Indemnity
1
Indemnity
2
Contract of indemnity is one of the specific contract having some specific features along with all the essential of a valid contract as given in Indian Contract Act, 1872. It is a class of contingent contract. Indemnity, is a specific contract express or implied, to keep a person harmless from loss which that person may incur by reason of some act, omission or event. A form of indemnity may be illustrated by “If you will supply goods to „A‟. „A‟. I will see you paid”. There is, as a rule, a right of subrogation to all the t he remedies available to the person indemnified under an indemnity available to a person indemnifying.
Indemnity
2
Contract of indemnity is one of the specific contract having some specific features along with all the essential of a valid contract as given in Indian Contract Act, 1872. It is a class of contingent contract. Indemnity, is a specific contract express or implied, to keep a person harmless from loss which that person may incur by reason of some act, omission or event. A form of indemnity may be illustrated by “If you will supply goods to „A‟. „A‟. I will see you paid”. There is, as a rule, a right of subrogation to all the t he remedies available to the person indemnified under an indemnity available to a person indemnifying.
Section 124 of Indian Contract Act says that A contract of indemnity means 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. The person who makes the promise is known as the indemnifier and the person to whom the promise is made is known as the indemnity holder. Indemnity is a protection against the loss, especially in the form of a promise to pay for the loss of of money or goods by a person to the other while entering in a transaction with the third party. party.
3
The definition of „Contract of Indemnity‟ under Section 124 of Indian Contract Act does not include
(i) implied promises to indemnify and
(ii) cases where loss arises from accidents and events not depending on the conduct of promisor or any accidents and events not depending on the conduct of promisor or any other person.
This definition is not exhaustive. In Gajanan Moreshwar Vs.Moreshwar Madan AIR (1942) Bom-302, it has been held that “Section 124 and 125 of Indian Contract Act are not exhaustive and the Courts here would apply the same equitable principles that the Courts of England do.”
A contract of indemnity may be express or implied. An implied contract of Indemnity may be inferred from the circumstances of the case or from relationship of the parties. (Section 69 of Indian Contract Act also implies a promise to indemnify.)
4
Essential conditions for a contract of indemnity:Promise: Express promise to indemnify There should be a promise by one person to the other person. Saving from loss :. The second condition is that the promise should be for the purpose of saving from the loss. Loss by Human Agency: - The loss should have been caused due to the conduct of the promisor himself or by the conduct of any other person. But the loss should be caused through human agency.
5
„A” contracts of indemnifying „B‟ against the consequence of any proceedings which „C‟ may take against „B‟ in respect of a certain sum of Rs. 200. This is a contract of Indemnity.
GAJAN MORESHWAR vs. MORESHWAR MADAN 1942 BOM 302, FACTS: G Moreshwar got a plot in Bombay for a long lease period. He transferred the lease to M Madan for a limited period. M Madan started construction over the said plot and got his supplies from a K D Mohan Das. When Mohandas asked for payment, the defendant could not pay up. Upon request of M Madan, G Moreshwar executed a mortgagee deed in favor of K D Mohan Das. Mohandas, the supplier. Interest rate was decided and G Moreshwar put a charge over his properties. A date was set for the return of the principal amount. M Madan had agreed to pay the principal amount, the interest and to get the mortgage deed released before a certain date. M Madan did not pay anything to K D Mohan Das; it was G Moreshwar who paid some interest. When despite repeated request, M Madan did not pay the principal amount, interest or get the mortgage deed released, G Moreshwar sued him for indemnity 6
HELD: The Privy Council did not accept M Madan‟s stance that G Moreshwar had suffered no loss and thus could not claim anything under Sections 124 and 125. The Council held that an indemnity holder has rights other than those mentioned in the Sections above. If the indemnity holder has incurred a liability and the liability is absolute, he can turn to the indemnifier to take care of the liability and pay it off. Thus, G Moreshwar was entitled to be indemnified by M Madan against all liability under the mortgage and deed of charge.
7
In G A J A N M O R E SH WA R v s . M O R E S H WA R M A D A N A I R 1942 BOM 302 , it was decided that law relating to indemnity is by no means exhaustive and thus, the Courts in India shall follow the English Law. In the same case, English equity law was discussed; whether requiring an indemnity holder to actually pay and clear the damages before claiming them from the indemnifier places an undue burden on the indemnity holder. Thus, if the liability of an indemnity holder became absolute, he was held entitled to get the indemnifier to pay off the claim or to pay the court sufficient amount of money for making a fund to pay the claim as and when it was made. Position in EnglandUnder English law, the word “indemnity” carries a much wider meaning than given to it under the Indian Contract Act. It includes a contract to save the promise from a loss, whether it be caused by human agency or any other event like an accident and fire..
8
A contract of indemnity may be express or implied An implied contract may be inferred from the circumstances of the case or relationship of the parties
ADAMSON vs. JARVIS [1827] 4 BING 66 FACTS: Adamson was an auctioneer who was given cattle by Jarvis to be sold at an auction. Adamson followed the instructions and sold the cattle. But Jarvis was not the owner of the cattle. The real owner of the cattle s ued Adams for conversion and was successful. Adamson had to pay damages and he then sued Jarvis to be indemnified for the loss that he suffered by way of damages to be paid to the real owner. HELD: Adamson carried out Jarvis‟s instructions and was entitled to presume that if anything went wrong as per instructions, he would be indemnified. Jarvis was ordered to pay damages to Adams.
9
Rights of indemnity-holder when sued The following rights have been conferred by section 125 of the Act – All damages which the indemnity holder may be compelled to pay in a suit to which this contract applies( in respect of any matter to which the promise of the indemnifier applies) If A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a particular transaction. If C does institute legal proceeding against B in that matter and B pays damages to C, A will be liable to make good all the damages B had to pay in the case.
10
b) all the costs of suits that he may have had to pay to the third party provided he acted as a man of ordinary prudence and he did not act in contravention of the directions of the indemnifier or if he had acted under the authority of the indemnifier to contest such a suit. In the case of ADAMSON vs. JARVIS [1827] 4 BING 66, Adamson was entitled to recover the money he had to pay to the true owner of the cattle as well as any expenses incurred by him to get a legal counsel, etc.
11
c) All the sums that he may have paid under the terms of any compromise of any such suit provided such compromise is not contrary to the indemnifier‟s orders and was a prudent one or if he acted under authority of the indemnifier to compromise the suit. The indemnity holder is also entitled to losses due to change of law not foreseen by the parties when they entered into such contract of indemnity
12
Time of commencement of the indemnifier‟s liability under the contract of indemnity: Sec 125 does not state the time of commencement of the Indemnifiers liability under the contract of indemnity.Different High Courts have been observing different rules in this connection. Some High Courts have held that the indemnifier is not liable until the indemnifier has incurred an actual loss. Other have held that indemnified can compel the indemnifier to make good his loss even before the actually discharge his liability. It has been observed by Buckley L.J. in Richardson, ex party etc. Re(1911) 2 K.B.705. “Indemnity is not given by repayment after repayment. Indemnity requires that the arty to be indemnified shall never be called upon to apply. The latter view, which is based on equitable principles, has now almost come to stay.
13
• Liverpool Insurance Co‟s Case (1914) “….To indemnify does
not merely mean to reimburse in respect of moneys paid, but to save from loss in respect of liability against which the indemnity has been given. If it be held that payment is a condition precedent to recovery, the contract may be of little value to the person to be indemnified, who may be unable to meet the claim in the first instance.”
• Similar observation was made by Chagla J. in the case of
Gajanan Moreshwar Vs.Moreshwar Madan AIR (1942) Bom.302, that “if the Indemnified had incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and pay if off:
14
GUARANTEE Section 126 A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called surety, the person in respect of whose default the guarantee is given is called the „principal debtor‟ and the person to whom the guarantee is given is called the „creditor‟. Oral or written Express or implied So a contract of guarantee must be two contracts- a principal contract between the principal debtor and creditor and a secondary contract between the creditor and surety.
15
Example S requests C to lend Rs 500 to P and guarantees that if P fails to pay the amount he will pay. This is a contract of guarantee. Principal Debtor- P Creditor Surety -S
16
-C
17
As between C and P-there is a contract out of which the guaranteed debt arises. As between S and C-there is a contract by which S guarantees to pay to C,P‟s debt in case of his default. As between S and P, there is a contract that P shall indemnify S in cases S pays in the event of a default by P. This contract if it is not express it is always implied(the third contract is like an invisible contract. It is implied)
Essential features of a contract of Guarantee: 1.Concurrence- A contract of guarantee requires the concurrence of all the three parties to it- The PD, the C and the S 2.Primary Liability in some person-There must be a primary liability in some person other than the surety. 3.Essentials of a valid contract-
18
Types of Guarantee
Specific Guarantee- A guarantee which attends to a single debt or specific transaction is called a specific guarantee. The liability of the surety comes to an end when the guaranteed debt is duly discharged. Continuing Guarantee- Sec 129 A guarantee which extends to a series of transactions is called a continuing guarantee. A continuing guarantee may be given for a part of debt or the entire debt A guarantees payment to B, a tea- dealer, to the amount of pound 100, for any tea he may from time to time supply to C. B supplies C with tea to above the value of pound 100, and C pays B for it. Afterwards B supplies C with tea to the value of pound 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of pound 100.
19
Revocation of continuing guarantee A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.
20
Rights of Surety Rights against the principal Debtor 1. Rights of Subrogation( sec 140 Right of surety against principal debtor) On payment of guaranteed debt or performance of the guaranteed duty, the surety acquires all rights which the creditor had against the principal debtor which could be exercised by the creditor earlier when the payment was due. Sec. 140 2.Rights to indemnity (sec 145)- Surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but, no sums which he has paid wrongfully 21
Rights against the Creditor 1.
Right to Securities (Sec 141)- A surety is entitled to the benefit of every security which the creditor has against the principal debtor. He is entitled to have the possession of the goods put as security before the creditor at the time of contract.
2. Right to Claim set off- The surety has the right to claim set off or counter claim, if any,the debtor has against the creditor
22
Right against the co- sureties Co-surety- Meaning and Its liability : Sometimes, there is a condition that the creditor will not act unless any other person does not join as co-surety. The liability of the co-surety is also co-extensive with that of the principal debtor and provides an additional security to the creditor. The creditor can proceed against the co-surety without suing the surety or the principal debtor first. Though, ultimately the amount will be shared by the above mentioned persons W h e n t h e s a m e d e b t o r d u t y i s g u a r an t e ed b y t w o o r m o r e p er s o n s , s u c h p e r s o n s a r e called co -su reties.
Rights against the Co- surety : The co-surety owes a duty to share the payment equally. This sharing is possible when they are co-sureties for the same debt. It is immaterial whether they have agreed to share jointly or severally. Sec. 146 Right of Contribution-When one of the co-sureties makes payment to the creditor, he has a right to claim contribution from the other cosurety or co-sureties.Sec146-147 Sec 146-absence of contract-equal contribution Sec 147-liability bound in different sums, 23
The surety can take the security which was placed before the creditor at the time of contract of guarantee. The goods received after the contract of guarantee cannot be touched by the surety in any circumstances. If the goods given as security are lost by the creditor then that loss will release the surety from making payment
Though the co-sureties can decide something contrary to this principle by a stipulation in the contract it may be a possibility that one of the sureties may be released and the other may still be under stress of liability .
24
Liability of Surety: According to Sec 128 of the Contract Act, the liability of the co-surety is co-extensive with the principal debtor. It means that the liability of the surety is the same as that of the principal debtor. If the amount of debt of the principal debtor is decreased because of whatever reason there will be decrease in the liability of the surety to that extent. For example, if the principal debtor is a minor and the remedy cannot be availed of due to his minority, the same excuse may be pleaded by the surety also
Extent of SURETY’s liability
Liable on default of principal debtor Duty to see that principal debtor fulfills his obligation on time If some variation is done in the contract without telling the surety , then the surety is not liable.
25
• . • Suit for Claim Against Surety: • The liability of the surety is joint and several. Hence, the creditor can sue
the surety instead of suing the principal debtor first.
26
DISCHARGE OF SURETY FROM LIABILITY
Notice of revocation…generally continuing guarantee [section 130] Death of surety [SEC. 131] Variance in terms of contract [SEC. 133] Release or discharge of principal debtor [SEC.134] Arrangement by creditor with principal debtor without surety‟s knowledge [SEC. 135] Loss of security [SEC.141], etc
• Modes of Discharge of Surety : The following modes are recognized by the
Contract Act for the discharge of co surety • 1. Revocation by Surety (Sec. 130) : A surety gets released from future
transaction when he gives notice to the creditor for this purpose. The release from liability under this mode extends to the future transactions only. It means that the liability for the past transaction will still continue. Revocation is possible in continuing guarantee only Sec130
• 2. By death of the Surety (Sec. 131) : The death of the surety abates or
washes the liability of the surety. The person is not in existence now against whom the proceedings could be initiated. But, the parties may decide contrary to this rule.
• 3. By variance in the terms of the contract (Sec. 133): If there is any
variance in the terms of the contract between the principal debtor and the creditor without the consent of the surety, the surety gets discharged as regards transactions subsequent to such a change. The reason for such a discharge is that the surety agreed to be liable for a contract which is no more there and he is not liable on the altered contract.
28
• 4. By Release or Discharge of Principal Debtor (Sec. 134 ) : The liability
of the surety, according to section 128, is co-extensive with that of the principal debtor. Therefore, if by any contract between the creditor and the principal debtor is released, or by any act or omission of the creditor, the principal creditor is discharged, the surety will also be discharged from his liability accordingly.
• 5. When the Creditor Compounds with, gives time to or Agrees not to Sue
the Principal Debtor (Sec. 135) : A contract between the creditor and the principal debtor, by which the creditor makes a composition with or promises to give time to or not to sue the principal debtor, discharges the surety unless the surety assents to such contract.
• 6.By Creditor‟s Act or Omission Impairing Surety‟s Eventual Remedy (Sec.
139) : Section 139 provides that „if the creditor does not act, which is inconsistent with the right of the surety, or omits to do an act which his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.
• 7. By Loss of the Security by the Creditor (Sec. 141) : According to
section 141, the surety is entitled to all securities, which the creditor has against the principal debtor at the time when the contract of the suretyship is entered into. If the creditor loses or without the consent of the surety, parts with such security the surety is discharged to the extent of the value of the security.
29
• Distinction
• 1. Parties : In contract of Indemnity, there are two parties, in
case of guarantee there are three parties.
• 2.Object : In contrast of Indemnity, the object is to provide
security from loss and in case of guarantee to provide additional security to the creditor. Charan Singh vs. Finance Ltd.4
• 3.Liability : In indemnity the liability of the indemnifier is
primary one and in case of contract of guarantee it is the secondary one.
• 4. Recovery of Amount after Payment : In case of Indemnity,
the indemnifier cannot recover the amount. On the other hand, the recovery can be made in case of guarantee. • 5. Number of Contract : There are only two contracts in case of Indemnity contract and there are three contracts in case of 30the guarantee.
