Rights of Indemnity-Holder

By | December 25, 2019
Rights of Indemnity- Holder

Rights of the Indemnity Holder get invoked in the case when that person is being sued by the third party. The Indian Contract Act, 1872 provides for specifically three rights in such scenarios. Being limited to the circumstance of suing, these rights are not exhaustive but crucial for the indemnified.

Introduction

Protection of another through the medium of a contractual relationship is the unique characteristic of the relationship of indemnity. In such a contract, the person who is being provided with this opportunity to get indemnified obviously gets the rights in such opportunity to bear fruit of the same.

The Indian Contract Act, 1872 (hereinafter “The Act”), is providing with the framework governing this regime of indemnity and the rights of the indemnity holder. Chapter VIII of the Act provides for the special types of the contract of indemnity and guarantee.

Though only two sections at the beginning of this chapter can be specifically pointed out in terms of providing the law related to the indemnity, these two provisions are very important to understand the rights that an indemnity- holder has. In this article, those rights so provided by the Statute would be examined at length.

Meaning of Indemnity

To indemnify is to secure against hurt, loss or damage.[1] A person can promise to indemnify another from harm or hardship that may happen in future to that respective person. In law, § 124 of the Act, throws more light on such kind of relationship-

“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”.”[2]

The definition so provided hereinabove clearly shows that there are two parties involved in this contract of indemnity, namely- INDEMNIFIER and INDEMNIFIED. The basic aspect is the saving of another person from loss caused to him by –

  1. His/ Her own Conduct
  2. Conduct of the third party

In the landmark case of Adamson v. Jarvis[3], this concept of indemnity was immortalised. In this case, Jarvis asked Adamson to sell cattle at an auction, which was duly done also. Later, when the real owner turned up, Adamson had to pay up the damages.

The court held that Jarvis would have to indemnify Adamson for the losses that he had to suffer. The simple reason is that when Adamson was performing the tasks so allotted by Jarvis, it is reasonable to presume that all the eventualities that would arise in future would be taken care of by him in the future.

Similarly, in another case[4] there was an editor of a newspaper who used to defend cases going on the newspaper he was working for. The court held him to have the right to obtain indemnity from the employer of the newspaper.

Such examples indicate towards the rights that Adamson and the editor had as indemnity holders.

Rights of Indemnity Holder

The law protects the needs and position of the indemnity holder. Section 125 of the Act is as follows-

“125. Rights 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 or 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 authorized 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 contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.”[5]

These are the statutory rights so expressly provided by the law. But the remedies provided in this provision are not exhaustive since all the reliefs are not being set out over here. This shows that a certain area is kept untouched for equitable reliefs.[6] Also, this section throws light on the situation when the indemnity holder is sued.

But for study purposes, the reliefs so hereinabove mentioned would be discussed as follows-

Damages paid in suit

This logical principle of providing the indemnity to a person who had acted on the faith of another party was long back established in 1873. In the case of Parker v. Lewis[7], it was authoritatively laid down that it would be obvious for the person indemnified, who has altered his position and faced action for that action, to be indemnified and be protected by the third party.

The suit, in which the indemnified is roped in, has a binding effect on the indemnifier in terms of its final result, even though he was not a party to the contract. This is not an exception to the rule of res judicata rather; it is so because the claim against which the indemnification had been promised has been conclusively established.[8]

Thus, the indemnifier cannot plead that he was not a party to a dispute hence the result should be implemented upon him.[9] Indian Jurisprudence is well settled on this point that the indemnifier cannot escape from the responsibility of providing the damages to the indemnified.[10]

The aspect of time has to be constructed liberally. It implies that the usage of past tense as clear from the phrase, “compelled to pay” does not mean that the person should have suffered loss already.[11] The indemnifier would have to pay for the losses even before the indemnified has paid or suffered losses.[12]

The measure of damages would depend upon the extent to which the person has been indemnified, if more than the amount, the indemnifier may refuse as well.[13]

Usually, it is seen that the indemnified has to go to the court to get the decree in favour so as to get the amount which was earlier been promised.[14] It could also have been the option to ask the indemnifier to pay the amount in question to the creditor concerned.

This practical agony stares in the face of the settled legal position that the indemnity- holder can certainly ask for the amount from the indemnifier and get saved from the liability that is accrued upon him.[15] The indemnified is usually asked to prove the loss which so is being claimed to have arisen.

But, in some cases, such terms can be premeditated. For example, in simple insurance contracts, there is a pure and simple contingency that arises. The contract may provide for specific events on the occurrence of which, the liability of the indemnifier can be agreed to arise.

Thus, on such happening, the payment representing either the loss or the possibility which that event entails is being handed over to the indemnity holder.[16]

In such situations, the existence or the non-existence of a loss becomes immaterial. The promisor is bound to pay to the promise. In cases where the former agrees to pay to the latter under a letter of credit or bank guarantee, the payment has to be made according to the tenor of the agreement and irrespective of whether the loss has occurred.[17]

This section highlighted the importance and legal position with respect to the aspect of damages. The other two parts are explained further.

Costs in such suit

When a third party lays down a claim against the indemnity holder, it is well established the duty to pay the latter arises for the indemnifier at the first place. The damages as discussed above would definitely be the end result of the total liability that the indemnity holder had to carry.

But, when it comes to pursuing the particular suit, in which the purpose or the action of the indemnity is being involved, the indemnity holder is being provided with the statutory right to claim costs as well with the damages from the indemnifier.

When it comes to the quantum of such costs that can be so claimed from the indemnifier, the courts have interpreted this relationship and concluded on various lines so as to iron out the confusions.

First is the situation of kinds of costs that arise while defending or fighting a suit in a court of law. In such a case, the indemnity holder, as decided by the courts, would be entitled to reasonably incurred costs. Such expenses do arise while reducing or ascertaining or resisting the claim. Hence, the cost of such a nature can be recovered. [18]

The second situation can be best understood from a hypothetical arrangement. Suppose, the indemnity- holder faces a proceeding for claim over a movable property say a watch. For such a matter, a hotshot lawyer was being engaged and huge travel and food expenses were being incurred by the indemnity holder.

The question arises, should such a person be entitled to the costs that the law so benevolently provides to the indemnity- holders. The conscience would say no. And so did the judicial conscience. This was categorically held that only those costs would be recoverable that are supposed to be incurred by a prudent man.[19]

This is the reason that the fees of the pleader that the indemnified may ask for should be reasonable. If a vendee has been given indemnity from the vendor of the property against litigation, the former can claim the fees of the lawyer, subject to the condition that the same is not unreasonable and beyond basis.[20]

The courts have been further generous to expand the scope of the costs that are so recoverable. It has been held that the costs, for which the indemnity holder is entitled, would not be limited to only the taxed costs.[21]

Amounts in the compromise

This subpart is similar to that of the second sub-part of costs. But, this situation is being envisaged to arise that under a compromise. For this arrangement as well, the promise would become entitled to such amounts that-

  1. The Promisor has specifically authorised the promisee to do it.
  2. The compromise is not to be against the orders of the promisor and the action has been taken in a prudent manner.[22]

Like the principle of res judicata could not be brought by the promisor in the case of damages, here as well, the promisor cannot shrug off his/ her responsibility that he/she is not liable for paying the amount since he/ she is not a party to the relationship.

In the landmark case of Alla Venkataramanna v. Palacherla Manqamma [23], the court laid down the conditions for the claim by the promisee, in this case, to be valid. If the indemnity holder genuinely wants the amount to be recovered, certain conditions with respect to the compromise so effected would have to fulfil:

  1. The compromise should have been put to effect in a bona fide manner.
  2. It has been resolved without any sort of collusion
  3. It has not been impeached as an immoral bargain[24]

All these rights would arise in the sole situation of the indemnity holder getting sued at the hands of any third party.[25] Thus, the section cannot be said to be exhaustive, as mentioned in the beginning.

Importance of Notice

When in such cases, the indemnity holder has to hold a liability, it is usually considered not necessary so as to provide a notice to indemnifier for initiating the proceedings against him/ her.[26] This is upon the indemnity holder to give the notice or not to give it, thus discretion remains with the indemnity holder.[27]

But, in any case, the added benefit of giving the notice to the promisor would be that if he/ she refuses then it would be difficult for him/ her to showcase whether the costs or amounts that have arisen are reasonably incurred or not.[28]

Conclusion

The rights are at the disposal of one party against the other. The law astutely provides for conditions that must and should be followed at both the ends of that of the indemnifier as well as the indemnified.

Hence, it is a very precious opportunity that is being given in the hands of the indemnity holder and should be cautiously exercised in light of the legal restrictions and conditions enshrined hereinabove.


[1] Merriam Webster, Indemnity, https://www.merriam-webster.com/dictionary/indemnity.

[2] §124, Indian Contract Act, 1872.

[3] Adamson v. Jarvis, [1827] 4 BING 66.

[4] Coulson v. News Group Newspapers Ltd., [2011] EWHC 3482 (QB).

[5] §125, Indian Contract Act, 1872.

[6] Kailash Kumar Kanoria v. Shiv Shankar Pasari, (2009) 1 Cal LT 90.

[7] Parker v. Lewis, (1873) LR 8 Ch 1035.

[8] Alla Venkataramanna v. Palacherla Manqamma, AIR 1944 Mad 457.

[9] Gokuldas v. Gulab Rao, AIR 1926 Nag 108.

[10] Nallappa Reddi v. Vridhachala Reddi, (1914) 37 Mad 270.

[11] Chunibhai Patel v. Natha Bhai Patel, (1944) 22 Pat 655.

[12] Ghulam Asadullah Khan v. Mahommad Ali Khan, AIR 1943 Mad 360.

[13] Anwarkhan v. Gulam Kasam, AIR 1919 Nag 126.

[14] Khetarpal Amarnath v. Madhukar Pictures, AIR 1956 Bom 106.

[15] Gajanan Morehwar Parelkar v. Moreshwar Madam Mantri, AIR 1942 Bom 302.

[16] In Re British India General Insurance Co. Ltd., AIR 1971 Bom 102.

[17] R Yashod Vardhan et. al., Pollock & Mulla The Indian Contract Act, 1872 1270 (Lexis Nexis 15th Edn. 2018).

[18] Pepin v. Chunder Seekur Mookerjee, (1880) ILR 5 Cal 811.

[19] Gopal Singh v. Bhawani Prasad, (1888) ILR 10 All 531.

[20] Sri Rajah Venkata Rangayya Appa Rao Bahadur Zamondar Garu v. Sri Rajah Bommadevara Satyanarayana Varaprasad Rao Naidu Bahadur Zamindar Garu, AIR 1921 Mad 544.

[21] Mangladha Ram v. Ganda Mal, ARI 1929 Lah 388.

[22] R Yashod Vardhan et. al., Pollock & Mulla The Indian Contract Act, 1872 1270 (Lexis Nexis 15th Edn. 2018).

[23] Alla Venkataramanna v. Palacherla Manqamma, AIR 1944 Mad 457.

[24] Id.

[25] Profulla Kumar Basu v. Gopee Bullabh Sen, (1944) 2 Cal 318.

[26] Duffield v. Scott, (1789) 3 Term Rep 374.

[27] Parker v. Lewis, (1873) LR 8 Ch 1035.

[28] The Millwall, Gaselei v. Darling, (1905) P 155.

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