Damages Under Indemnity
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Transcript of Damages Under Indemnity
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Advaith GovindRoll No: 829IV Semester
NUALS
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CN!RAC!S II PR"#C!:
$amages %nder
Indemnit&: A
Com'arative Anal&sis o(
the Indian and #nglish
Legal Positions
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CONTENTS
Acknowledgement.....................................................................................................2
Introduction...............................................................................................................3
Concept of Indemnity................................................................................................4
Insurnce Indemnity..................................................................................................!
"mges under Englis# $w.....................................................................................%
"mges under Indin $w.....................................................................................&2
Conclusion...............................................................................................................&4
'i(liogrp#y............................................................................................................&)
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Acknowledgement.
I e*press deep sense of grtitude to my tec#er+ ,rofessor "r. Anil -. Nir Sir for giing me n
opportunity to work upon t#e topic of my interest. I lso t#nk my prents nd friends w#o were
lwys in constnt support nd guidnce. I m lwys inde(ted to $ord Almig#ty for #is
(lessings to (ring out my (est.
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Introduction
What is Indemnity?
/Indemnity0+ in t#e widest sense+ is 1to recompense ny loss or li(ility w#ic# person #s
incurred+ suc# s one rising from ny duty or promise. ,ut in simple words+ n indemnity is
promise mde (y one prty+ clled t#e 1indemnifier+ to protect t#e ot#er+ clled t#e 1indemnified
prty from loss cused to t#e ltter s result of specified ct or eent. T#e purpose of t#is is
not to merely reim(urse t#e person in terms of ny mount pid+ (ut is (siclly t#e li(ility of
t#e indemnifier to se t#e indemnified from clim mde (y t#ird prty. In sense+ indemnity
cn (e sid to (e form of insurnce to t#e indemnified prty to (er certin risks nd loss. or
e*mple+ n insurer 5indemnifier6 greeing to py for t#e loss w#ic# #s (een suffered (y t#e
insured 5indemnified prty6 s result of rod ccident is n indemnity.
T#e contrct of Indemnity cn (e sid to (e species of contrct nd Indemnity cn (e treted s
su(species of compenstion. or lid contrct of indemnity+ it must fulfill ll t#e essentils
re7uired for lid contrct. Suc# contrct for indemnity my rise eit#er (y n e*press
promise w#ere t#ere is n greement (etween prties to indemnify ec# ot#er or (y opertion of
lw. 8nder t#e ltter+ t#e proisions for suc# re proided under t#e Negoti(le Instruments Act+
&%39. Also+ under Section &3 of t#e Indin ,rtners#ip Act+ &%32+ firm is (ound to indemnify
n gent for loss suffered to #im w#ile doing ny lwful ct for t#e firm.
T#e $w $e*icon defines "mges s / compenstion for legl in:ury. As generl rule t#e
t#eory upon w#ic# t#e lw llows dmges for t#e ioltion of ciil rig#t is (sed upon t#e
doctrine t#t w#ere ciil in:ury #s (een sustined t#e lw proides remedy t#t s#ould (e
commensurte to t#e in:ury sustined0.&
Section 73 of t#e Indin Contrct Act gies rig#t to t#e prties of contrct+ to clim for
dmges in cse of (rec# of contrct.
) In(ra n*)8*
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Concept of Indemnity.
'efore tking look t t#e dmges coered under t#e Englis# nd t#e Indin lw+ t#e
proisions of indemnity t#t is coered under t#e Englis# nd Indin lw #s to (e scrutini;ed.
T#e (sic concept of Indemnity iterted (y t#e Englis# lw could (e e*plined (y t#e Englis#
cse Adamson V. Jarvis2. T#e plintiff+ n uctioneer+ sold certin cttle on t#e instruction of t#e
defendnt. It su(se7uently turned out t#t t#e liestock did not (elong to t#e defendnt+ (ut to
not#er person+ w#o mde t#e uctioneer li(le nd t#e uctioneer in #is turn sued t#e defendnt
for indemnity for t#e loss #e #d t#us suffered (y cting on t#e defendnts directions. T#e court
lid down t#t t#e plintiff #ing cted on t#e re7uest of t#e defendnt ws entitled to ssume
t#t t#e+ if+ w#t #e did+ turned out to (e wrongful+ #e would (e indemnified (y t#e defendnt.
T#us indemnity in Englis# lw mens promise to se person #rmless from t#e
conse7uences of n ct. 'ut it is wide enoug# to include promise of indemnity ginst loss
rising from ny cuse w#tsoeer+ like loss cused (y fire or (y some ot#er ccident. Een
eery contrct of insurnce ot#er t#n life insurnce is contrct of indemnity.3 T#e ,romise cn
een (e n e*press or implied depending on t#e circumstnce of t#e cse.
or e*mple+ in Dugdale v. Lovering 4+ t#e plintiffs were in possession of certin trucks w#ic#
were climed (ot# (y defendnts nd one
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'ut t#e Section 124 of t#e Indin Contrct Act defines 1Indemnity s follows=
/A contrct (y w#ic# one prty promises to se t#e ot#er from loss cused to #im (y t#econduct of t#e promisor #imself+ or (y t#e conduct of ny ot#er person+ is clled /contrct of
indemnity.0 A contrct (y w#ic# one prty promises to se t#e ot#er from loss cused to #im (y
t#e conduct of t#e promisor #imself+ or (y t#e conduct of ny ot#er person+ is clled /contrct
of indemnity.0
T#us in t#e Indin Contrct Act+ t#e scope of indemnity is (y t#e ery process of definition
restricted to cses w#ere t#ere is promise to indemnify ginst loss+ cused (y t#e promisor
#imself or (y ny ot#er person. T#e definition e*cludes from its puriew cses of loss risingfrom fire or perils of t#e se. $oss must (e cused (y #umn gency.)
In Gajanam Moreshar !arel"ar v Moreshar Madan Mantri + >ustice C#gl sserted t#t
/ICA is (ot# n mending nd consolidting Act+ nd it is not e*#ustie of t#e lw of
contrct.0 ?oreoer+ #e stted t#t section &24 dels only wit# one prticulr kind of indemnity
in w#ic# t#e loss is cused (y t#e conduct of t#e indemnifier #imself or of ot#er person+ (ut does
not coer t#e cses outside t#is or cses w#en li(ility rises (ecuse of somet#ing done (y t#e
indemnified t t#e re7uest of t#e indemnifier.
?oreoer situtions like t#ose in Adamson v. Jarvis# w#ere cttle were sold under t#e instruction
wrongful owner is outside t#e scope of t#e definition. Suc# cses nd t#e cses of loss rising
from n ct done t t#e re7uest of t#e promisor re coered under Section 223 of t#e Act.
T#e indemnity s enisged (y t#e section my (e e*pressed or implied. An Illustrtion
of implied indemnity is t#e decision of t#e ,riy Council in $e%y o& $tate &or India in 'oun%il v
(an" )& India Ltd .@
1 Gaanam oreshar Parel;ar v oreshar adan antri7 AIR )9.2 /om 32
0 S%'ra n*2
, AIR )938 PC )9)
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An indemnity (ond w#ic# permits n employee to lee t#e employment erlier t#n t#e
minimum greed period only t t#e cost of t#e forfeiture of t#e (ond money is lid proided
(ot# t#e period of restriction nd t#e (ond money re reson(le. Only t#e (ond money cn (eretined w#ic# is necessry to indemnify t#e employer for #is loss.9
Insurnce Indemnity
Almost ll insurnce ot#er t#n life nd personl ccident insurnce re contrct in indemnity.
T#e insurers promise to indemnify is n (solute one. A suit cn (e filed immeditely upon t#e
filure of performnce+ irrespectie of t#e ctul loss. If t#e indemnity #older incurred li(ility
nd t#t li(ility ws (solute+ #e would (e entitled to cll upon t#e indemnifier to se #im from
t#e li(ility (y pying it off.%
Section 125 of t#e Indin Contrct Act lys down t#e e*tent of $i(ility. It discusses t#e -ig#ts
of n indemnity #older w#en sued i.e. t#e promisee in contrct of indemnity+ cting wit#in t#e
scope of #is ut#ority+ is entitled to recoer from t#e promisor
/5&6 All dmges w#ic# #e my (e compelled to py in ny suit in respect of ny mtter to w#ic#
t#e promise to indemnify pplies
526 ll costs w#ic# #e my (e compelled to py in ny suc# suit if+ in (ringing or defending it+ #e
did not contrene t#e orders of t#e promisor+ nd cted s it would #e (een prudent for #im to
ct in t#e (sence of ny contrct of indemnity+ or if t#e promisor ut#orised #im to (ring or
defend t#e suit
536 ll sums w#ic# #e my #e pid under t#e terms of ny compromise of ny suc# suit+ if t#ecompromise ws not contrry to t#e orders of t#e promisor+ nd ws one w#ic# it would #e
8 P*N*V*S*V* Prasad v Union o( India7 ) An
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(een prudent for t#e promisee to mke in t#e (sence of ny contrct of indemnity+ or if t#e
promisor ut#ori;ed #im to compromise t#e suit.0
Section &2) 5&6 speks t#t t#e indemnityB#older is entitled to recoer ll t#e dmges w#ic# #e
my compelled to py in ny suit in respect of ny mtter to w#ic# t#e promise of indemnitypplies. T#is ws noted in !ar"er v Leis.&
T#is cse conclusiely #olds t#t once suit is decided ginst t#e indemnified nd #e+ (eing t#e
:udgment de(tor+ pys t#e money to t#e :udgment creditor+ or+ w#en in compromise+ #e
prudently settles t#e dispute (y pying t#e dmges indemnifier (ecomes (solutely li(le to
indemnify #im 5i.e. t#e decree (ecomes conclusie for t#e purpose of inoking indemnity6+
notwit#stnding t#t t#e suit could #e (een (roug#t or could #e (een ppeled ginst.
Also+ if t#e indemnifier trusts indemnified to furt#er ppel ginst t#e :udgment+ #e will still (e
li(le to py under t#e indemnity contrct to t#
e indemnified+ if ltter #d pid t#e decreed mount under t#e preious suit. It is only if
indemnified finlly wins t#e cse+ s#ll t#e :udgment de(tor will py t#e decreed mount to t#e
indemnifier.
In ddition to t#is+ Section &2) 526 nd &2) 536 en(les n indemnified to recoer ll costs #e
my (e compelled to py in suit in respect concerning indemnity+ eit#er in (ringing or
defending t#e suit or een in cse of compromise wit# respect to suc# suit.&&
A person w#o encs#es n indemnity (ond w#ic# is in t#e nture of (nk gurntee cn retin
only t#t prt of t#e mount of t#e (ond w#ic# represents t#e dmge or loss suffered (y t#e
(ondB#older s result of t#e contrcting prtys (rec#. Anyt#ing more would (e undesered
windfll for one prty nd penlty for t#e ot#er .&2
Commencement of $i(ility
) Par;er v Leis7 +)8,3- 8 Ch A'' )317 )10*
)) Pe'in v Ch%nder See;%r oo;eree7 ILR +)88- 1 Cal 8))*
)2 Cargill International SA v /angladesh S%gar = 4ood Ind%stries Cor'n*
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An importnt 7uestion in t#is connection is w#en does t#e indemnifier (ecomes li(le to pyD
Or+ w#en is t#e indemnityB#older entitled to recoer #is indemnityD T#e originl Englis# rule
ws t#t indemnity ws py(le only fter t#e indemnityB#older #s suffered ctul loss (y
pying off t#e clims. T#e m*im of lw ws= “you must be damnified before you can claim
to be indemnified”. 'ut t#e lw is not ny different. T#is process ws well e*plined in
Gajanam Moreshaar !arel"ar v Moreshar Madan Mantri.*+
It is true t#t under t#e Englis# common lw no ction could (e mintined until t#e ctul loss
#s (een incurred. It ws ery soon reli;ed t#t n indemnity mig#t (e wort# ery little indeed
if t#e indemnified could not enforce #is indemnity till #e #d ctully pid t#e loss. If suit is
filed ginst #im+ t#en #e #d to ctully wit till :udgment ws pronounced nd it ws only
fter #e #d stisfied t#e :udgment t#t #e could sue on #is indemnity. It is cler t#t t#is mig#t
under certin circumstnces t#row n intoler(le (urden upon t#e indemnityB#older. e mig#t
not (e in position to stisfy t#e :udgment nd t#us #e could not il #imself of #is indemnity
till #e #d done so. T#erefore+ t#e court of e7uity stepped in nd mitigted t#e rigour of t#e
common lw. T#e court of e7uity #eld t#t if #is li(ility #d (ecome (solute t#en #e ws
entitled eit#er to get t#e indemnifier to py off t#e clim or to py into court sufficient money
w#ic# would constitute fund for pying off t#e clim w#eneer it ws mde.0
T#is principle ws e*pounded in ,i%hardson ,e- / 0arte 1he Governors o& $t. 1homass
3os0ital *4. It ws o(sered in t#is cse t#t indemnity is not necessrily gien (y repyment
fter pyment. Indemnity re7uires t#t t#e prty to (e indemnified s#ll neer (e clled upon to
py. T#e ig# Court of Clcutt followed t#is principle in )sman Jamal $ons Ltd v Go0al
!urshttam*5. T#e ig# Court of All#(d+ ?drs nd ,tn #e ll e*pressed t#eir
concurrence in t#e principle t#t s soon s t#e li(ility of t#e indemnityB#older to py (ecomes
cler nd certin
#e s#ould #e t#e rig#t to re7uire t#e indemnifier to put #im in position to meet #im t#e clim.
'ut contrry iews #e lso (een e*pressed.
)3 S%'ra n*1*
). +)9))- 2 >/ ,17,)1 +CA-*
)1 ILR +)929- 10 Cal 202*
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F#ere n ut#ori;ed gent of t#e insurnce compny collected t#e premium mount from t#e
ssured ginst proper receipt+ t#e li(ility of t#e insurer (egn from t#t moment t#oug# t#e
gent deposited t#e collection wit# t#e compny fter t#e occurrence. &!
Specified Time for Notice .
An insured motor e#icle ws lost (y t#eft. T#e insurnce policy re7uired t#e ssured to send
notice to t#e insurer immeditely fter t#eft or ny ot#er criminl ct. T#e ssured mde police
report of t#e t#eft immeditely fter t#e incident+ (ut informed t#e insurer fter one mont#. T#e
7uestion ws w#et#er t#is could (e regrded s notice gien immeditely. T#e court sid t#t
t#e e*pression immeditely implies notice to (e gien wit# promptitude oiding unnecessry
dely. Immedite police report s#owed t#e (on fides of t#e ssured in t#e mtter. -eport to t#e
insurer fter one mont# could not (e regrded s unreson(le. Indemnifiction could not (e
denied.
"mges under Englis# $w.
T#e (sic concepts wit# respect to ny dmges re s follows=
56 CustionB It simply refers to t#e re7uirement t#t t#ere must (e cusl connection (etween
t#e defendnts (rec# of contrct nd t#e climnts loss. It #s (een #eld t#t t#e (rec# of
contrct need not (e t#e sole reson for t#e loss suffered so s to recoer dmges+ (ut it s#ould
(e n effectie or dominnt cuse of suc# (rec#.
)0 riental Ins%ran5e Co Ltd v Asha Patel7 )990 AI?C 2.3 +"=>-*
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5(6 -emoteness of dmgeB T#e dmges t#t cn (e recoered for (rec# of contrct re
goerned (y t#is principle. In cse t#e dmgeGloss suffered (y t#e climnt is too remote
conse7uence of t#e (rec#+ t#en t#e defendnt is not entitled to py dmges. T#e generl norms
under common lw for remoteness of dmges were lid down in t#e lndmrk cse of 3adley v.
(a/endale.*6 In t#is cse+ t#e court pointed out t#t only suc# dmges re recoer(le /suc# s
my firly nd reson(ly (e considered s rising nturlly+ i.e.+ ccording to t#e usul course of
t#ings0 from suc# (rec# itself+ or w#en t#ey re /suc# s my reson(ly (e supposed to #e
(een in t#e contempltion of (ot# prties t t#e time t#ey mde t#e contrct+ s t#e pro((le
result of t#e (rec# of it.0
5c6 ?itigtionB T#is #s (een not#er principle w#ic# limits t#e mount of dmges t#t cn (erecoered in cse of (rec#. It stipultes t#t t#e person w#o #s suffered loss must tke ny
reson(le steps il(le to #im to mitigte t#e e*tent of t#e dmge cused (y t#e (rec#. T#e
rtionle (e#ind t#is rule is t#t climnt s#ould not (e compensted for loss suffered w#ic# is
not n ctul result of t#e (rec#+ (ut is (ecuse of #is own fult.
8sully+ t#e 1mitigtion of dmge principle comprises of t#ree different rules. irstly+
climnt cn neer recoer n oid(le loss. Secondly+ w#ere t#e climnt does tke reson(le
steps to mitigte loss+ #oweer+ #e remins unsuccessful+ t#en #e would (e entitled to clim
dmges for suc# losses. T#irdly+ w#en suc# ttempt to mitigte remins successful+ #e would
not (e entitled to recoer for suc# loss or dmge.&9
Indemnity is generlly preferred oer ot#er forms of recoery (ecuse t#ere remins no
#indrnce s regrd to t#e 7untum of loss t#t cn (e recoered. T#us+ t#e climnt cn
successfully recoer ll kinds of losses suffered (y #im s conse7uence of (rec# of t#e
relted indemnity. Trditionlly+ n indemnity clim ws regrded s de(t clim+ so principles
), @)81. #
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relted to mitigtion nd remoteness w#ic# re generlly Applic(le for dmges in cse of
(rec#+ were deemed inpplic(le in cse of indemnity. In t#is regrd+ t#e cse of ,oys%ot
'ommer%ial Leasing Ltd v Ismail *7 is pertinent.
In t#is cse+ director w#o #d proided n indemnity for n e7uipment lese grnted to t#ecompny climed t#t t#e lessor s#ould #e mitigted t#e loss suffered (y reson of defult of
t#e lessee. -e:ecting t#is clim+ t#e court pointed out t#t / clim under contrct of indemnity
is not clim in dmges t ll+ (ut it is clim in de(t for specified sum due on t#e #ppening
of n eent w#ic# #s occurred.0
So+ trditionlly+ it ws (elieed t#t t#ese principles relted to remoteness nd mitigtion do not
pply in t#e cse of indemnity+ nd -oyscot ws cited s n ut#ority for t#e sme. oweer+ t#is
norm ws 7uestioned (y t#e Court of Appel in T#e Eurus cse. ere+ t#e court #eld t#t w#enindemnity is triggered (y (rec# of contrct+ suc# indemnity+ s mtter of construction+
coers only foresee(le conse7uences cused (y suc# trigger. T#e Court of Appel ffirmed
prgrp# from ls(uryHs $ws of Englnd stting t#t t#e e*tent of personHs li(ility under
n indemnity depends on t#e nture nd terms of t#e contrct.0
T#us+ it cn (e concluded t#t t#e prties #e t#eir own freedom to n greement contining no
proision to t#e contrry+ #oweer+ n /e*press e*clusion0 will (e re7uired to persude t#e courts
to look into t#e mtter of w#et#er t#e contrctul indemnity in 7uestion ws intended to coer more t#n t#e norml indemnity in terms of dmges.
T#oug# t#e two foreBsid decisions mig#t pper to (e contrry+ yet+ it #s (een suggested t#t
t#ey re reconcil(le.
T#e :udgment deliered in T#e Eurus cse+ ctegoriclly pinBpointed t#t t#ere remins no
in#erent indiction s to w#t is coered (y n indemnity+ s t#e sme is dependent on t#e
indiidul contrct w#ic# cn ry from one to not#er. In -oyscot+ indemnity #d specific
reference to sum e7uilent to de(t+ nd since t#ere remins no duty to mitigte in de(t like in
cse of dmges+ t#e results ried in t#ese two cses. T#us t#e conclusion is little uncertin.
"espite t#is+ it ppers t#t t#e rules of remoteness nd mitigtion will (e pplic(le to
indemnities triggered (y reson of (rec# of contrct.
)9 29 A'ril )993 +CA-
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Also+ t#e legl position relted to pplic(ility of suc# principles to indemnities for loss rising
out of specific circumstncesGsitutions is m(iguous+ since t#ere remins no ut#ority in t#is
issue. In t#e Eurus cse+ it ws specificlly stted t#t t#e court did not ddress suc# situtionsw#ere n indemnity is triggered ot#er t#n (y (rec# of contrct. oweer+ common (elief
e*ists s to suc# rules (eing not pplic(le in t#e (oe circumstnces.
"mges under Indin $w.
At t#e outset+ it is importnt to first e*mine t#e sttutory proisions relted to indemnifiction
nd t#e min points of difference (etween rig#t to indemnifiction nd rig#t to dmges. T#us+ it
is pertinent to study t#e definition of indemnity s per t#e Indin Contrct Act+ &9@2. T#e Act
defines indemnity in nrrow sense to men 1 contrct w#ere t#e indemnifier grees to protect
t#e indemnified prty from ny loss cused to it eit#er (y t#e conduct of t#e indemnifier #imself
or (y t#e conduct of ny ot#er 5t#ird6 person. It is notewort#y to mention t#t t#e (oe
definition does not coer wit#in its m(it losses conse7uentil to eents w#ic# do not depend on
t#e conduct of t#e indemnifier or ny ot#er t#ird person+ suc# s (y reson of ny eent cused
(y n ct of Jod. Een t#e $w Commission #d tken note of t#is nomly in its &3t# report
nd recommended e*pnding t#e definition of indemnity (y proiding for n mendment in t#e
Indin Contrct Act so s to (ring more clrity nd certinty on t#is issue.
Section @3 of t#e Indin Contrct Act reltes to dmges w#ic# gies t#e contrcting prties
rig#t to clim dmges in cse of (rec# of contrct. oweer+ 7uite often t#ese two concepts
re confused wit# ec# ot#er+ since t#ey seem to coincide wit# ec# ot#er in t#e cse of (rec# of
contrct. Interestingly+ t#e end result comes out to (e t#e sme+ een t#oug# t#ey re essentilly
two distinct nd unrelted legl concepts.
T#oug#+ t#ere re mny key differences (etween t#e two sections+ t#e one concerning 7untum
of recoery is definitely t#e most striking. A plin reding of t#e lnguge of sections @3 nd &24
gies n inference t#t t#e rig#t to recoer loss out of n indemnity my not necessrily (e
su(:ect to ll t#e sttutory constrints on rig#t to clim dmges s set out under section @3+ suc#
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s t#e re7uirement t#t t#e loss s#ould (e direct+ immedite nd not remote+ t#us not coering
conse7uentil loss+ etc.
Section &24 does not only restrict its scope to loss w#ic# #s lredy (een suffered (y t#e
indemnity #older+ (ut lso includes t#e o(ligtion to se suc# #older from n e*pected loss+w#ic# would ot#erwise itite t#e ery purpose of n indemnity.
Gajanan Moreshar !arel"ar v. Moreshar Madan Mantri 28 is one of t#e most importnt cse
lws in respect to t#e concept of indemnity.
T#e $w Commission of Indi ccepted t#e iew t#t+ to indemnify does not only men to
reim(urse in respect of t#e money pid+ (ut+ in ccordnce wit# its sid derition+ it includes to
se from loss in respect of t#e li(ility ginst w#ic# t#e indemnity #s (een gien.
2 S%'ra n*1
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Conclusion.
-ecently+ indemnity cluses #e (ecome 7uite populr nd re used widely in commercil
trnsctions+ especilly due to n incresed risk of loss from rious sorts of t* li(ilities+ l(our
trou(les+ etc.+ w#ic# re essentilly unforesee(le eents t t#e time of entering into contrct.
As it is known nd specificlly proided+ one cnnot clim compenstion for (rec# of contrct
w#en t#e loss suffered is indirect ndGor remote. oweer+ t#ere remins no suc# e*ception for
contrct of indemnity. ?uc# is left to t#e contrctul freedom nd will of t#e prties. A typicl
indemnity cluse t#us proides for protection ginst ll kinds of losses+ clims nd li(ilities+
#owsoeer rising in reltion to t#e specified trnsction.
T#us+ t#e Indin lw position seems to (e no different from t#e common lw one in t#is regrd+
t#oug# muc# depends on t#e nture nd wordings of t#e contrct in 7uestion nd t#e CourtHs
inference of t#e intention of t#e contrcting prties to include conse7uentil losses. T#us it cn
(e concluded t#t s generl rule+ t#e lw usully lens unfour(ly towrds t#ose w#o try to
oid li(ility or seek e*emption from li(ility of t#eir ctions+ irrespectie of w#ere t#e cuse of
ction rises.
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'i(liogrp#y.
?ercntile $wB Atr Sing#
$w of Contrcts nd Specific -elief ActB Atr Sing#
Indin Contrct Act+ &9@2
Indin ,rtners#ip Act+ &%32