INTRODUCTION:
“Indemnity is a legal notion expressed in the form of a contract or specified as a provision in commercial contracts, in which a party promises to compensate the indemnified party for damages incurred as a result of the promisor's or any third party's actions.” It can also be employed in circumstances when the indemnified individual is sued by a third party, and is therefore used to cover legal fees. As a result, it is a contract that is subject to the occurrence of losses.
It can better be enlightened with the help of an example: “A undertakes to indemnify B for the consequences of any legal action taken by C against B in connection to a particular quantity of rupees.” This is known as the “Contract of Indemnity”.
WHAT EXACTLY IS INDEMNITY?
In 1827, the “Adamson v. Jarvis” [i]case established the notion of indemnification. Jarvis, the principal, portrayed himself as the owner of cattle and other products to Adamson, an auctioneer, and permitted the auctioneer to sell them. Jarvis had no rights to the items or livestock, which the auctioneer was completely unaware of. Adamson just sold it after following the directions. He was, however, prosecuted for conversion. He was directed to sue Jarvis for damages and other expenses, and to reimburse the actual owner.
The Indian Contract Act of 1872 governs indemnification contracts in India. “The contract of indemnity is defined in Section 124 of the Indian Contract Act, 1872” as "a contract by which one party promises to rescue the other from damage caused to him by the promisor's or any other person's action." In the meaning, indemnification is a phrase that can be broadly and widely defined to include any stated or inferred pledge by one party not to cause damages to the other. The loss in question should be caused only by the actions of a "human agent." In other words, it cannot cover any loss caused by unforeseen situations, an unavoidable accident, or a natural disaster. As a result, the indemnified or protected person is the only one who benefits and has specific rights.
A contract of indemnification, according to English law, is "a commitment to preserve a person harmless from the consequences of an act." In comparison to the Indian Law concept, indemnification has a broader scope in English Law. It comprises an agreement to safeguard the promisee against any loss, whether caused by human action or by external events such as fire, accident, earthquake, or other natural disasters. Furthermore, insurance (does not include Life Insurance) falls within the contract of indemnification in English law.
RIGHTS OF INDEMNITY HOLDER:
“If the responsibility incurred is absolute and the indemnity contract covers it, the indemnity holder has the right to sue the promisor for particular performance.
When sued, the indemnity bearer has three rights under Section 125 of the Indian Contact Act of 1872. According to it, the promisee in an indemnification contract is entitled to recover from the promisor if he acts within the limits of his power.
(1) Any and all damages that he (or she) may be forced to pay in any litigation relating to any matter to which the commitment to indemnify relates;
(2) all expenses that he (or she) may be obliged to pay in any such litigation if, in initiating or defending it, he did not violate the promisor's directions and behaved as he would have done in the absence of any contract of indemnification, or if the promisor permitted him to initiate or defend the matter;
(3) Any payments paid under the conditions of any compromise of any such litigation, provided the compromise was not against the promisor's instructions and was one that the promisee would have made if there had been no contract of indemnity, or if the promisor permitted him to compromise the matter.”[ii]
These rights can be exercised only when the indemnity holder is prosecuted. The rights are broadly explained below:
1. RECOVER DAMAGES
The holder has the right to prosecute for the damages he was forced to pay in a case. The indemnifier is subsequently responsible for paying the damages that were legitimately agreed upon. Furthermore, the indemnifier can collect all damages paid by the indemnity-holder to the third person or the indemnifier himself.
In “Parker vs. Lewis”,[iii] the court held that “…if a person has agreed to indemnify another against a particular claim or a particular demand, and an action is brought on that demand, [indemnified] may then give notice to the [indemnifier] to come in and defend the action, and if he does not come in, and refuses to come in, [indemnified] may then compromise at once on the best terms he can, and then bring an action on the contract of indemnity. On the other hand, if [indemnifier] does not choose to trust the [indemnified] with the defence to the action, he may, if he pleases, go on and defend it, and then, if the verdict is obtained against him, and judgment signed upon it…at law that judgment, in the case of express contract of indemnity is conclusive”.
In the case of an express indemnification contract, however, this decision held the defendant accountable to indemnify. In other words, if the indemnified files a claim for damages against the indemnifier or decides to settle the case, the indemnifier will be obligated to reimburse the indemnified regardless of whether the case is determined to his advantage or not. Even if the complaint is appealed, the indemnifier is still obligated to pay according to the agreement.
The court declared in “Nallappa Reddi v. Vridhachala Reddi [iv] that the defendant (in this case, the indemnifier) cannot avoid duty to pay the indemnified by raising any contentions.”
2. RECOVER COSTS
The indemnified has the right to recover costs paid in defending a lawsuit provided he or she acts prudently and not against the promisor's direction or with the promisor's permission.
Despite not being a party to the contract, the court held that the indemnifier is obligated to compensate the promisee for damages incurred while defending third-party litigation in “Alla Venkataramanna vs. Palacherela Manqamma”.[v]
Costs legitimately expended (by indemnified) in contesting, minimising, or verifying the claim may be recovered was held in “Pepin vs. Chunder Seekur Mookerjee (from the indemnifier)”.[vi]
3. RECOVER SUMS
The amount paid in the event of a negotiation of the claim can also be recovered without violating the indemnifier's directives. In order for this agreement to work, the indemnifier must act in moral belief and not with the intent of deceiving the indemnifier. The deal must also be fair and not unethical. To put it another way, anything more would be an unjust windfall for one side and a punishment for the other. "The level of damages would rely on the extent to which the individual has been indemnified, if greater than the sum, the indemnifier may reject as well," the court held in “Anwar Khan vs. Gulam Kasam”.[vii]
In “Gopal Singh v. Bhawani Prasad”, [viii] the Court held that only those expenditures that are intended to be expended by a reasonable person can be recovered.
CONCLUSION
To summarise, an indemnity contract is an excellent instrument for protecting and securing a party from damages. The insured party is granted a benefit in that they do not have to establish the event's causality or proximity to the promisor's or any third-default; party's just happening is enough to claim damages. The party may also seek damages for losses incurred as a result of the breach of contract. All of this ensures that the insured party is untouched by the repercussions of any harmful incident.
As can be seen, the rights clause is not exhaustive, allowing for a broader interpretation in the interests of equality and justice. “The rights of the indemnity holder should be more completely defined and the remedies of an indemnity holder should be highlighted even in circumstances where he has not been sued, the Law Commission stated in its suggestion (13th Report, 1958)”. Redefining and integrating more rights in the indemnity holder's favour can go a long way toward safeguarding their interests and reducing the costs and risks associated with litigation and other third-party conduct.
[i] [1827] 4 BING 66 [ii] Section 125 in The Indian Contract Act, 1872, available at: https://indiankanoon.org/doc/301393/ [iii] (1873) 8 Ch App 1035 [iv] (1914) 37 Mad 270 [v] AIR 1944 Mad 457. [vi] ILR (1880) 5 Cal 811 [vii] AIR 1919 Nag 126 [viii] (1888) ILR 10 All 531
This article is written by Ananaya Chauhan of Delhi Metropolitan Education, Affiliated to Guru Gobind Singh Indraprastha University, New Delhi.