to include a promise of indemnity against loss arising from any cause whatsoever, e.g., loss caused by fire or by some other accident. Indeed, every contract of insurance, other than life assurance, is a contract of indemnity. According to Longmans Dictionary of Contemporary English, indemnity is protection against loss, especially in the form of a promise to pay, or payment for loss of money, goods, etc. It is a security against, or compensation for loss, etc.2 An expressed or implied contract to compensate an individual for loss or damage.

1 2

(1872) 4 Bing 66: 5 LJ (OS) (CP) 68: 29 RR 503. Chambers New English Dictionary.

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INDEMNITY AS PER INDIAN CONTRACT ACT, 1872:

Indemnity literally means, (1) payment for damage, a guarantee against losses. (2) a bond protecting the insured against losses caused by others failing to fulfill their obligations. (3) the granting of exemption from prosecution. (4) an option to buy or sell a specific quantity of stock at a stated price within a given period of time It is entered into with the object of protecting the promises against anticipated loss. The contingency upon which the whole contract of indemnity depends is the happening of loss. ILLUSTRATIONS: (b) A lost his share certificate. He applied to the company for the issue of a duplicate certificate. The Company asked A to furnish an indemnity bond in its favour to protect it against any claim that may be made by any person on the original certificate. A, accordingly executed the indemnity bond. It is a contract of indemnity between A and the Company. A is the indemnifier and the Company is the indemnified or indemnity-holder. A contract of indemnity is one whereby a person promises to save the other from loss caused to him by the conduct of the promisor himself or of any third person. For example, a shareholder executes an indemnity bond favouring the company thereby agreeing to indemnify the company for any loss caused as a consequence of his own act. The person who gives the indemnity is called the 'indemnifier' and the person for whose protection it is given is called the 'indemnityholder' or 'indemnified'. A contract of indemnity is restricted to cover the loss caused by the promisor himself or by a third person. The loss must be caused by some human agency. Loss arising from accidents like fire or perils of the sea are not covered by a contract of indemnity. As per Section 124 of the Indian Contract Act, the contract of indemnity is defined as, a contract by which one party promises to save other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. Well, this section is not so difficult to understand when you relate it to practical house. Suppose you are hired by a newspaper to write articles for them as a freelancer. Typically, your contract 2|Page

would have an indemnity clause so that if you write something against a very important person and that person files a suit against the newspaper for defamatory material, the newspaper can show the indemnity clause that you signed, protecting them from any form of loss caused due to your conduct. Then, the onus of fighting the defamation suit becomes your responsibility. Thats not all about the contract of indemnity as it is incorporated in most contracts, particularly in real estate purchase and bank loans. A person who promises to bear the loss is known as indemnifier and the person whose loss is covered is known as indemnified. These types of contracts are mainly formed between insurance companies and their customers. 124. "Contract of indemnity" defined A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a "contract of indemnity".

Illustration A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

The only illustration appended to the section says that if a person promises 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 is called the indemnifier and the person for whose protection it is given is called the indemnity-holder or indemnified. According to Section 124 of the Indian Contract Act, 1872, 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. This provision incorporates a contract where one party promises to save the other from loss which may be caused, either i. ii. By the conduct of the promisor himself, or By the conduct of any other person.

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This definition covers indemnity for loss caused by human agency only. It does not deal with those classes of cases where the indemnity arises from loss caused by events or accidents which do not or may not depend upon the conduct of the indemnifier or any other person, or y the reason of liability incurred by something done by the indemnified at the request of the indemnifier.3 The definition excludes from its purview cases of loss arising from accidents like fire or perils of the sea. Loss must be caused by some human agency. Contracts of insurance against loss are covered by the chapter on Contingent Contracts.

Gajanan Moreshwar v. Moreshwar Madan, A.I.R. 1942 Bom. 302, at p. 303

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INSURANCE CONTRACT IF CONTRACT OF INDEMNITY

India:
It has been noted above that Section 124 recognizes only such contract as a contract of indemnity where there is a promise to save another person from loss which may be caused by the conduct of the promisor himself or by conduct of any other person. It does not cover a promise to compensate for loss not arising due to human agency. Therefore, a contract of insurance is not covered by the definition of Section 124. Thus, if under a contract of insurance, an insurer promises to pay compensation in the event o loss by fire, such a contract does not come within the purview of Section 124. Such contracts are valid contracts, as being contingent contracts as defined in Section 31. In United India Insurance Company v. M/s. Aman Singh Munshilal,4 the cover note stipulated delivery to consigner. Moreover, on its way to the destination the goods were to be stored in a godown and thereafter to be carried o the destination. While the goods were in godown, the goods were destroyed by the fire. It was held that the goods were destroyed during transit, and the insurer was liable as per the insurance contract. Liability of insurer and breach of fidelity insurance contract Where insured bad of fertilizers stored in plaintiffs godown, were found missing due to act of embezzlement by the employees of plaintiff Company. Defendant Company had insured to indemnify plaintiff against any loss sustained by such act. The alleged breach of condition in the contract notice to be given to the defendant regarding discovery of such act could not be said to be fundamental breach. Held, that it would not permit the defendant to negate the legitimate claim of the plaintiff, hence decreeing suit of declaration and recovery of amount with interest by Trial Court was proper.5

4 5

A.I.R. 1994 P. & H. 206. Oriental Insurance Co. Ltd., Ahmedabad v. Gujarat State Warehousing Corpn., Ahmedabad, A.I.R. 2003 Guj. 159.

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England:
Under English law, the word indemnity carries a much wider meaning than given to it under the Indian Contract Act. It includes a contract to save the promise from a loss, whether it be caused by human agency or any other event like an accident and fire. Under the English law, a contract of insurance (other than life insurance) is contract of indemnity. Life insurance contract is, however, not a contract of indemnity, because in such a contract different considerations apply. A contract of life insurance, for instance may provide the payment of a certain sum of money either on the death of a person, or on the expiry of a stipulated period of time. In such a case, the question of amount of loss suffered by the assured, or indemnity for the same does not arise. Moreover, even if a certain sum is payable in the event of death, since, unlike property, the life of a person cannot be valued, the whole of the amount assured becomes payable. For that reason also, it is not a contract of indemnity. The Indian Contract Act does not specifically provide that there can be an implied contract of indemnity. The Privy Council has, however, recognized an implied contract of indemnity also. 6 The Law Commission of India in its Report7 has recommended the amendment of Section 124. According to its recommendation, the definition of the Contract of Indemnity in Section 124 be expanded to include cases of los caused by events which may or may not depend upon the conduct of any person. It should also provide clearly that the promise may also be implied.

6 7

Secretary of State v. The Bank of India Ltd., A.I.R. 1938 P.C. 191. 13th Report, 1958, on the Indian Contract Act, 1872.

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RIGHTS OF INDEMNITY HOLDER

In a suit against the indemnity holder, he may have been compelled to pay damages, and incurred costs, etc. in his own turn, he can bring an action against the promisor (indemnifier) to recover damages and costs, etc. paid by him, if the indemnifier has promised an indemnity in such a case. The provision in this regard is contained in Section 125, which reads as under:

125. Right of indemnity-holder when sued 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 may be 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 in any such suit, if in bringing of defending it, he 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 contract of indemnity, 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 such suit, if the compromise was not contract to the orders of the promisor, and was one which it would have been prudent for the promise to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit.

The indemnity-holder, acting within the scope of his authority, is entitled to recover the following amounts(1) All damages which he may be compelled to pay in any suit in respect of any matter to which the promise of indemnity applies;8 (2) All costs which he may be compelled to pay in such suits if, in bringing or defending it, he did not contravene the order of the promisor, and acted as it would have been prudent

Parker v Lewis, (1873) LR 8 Ch 1035;

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for him to act in the absence of any contract of indemnity, or, if the promisor authorised him to bring or defend the suit;9 (3) All sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promise to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit. A person who encashes an indemnity bond which is in nature of a bank guarantee can retain only that part of the amount of the bond which represents the damage or loss suffered by the bondholder as a result of the contracting partys breach. Anything more would be undeserved windfall for one party and penalty of the other.10 Where a motor vehicle (truck) was under indemnity insurance for Rs.200000 and it was stolen with no chances of recovery, it was held that the proper amount of indemnity was as fixed by the surveyor at Rs. 1,87,492 and that it was payable with 18% interest for the delay period. The settlement of claim at a lesser amount by insurance authorities was arbitrary and unfair under Article 14 of the Constitution.11

Bepin v Chunder Seekur Mookerjee, 1880 ILR 5 Cal 811; Cargill International SA v Bangladesh Sugar & Food Industries Corpn, (1996) 4 All ER 563. 11 Mohit Kumar Saha v New India Assurance Co Ltd, AIR 1997 Cal 179.
10

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RIGHTS & DUTIES OF INDEMNIFIER

Rights of the indemnifier:

The rights of the indemnity-holder are the duties of indemnifier, and duties of the indemnityholder are the rights of the indemnifier. There are not prescribed any specific rights of the indemnifier either in Nepalese law or in Indian law. However, he is not liable for indemnity. (i) If indemnity-holder acts negligently. (ii) If indemnity-holder is acting with the intention of causing any loss or damage. (iii) If he is acting against the instructions of the other party (promisor).

Duties of indemnifier:

The duties of an indemnifier arise in the following circumstances: (i) There must be a loss in accordance with the contract to make the indemnifier liable. (ii) There must be an occurrence of the anticipated event. Without any occurrence of the prescribed event, there is no indemnity by the indemnifier. (iii) Where the right of indemnity is used by the indemnity-holder prudently and the instruction of the indemnifier is not contravened or when there is no breach of contract. (iv) If the costs demanded by the indemnifier are not caused by negligence, haphazard behaviour.

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COMMENCEMENT OF LIABILITY
When can indemnifier be made liable? Can he claim to be indemnified before he is demnified ?There has been a controversy regarding the point, as to whether the indemnifier can be asked to be indemnify before the indemnity-holder has actually suffered the loss, or his liability arises only after the loss has been suffered by thee indemnity-holder. According to English Common Law, no action could be brought against the indemnifier until the indemnity-holder had suffered actual loss. The situation created a great hardship in those cases where the indemnity-holder was not in a position to meet the claim out of his pocket. Relief was not provided to the indemnity-holder in such cases by the Court of Equity. According to the rules evolved by the Court of Equity, it was no more necessary for the indemnity-holder to be demnified before he could be indemnified. In other words, the indemnity-holder can compel the indemnifier to save him from the loss in respect of liability against which indemnity has been promised. There has been a difference in opinion between various High Courts in India as to whether the indemnity-holder can claim indemnity before he has actually suffered the loss. According to the view expressed by Lahore12 and Nagpur13 High Courts, a person must be demnified before he can be indemnified, i.e., no indemnity can be claimed until the indemnity-holder has already actually suffered the loss. The High Courts of Bombay, Calcutta, Madras, Patna, and Allahabad have expressed a different view, and they are in favour of the application of law similar to the one recognized in England by the Court of Equity. According to the decisions of the courts, an indemnity-holder can compel the indemnifier to indemnify even before the indemnity-holder has actually suffered the loss. In State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd.,14 the respondent, a cooperative society, having a sugar factory, entered into a contract with one M/s. Pentagon Engineering Pvt. Ltd. for the installation of a paper plant. As per the agreement the Pentagon furnished a Bank Guarantee/Indemnity for the release. The retention money of 10% from the Proforma Invoices of the material reached at the site. The operative portion of the Bank
12 13

Sham Sunder v. Chandu, A.I.R. 1935 Lahore 974. Ranganath v. Pachusao, A.I.R. 1935 Nag. 117 14 A.I.R. 2007 S.C. 2361

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Guarantee read as to indemnify and keep indemnified Mula Sahakari Sakhar Karkhana Ltd. against all losses, claims damages actions and cost in respect of such sums which the supplier shall become liable to pay as the terms of the said order. Disputes and differences arose between the parties and as a result, the respondent terminated the contract and invoked the Bank guarantee against the Pentagon. Holding that the document indemnifying the respondent was a contract of indemnity and not guarantee, the Apex Court said that the claim made by the assured on termination of contract need not be honoured by the Bank without the proof of loss.

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Definition of guarantee
Contract of guarantee is defined in section 126 of Indian contract act . Contract of guarantee , surety, principal debtor and creditor a contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default .the person who gives the guarantee is called the surety, the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom guarantee is given is called creditor a guarantee may be either oral or written.15 For example: A takes a loan from a bank A promises to the bank to repay the loan B also makes the promise to the bank saying that if A does not repay the loan then I will pay .in this case A is a principal debtor who undertakes to repay the loan B Is the surety, whos liability is secondary because he promises to perform the same duty in case there is default on the on part of A. the bank in whos favors the promise has been made is the creditor. The object of a contract of guarantee is to provide additional security to the creditor in the form of the promise by the surety to fulfill a certain obligation in case the principal debtor fail to do that in every contract of guarantee there are three parties the creditor the principal debtor and the surety there are three contracts in contract of guarantee .firstly the principal debtor himself makes a promise in favors of creditor to perform a promise, secondly the surety undertakes to be liable towards to the creditor if the principal debtor makes a default.16 Thirdly an implied promise by the principal debtor in favor of the surety that in case the surety has to discharge the liability of the default of the principal debtor ,the principal debtor shall indemnify the surety 17 The contract of guarantee is no doubt tripartite in nature18 but it is not necessary or essential that the principal debtor must expressly be a party to that document. In a contract of guarantee, the principal debtor may be a party to the contract by implication. Thus, there is a possibility that a a person may become a surety without the knowledge and consent of the principal debtor. The
15

Contract act section 126

16 17

Ibid1 Section 145also see NS bank Vs Union of India, AIR 1991 AP 153,at 158 18 Mahabir shum sher vs Lloyds bank, air 1969 cal 371

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function of contract of guarantee is to enable a person to get a loan, or goods on credit, on an employment. Some person comes forward and tells the lender, or the supplier or the employer that he (the person in need) may be trusted and in case of any default .for e.g. in old case of Birkmy vs Darnell19 the court said if two comes to a shop and one buys, and other to give him credit, promises the seller ,if he does not pay you, I will pay. This type of collateral undertaking to be liable for the default of another is called a contract of guarantee. In English law a guarantee is defined as a promise to answer for the debt , default or miscarriage of another20

19 20

(1709) 91 ER 27:1 Salk 27. S.4, statute of frauds 1677, 29 II. C 3

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Essentials of guarantee
1. The contract may be either oral or in writing
According to sec 126, a guarantee may be either oral or written. On this point, the position in India is different from that in England . according to English law, for a valid contract of guarantee , it is necessary that it should be in writing and signed by party to be charged therewith. In English law under the provisions of statutes of fraud a guarantee is not enforceable unless it is in writing and signed by the party to be charged 21

2. There should be a principal debt

A contract of guarantee pre supposes a principal debt or an obligation to be discharged by the principal debtor. The surety undertakes to be liable only if the principal debtor fails to discharge his obligation. If there is no such principal debt, but there is a promise by one party in favor of another for compensating in a certain situation, and the performance of this promise is not dependent upon the default of somebody else, it is a contract of indemnity. The purpose of a guarantee being to secure a payment of debt, the existence of a recoverable debt is necessary. 22

3. Consideration
Like every other contract, a contract of guarantee should also be supported by some consideration. A guarantee without consideration is void23. For suretys promise, it is not necessary that there should be a direct consideration between the creditor and surety; it is enough that the creditor had done something for the benefit of the principal debtor. Benefit to the principal debtor constitutes a sufficient consideration to the surety for giving the guarantee. This is clear from sec 127 which read as under

21

S.chattantha karayalar vs central bank. Mountstephens vs lakeman, 1871 lr 7 QB 196 ,2012 Ex, affirmed ,LR 7 HL 17. Janak paul vs dhokal mall kidarbux ,(1935) 156 IC 200,

22 23

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Anything done, or any promise made for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee.

Illustrations

(a) B requests A to sell and deliver to him goods on credit. A agrees to do so , provided C promises will guarantee the payment of the prices of the goods .C promises to guarrntee the payment in consideration of As promise to deliver the goods . this is a sufficient consideration for Cs promise

4. Consent of the surety should not have been obtained by misrepresentation or

concealment
The creditor should not obtain guarantee either by any misrepresentation or concealment of any material facts concerning the transaction. If the guarantee has been obtained that way, the guarantee is invalid. The position is explained by section 142 and 143 which are as under

142. Guarantee obtained by misrepresentation invalid.-Any guarantee which has been obtained by means of misrepresentation made by the creditor , or with his knowledge ans assent, concerning a material part of the transaction, is invalid. 143. Guarantee obtained by concealment invalid.- Any guarantee which the creditor has obtained by means by means of keeping silence as to material circumstances is invalid Illustrations (a) A engages B as a clerk to collect money. B fails to account for some of his receipts and A in consequence calls upon him to furnish security for his duly accounting gives his guarantee for B s duly accounting . A does not acquaint C with Bs previous conduct. B afterwards makes default . the guarantee is invalid (b) A guarantee to C payment for iron to be supplied by him to B to the amount of 2000 tons. B and C have privately agreed that B should pay five rs er ton beyond the market price, such excess to

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be applied in liquidation of an old debt. This agreement is concealed from A is not liable as a surety.

According to the above stated provision, obtaining a persons consent to act a surety either by misrepresentation, or by keeping silence as regards material circumstances, renders such a contract invalid. Keeping silence as regards material circumstances, which could affect the suretys mind to stand as surety or not, would render the guarantee void. Thus if a cashier has been found guilty of embezzlement, but this fact is not disclosed when a surety has been made to guarantee the future conduct of the cashier, the surety will not be liable as such, under these circumstances. Similarly, if a surety is made to guarantee an employees existing and future liabilities, without being informed that the said employee is already indebted to an extent more that of the guarantee , the guarantee is invalid.24

24

Lee vs jones, (1863) 17 CBNS 482 (Ex Ch)

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Liability of surety: its nature and extent

According to section 128 , the liability of the surety is coextensive with that of that of the principal debtor, unless it is otherwise provided by the contract The provisions that the suretys liability is coextensive with that of the principal debtor mean that his liability is exactly the same as that of the principal debtor. For instance, the principal debtor makes a default in the payment of the debt Rs 10000. The creditor may recover from the surety the sum of 10000 plus the interest becoming due thereon as well as the amount spent by him in recovering that amount. This may be further explained by the e.g. A guaranteed to B the payment of bill of exchange by C, the acceptor. A is liable not only for the amount of the bill but also for any interest and charges which may have become due on it. If the principal debtors liability is reduced ,e.g. after the creditor has recovered the part of the sum due from him out of his property, the liability of the surety is also reduced accordingly.25In Narayan singh vs chattarsingh26it has been held that if the principal debtors liability is scaled down in an amendment decree or otherwise extinguished in whole or in part by a statute, the liability of the surety pro tanto be reduced or extinguished. If the principal debtor happens to be a minor and the agreement is made by him is void, the surety too cannot be made liable in respect of the same because the liability of the surety is coextensive with that of principal debtor. It has been held in an English case27 , that the guarantee of the loan or an overdraft to an infant is void, because the loan to infant is itself is void ab initio.

25 26

Harigopal aggarwal vs state bank of india a.i.r. 1956mad 211 A.I.R. 1973 raj 347 27 Coutts & co vs browne lecky ,(1947) k.b. 104

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DIFFERENCE BETWEEN CONTRACT OF INDEMNITY & GUARANTEE.

There are distinguishing differences between Indemnity and Guarantee in the Indian Contract Act.

Section 124 of the Indian Contract Act, 1872 defines the "Contract of Indemnity". It is contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person. 'A' contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 20000 rupees. This is a contract of indemnity.

A contract of guarantee is defined in Section 126 of the Act. It is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the surety; the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor.

In contract of indemnity there are only two parties viz the indemnifier or promisor and the indemnity holder or promisee. In contract of guarantee there are three parties viz the creditor, principal debtor and surety.

In indemnity, there is primary and independent liability. In guarantee the surety has collateral liability.

There is no existing debt generally in the case of contract of indemnity where there is existing debt in the case of guarantee.

There are two contracts in a contract of indemnity where there are three contracts in the case of guarantee.

In Indemnity the promisor is discharged by payment. In guarantee the surety is discharged by payment made by principal debtor.

Indemnifier may have some interest in the transaction where the surety will not have any connection with the transaction.

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CONCLUSION
Indemnity is a special contract under the Indian Contract Act, 1872. The legislation is a very well drafted one, but has given a very narrow definition of indemnity, due to which the Indian Courts have time and again held that certain documents do not come under the purview of the definition of indemnity contained in the Act. Such decisions have not created a problem, since the courts covered the liability under other provisions of the same Act, mainly under Section 31of the Act dealing with contingent contracts. Therefore, it would suffice to say that though the definition of indemnity under the Indian Contract Act is narrow, the principles regarding indemnities which have been laid down by common law are definitely addressed by other provisions of the Act. The main purpose of construction and interpretation of a contract of indemnity is to ascertain and give effect to the intention of the parties. While interpreting the indemnity clause in a business contract, care should be taken so as to give the meaning to the terms and phrases according to the common parlance used in that business rather than resorting to other means of interpretation, unless such construction leads to absurdity. The extent of liability under a contract of indemnity depends on the nature and terms of the contract and each case must be governed by its own facts and circumstances. Interpretation of the contract or clause of indemnity thus plays a crucial role in fixing the liability.

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BIBLIOGRAPHY
Books referred:Blacks Law Dictionary. Bangia, R.K. Contract -2, Allahabad Law Agency, 2004, Faridabad. Saharay, H.K. Dutt on Contract, Eastern Law House, 2006, Kolkata. Mitra, S.C. Law of Contract. Vol-2, Orient Publishers, 2005, New Delhi. Markanda, P.C. Law of Contract. Wadhwa Publishers. 2008. Nagpur. Singh, Avtar. Law of Contract. Eastern Book Company. 2008. Lucknow.

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