Presented by:
Amrita Singh
Relevant provisions of Indian Contract Act, 1872
Section 124 - “Contract of indemnity” defined
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Promise by the indemnifier to the indemnity holder
Purpose of promise – To save the indemnity holder from loss caused to him
Such loss may be caused by the conduct of the indemnifier or of any other person
Section 125 - Rights of indemnity- holder when sued
Preconditions:
◦ Existence of a contract of indemnity
◦ Indemnity holder should have acted within the scope of his authority
Indemnity holder entitled to recover from the indemnifier –
◦ Damages
◦ All costs
Provided:
 Indemnity holder did not contravene the orders of the indemnifier
 Indemnity holder acted prudently; or
 Indemnifier authorized indemnifier to bring/defend the suit
◦ Any compromise payment
Provided:
 compromise is not contrary to the orders of the indemnifier
 Indemnity holder acted prudently
 Indemnifier authorized indemnity holder to compromise the suit
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It must be a valid contract under section 10 of Indian
Contract Act:
◦
◦
◦
◦
Free consent
parties competent to contract
lawful consideration, lawful object
not expressly declared void
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Two parties:
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Loss to indemnity holder:
◦ Indemnifier (Promisor)
◦ Indemnity holder (Promisee)
◦ Occurrence of loss or damage is a contingency upon which liability
of the indemnifier comes into existence.
Indemnity
Guarantee
Contract of indemnity is a bilateral
contract: Requires the concurrence of
only two persons - the indemnifier and
the indemnity holder.
Contract of guarantee is a tripartite
contract: Requires concurrence of three
parties - the creditor, the surety and the
principal debtor.
Indemnifier
is
primarily
independently liable.
and
There must be contract by which the
principal debtor, expressly or impliedly
requests the surety to act as surety.
Indemnifier’s liability arises from loss
caused by the conduct of indemnifier
himself or by the conduct of another
person.
Surety’s liability arises from principal
debtor’s default.
Legal and equitable duty to indemnify
Implied indemnity arises where the relation between the parties is such
that either in law or in equity there is an obligation upon one party to
indemnify the other.
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As expounded by Lord Halsbury in Sheffield Corporation v. Barclay 1905 AC
392
“It is a general principle of law when an Act is done by one person at the request of
another which Act is not in itself manifestly tortuous to the knowledge of the
person doing it, and such Act turns out to be injurious to the rights of a third party,
the person doing it is entitled to an indemnity from him who requested that it
should be done.”
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Chitty on Contracts, 22nd Edn., Vol. II, in Para, 1035, at p. 445
"In many cases the law implies a promise to indemnity. If the circumstances are
such that the law imposes on any person a legal or equitable duty to indemnity, it
will imply, a promise on his part to do that which under the circumstances he ought
to do."
Indian cases upholding the equitable principle of implied indemnity:
•Secretary of State v. Bank of India Ltd. - AIR 1938 PC 191
•K.P.RM. Kuppan Chettiar Vs. SP.R.M.RM. Ramaswami Chettiar and Anr. - (1946)1MLJ383
•Joti Parshad Jai Gopal and Anr. Vs. Kartar Singh Sahib and Ors. - AIR1960P&H425
•Debabrata Ghose v. Jnanendra N. Ghose - AIR 1960 Cal 381
•Damodara Nayak Vs. Vatsala Nayak and Ors. - AIR1990Ker348
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Earlier view based on English Common Law:
◦ No action can be maintained against the indemnifier till the
indemnity holder has suffered actual loss.
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Present view based on equitable principles:
◦ Existence of a clear enforceable claim suffices to call
indemnifier’s obligation into action. The indemnity holder
compel the indemnifer to place him in a position to meet
liability that may be cast upon him without waiting until he
actually discharged it.
the
can
the
has
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Gajanan Moreshwar Parelkar Vs. Moreshwar Madan Mantri – AIR 1942 Bom 302
Sections 124 and 125 of the Indian Contract Act are not exhaustive of the law of indemnity.
The Courts in India would apply the same equitable principles that the Courts in England do.
“An indemnity might be worth very little indeed if the indemnified could not enforce his
indemnity till he had actually paid the loss. If a suit was filed against him, he had actually to
wait till a judgment was pronounced, and it was only after he had satisfied the judgment
that he could sue on his indemnity. It is clear that this might under certain circumstances
throw an intolerable burden upon the indemnity-holder. He might not be in a position to
satisfy the judgment and yet he could not avail himself of his indemnity till he had done so.
Therefore the Court of equity stepped in and mitigated the rigour of the common law.”
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Recent case laws:
◦ The New India Assurance Company Ltd. Vs. The State Trading Corporation of India Ltd. &
Anr. – MANU/GJ/0001/2007
◦ State Bank of India Vs. Moti Thawardas Dadlani and Ors. - (2007)109BOMLR483
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Broad indemnity clause:
“Contractor agrees to indemnify and hold harmless Owner from any and all
liabilities, claims, actions, demands, losses, damages, penalties, lawsuits,
judgments, including attorneys’ fees and costs, arising out of or relating to the
work of Contractor.”
The clause makes no accommodation for the possibility that someone else might
also be responsible.
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Narrower version of indemnity clause:
“Contractor agrees to indemnify and hold harmless Owner from any and all
liabilities claims, actions, demands, losses, damages, lawsuits, judgments,
including attorneys’ fees and costs, but only to the extent caused by, arising out
of, or relating to the work of Contractor.”
This additional language suggests an apportionment of relative fault.
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Capping of exposure:
“In no event shall the maximum liability hereunder exceed the sum of Rs.
_________. The limitation should bear a reasonable commercial relationship to
the contract”
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Every indemnification clause is different so read it
carefully - Don't assume that it is "standard" or "fair."
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Who is agreeing to pay who - Are you agreeing to
pay the counter party if there is a problem or is the
counter party agreeing to pay you? Don't go out of
your way to offer indemnifications; it increases your
potential risk.
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What kinds of losses will be covered - Will the
indemnifier pay the attorneys' fees, Court costs and
actual damages?
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Which party gets to control the legal strategy - Who is picking the attorney? Who gets to
decide whether to settle the case?
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What kind of event triggers the obligation to indemnify - Breach of contract or negligence by
the other party? Third-party claims?
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Is there a duty to defend - Does the contract require the indemnifier to assist in defending against
a lawsuit, or does it merely require the indemnifier to pay for the financial losses?
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Never agree to indemnify the counter party against its own conduct -Indemnifications allocate
risk to the party who is best able to prevent the risk of loss. Don't trust a client who asks you to
indemnify its conduct. If you can't control the situation, don't agree to be liable for it.
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Indemnity provision should be integrated with the other risk allocation provisions in the
contract – Include a clear dispute resolution mechanism. If the parties disagree over an indemnity
claim, the dispute resolution mechanism will come into play.
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Insurance - If it is a long term contract and you have reasons to worry that the counter party may
not have the resources to fulfill its indemnification obligations; it is advisable to require the
counter party to have an adequate insurance to cover the risks involved. Being co-insured on
target company insurance policies provides an additional security to the indemnified
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Limitation of liability – It is advisable to exclude consequential and remote damages from the
scope of indemnity.
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Assignment of contract – If the contract is assigned, are the indemnity obligations also assigned?
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Indemnity holder’s duty to co-operate with the indemnifier – The indemnifier’s obligation can be
made conditional to the indemnity holder promptly notifying the indemnifier of any claim in
writing and cooperating with the indemnifier in the defense of the claim.
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Indemnity Bond is listed as Article 34 of the Indian Stamp Act
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Duty payable in Delhi:
◦ When the amount secured does not exceed Rs. 1000/- : 2%
◦ In other case: Rs.100/-
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When an agreement includes an indemnity clause, the stamp duty
payable shall be:
◦ stamp duty payable on the agreement + stamp duty payable on an
indemnity bond
◦ If the agreement is an agreement of sale, mortgage or settlement,
stamp duty is payable only on the principal agreement and for the
indemnity clause included therein a token stamp duty of Re.1 is payable.
Any Queries??