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MAR GREGORIOS COLLEGE OF

LAW
Nalanchira, Thiruvananthapuram

PAPER-05

SPECIAL CONTRACTS
ASSIGNMENT - EXTENT OF LIABILITY
[SECTION 125 - INDIAN CONTRACT ACT]

SUBMITTED TO: PROF. RAJ DAS KURIEN (FACULTY OF LAW)

SUBMITTED BY: ABHIJITH A U

ROLL NO: 403

SUBMITTED ON: 05-12-2016


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TABLE OF CONTENTS

Sl. No. Content Page No.


1. Introduction 3
2. Indemnity 4

3. Extent of Liability 6
4. Conclusion 7
5. Bibliography 8
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INTRODUCTION

The law of Contract is one of the most familiar legal concepts in our
society as it is so central to the essence of our political, economic, and social life.
In order for a contract to exist there are many factors to be considered like the
‘consent’ between the parties performing the contract, the object of the contract,
competency of the parties, lawful purpose, etc;.

There are many aspects of contract which are used by the public in their
everyday life. One such aspect is the contract of indemnity, the contract of
indemnity is a contract by which one party promises the other to save him from
loss occurring due to the promisor’s or any other person’s actions. This
assignment aims to confer the idea of contract of indemnity and its various
aspects.
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INDEMNITY

Section 124 of the Indian Contract Act 1872 defines a contract of


indemnity as – 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, is called 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”. For example, if ‘A’ promises ‘B’ to indemnify him for any loss
or consequences which may arise as a result of ‘B’ giving a beating to ‘C’. This
example is a clear definition of a contract of indemnity, but it cannot be said to be
legally binding, as one of the important and pre-requisite of a contract is ‘lawful
purpose’ & assaulting another is not permissible by the law.

Indemnity may be defined as the obligation or duty resting on one person


to make good any loss or damage another has incurred while acting at his request
or for his request for his benefit.1

As per this section, the rights of the indemnity holder are not absolute or
unfettered. He must act within the authority given to him by the promisor and
must not contravene the orders of the promisor. Further, he must act with normal
intelligence, caution, and care as if there were no contract of indemnity.2

Contract of Indemnity is a promise given by the indemnifier to the indemnified;


the promise may be expressed or implied based on the circumstances.3

a) A person who is interested in the payment of money which another is


bound, by law, to pay and who, therefore, pays it, is entitled to be
reimbursed by the other. (Section 69, Indian Contract Act)
b) The employer of an agent is bound to indemnify him against the
consequences of all lawful acts done by such agent in exercise of the
authority conferred upon him. (Section 222, Indian Contract Act)

We can clearly see the difference of the Contract of Indemnity in the Indian law
and the English law.

1
Dr. S R Myneni, Contract-II, Asia Law House, 1st edition 2010-11, pg.1
2
http://hanumant.com/IndemnityGuarantee.html
3
M Krishnan Nair, Contract-II, Lekha Publications, 1st edition 1986, pg.55
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Indian Law:

Indemnity in Indian law has a more narrow approach, thus the scope of
indemnity is restricted to cases where there is a promise to indemnify against
loss, caused: (a) by the promisor himself, or (b) by any other person. The
contract of indemnity in Indian law excludes the situations where the loss
happens due to accidents or due to natural calamities. The Indian law only
accepts the contract of indemnity if it is caused by human means or through
human agency4, i.e. in a case of contract of insurance the Indian law does not
apply the principle of indemnity. Indian Courts apply the English definition to
contracts of indemnity. As was observed by Justice Chagla, “Sections 124 and
125 of the Contract Act are not exhaustive of the law of indemnity and the courts
here would apply the same principles that the courts in England do”.5

English Law:

Indemnity in English law means “A promise to save another harmless from


loss caused as a result of a transaction entered into at the instance of the
promisor”. So the definition of indemnity is much wider compared to Indian law,
it also covers the loss that might be caused by events or accidents over which
nobody has any control.

In Secretary of State v. Bank of India6, B, a broker forged the signature of A, the


holder of Government promissory notes and endorsed to Bank of India. The
Bank got them renewed from the Government. A sued the government and
recovered damages. It was held that government could recover the damages from
the Bank of India on an implied contract of indemnity.

4
See Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri, [AIR (1942) Bom 302]
5
https://sol.du.ac.in/mod/book/view.php?id=644&chapterid=370
6
[(1938) 65 1A 286]
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EXTENT OF LIABILITY

Section 125 of the Indian Contract Act lays down the extent of liability of
the 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-

a) All damages the promisee is compelled to pay in any suit to which the
promise to indemnify applies,
b) All costs which the promisee bears to defend or sustain such a suit,
c) All sums which the promisee pays under the terms of any compromise of
any such suits.

In short, section 125 states that the indemnity holder can recover from the
indemnified all damages, all costs of the suit and compromise money. It is also
to be noted that a contract of indemnity being a contract must possess its basic
requisites like consensus between parties, competency, lawful object, etc;
otherwise it will not be valid.

One person’s right is the others liability, so we can say that the extent of
indemnity holder's right will be treated as the extent of the indemnifier's liability
under the contract of indemnity7, i.e. the right of the indemnity-holder to get
compensated for any loss is the liability of the indemnifier.

The liability of the indemnifier is to compensate the loss suffered by the


indemnified. And the liability of the indemnity-holder is to abide by the
instructions of the indemnifier and to not stray from it. If the promisee acts
beyond the scope of his authority, he shall not get the right of indemnity. So the
liability of the indemnifier is only up to the amount he promised to compensate.

Commencement of Liability

There is no prescribed time for the commencement of indemnifier’s


liability. The original English rule was that indemnity was payable only after the
indemnity-holder had suffered actual loss by paying off the claim. This is based
on the English maxim, “you must be damnified before you can claim to be

7
http://escontract2.blogspot.in/2013/06/125-rights-of-indemnified-liabilities.html
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indemnified”.8 In simpler terms, the liability of the indemnifier commences only


after the promisee had suffered a loss.

Under English common law, if a suit is filed for compensation indemnity


holder had to wait till a judgement was pronounced. In such situations the
waiting alone will discourage the person from maintaining the suit. The court of
equity stepped in and held that if the indemnity-holder’s liability had become
absolute then he was entitled either to get the indemnifier to pay off the claim or
to pay into court sufficient money which would constitute a fund for paying off
the claim whenever it was made.9

This principle was continued in Indian courts in the decision of Osman


Jamal & Sons Ltd v Gopal Purshttam10, A company was acting as the
commission agents of the defendant firm and in that capacity bought certain
goods for the defendants which they failed to take. The supplier became entitled
to recover from the company certain sum of money as damages for breach. The
company went into liquidation before paying the claim. It was held that the
Official Liquidator could recover the amount even though the company had not
actually paid the vendor.

The liability commences when the indemnifier or any other person does an
act which causes the indemnity-holder to suffer loss for which the contract of
indemnity is taken. The indemnifier has the liability to pay off the amount he
promised to the indemnity-holder.

CONCLUSION

As we have discussed in the above mentioned cases, the extent of liability


of the Indemnifier is to compensate the loss suffered or the expense incurred by
the indemnified. These expenses may be the direct loss he suffered, the amount
spent on maintaining a suit or the amount spent on an arbitrator. A contract of
indemnity may be expressed or implied. The extent of liability of an indemnifier
is only up to the amount he promised and commences only after the indemnified
suffers a loss due to the conduct of the indemnifier or any other person.

8
Avtar Singh, Contract & Specific Relief, Eastern Book Company, Eleventh edition 2013, pg.576
9
The court distinguished the case from its earlier decision in Shanker Nimbaji v Laxman Sapdu, AIR 1940 Bom161
10
[ ILR (1929) 56 Cal 262]
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BIBLIOGRAPHY

1. Contract-II, Dr. S R Myneni, First edition 2010-11

2. Contract-II, M. Krishnan Nair, First edition 1986

3. Contract & Specific Relief, Avtar Singh, Eleventh edition 2013

4. https://sol.du.ac.in/

5. http://escontract2.blogspot.in/2013/06/125-rights-of-indemnified-

liabilities.html

6. http://hanumant.com/IndemnityGuarantee.html

7. https://kanwarn.wordpress.com/2010/11/25/indemnity-under-indian-

contract-act-1872-part-2/

8. http://www.lawteacher.net/free-law-essays/contract-law/contract-of-

indemnity-and-law-of-guarantee-contract-law-essay.php