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Contract of Indemnity
[1990] 4 CLA (Mag.) 303
P M BAKSHI
The distinction between a contract of guarantee and a contract of indemnity is a subtle one. In the article below, Shri Bakshi explains the law
on the subject in Britain and in India.

DEFINITION
1. Section 124 of the Indian Contract Act, 1872 defines 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. The English concept of this contract is not
substantially different In fact, Halsbury's Laws of England, 4th edn., Vol. 20, p. 164, para 305, while offering its own definition, also refers to
the Indian definition in a footnote by way of comparison. Halsbury defines indemnity as a contract by which one party agrees to make good
a loss suffered by the other. Halsbury notes that in the widest sense, it would include contracts of insurance and a contract of guarantee ;
but points out that indemnity may be limited to describing a contract to save the promisee from loss caused by the claims of third parties,
which will not then include a contract of marine insurance against loss or damage to the subject matter of insurance and can even be
differentiated from 'liability insurance'.
1.1 Chitty on Contracts (1961), Vol. 2, p. 452, para 1026, draws a distinction between guarantee and indemnity. The former is a promise to be
liable for a debt conditionally on the principal debtor making a default, while the latter is a promise to become liable for a debt whenever a
person to whom the promise is made should become liable. Liability is in this case independent of the question whether somebody else makes
a default or not - Guild v. Conrad [1894] 2 QBD 885.

HOW ARISING
1. A right to indemnity may be created by express contract or by implied contract or by law. Circumstances may attach a duty to indemnify,
because there are cases in which an indemnity is given on an assumed promise by a person to do what under the circumstances he ought
to do - Birmingham & District Land Co. v. London & North Western Railway [1886] 34 Ch.D 261.
2.1 Liability under a contract of indemnity is coterminous with the liability which it is intended to cover - Hornby v. Cardwell [1881] 8 QBD 329.
Of course, this proposition may be subject to contract to the contrary and, in this sense, each case must be governed by its own facts and
circumstances. A trader hired a driver and van on month to month basis from a carrier, undertaking to indemnify the latter against 'all claims or
demands whatsoever'. A customer's percel was stolen from the van owing to the driver's negligence. The clause applied- Gillespie Brothers &
Co. Ltd. v. Roy Bowles Transport Ltd. [1973] 1 All ER 193 (CA). Indemnity against claims arising from causes other than negligence would not
exclude a breach of statutory duty, because 'negligence' did not include breach of statutory duty - Murfin v.United Steel Co. Ltd. [1957] 1 All
ER 53. Similarly, an indemnity against 'all claims and demands or liability whatsoever' would not include a claim by the party giving the
indemnity - Western Railway Co. v. James Durford & Sons Ltd. [1928] 44 TLR 415 (HL). Incidentally, exemption clauses as to negligence
have been extensively considered in Canada Steamship Lines v.R [1952] All ER 305 (PC).

COVERAGE OF INDEMNITY
1. Indemnity clauses should be drafted carefully, because bad drafting, which is ultimately found not to cover a particular loss or liability, would
be an economic loss. A covenant of indemnity given by a continuing partner to incoming partners against the existing liability of the firm,
was held to cover only payments made by the incoming partners out of private means - Grylls v. Grylls, Mann, Kendall [1869] 18 WR 85.
Even where the indemnity clause covers the situations, the amount recoverable thereunder will only cover that loss which is directly
connected with the event contemplated by the indemnity clause. For example, in the English case of Hooper v. Bromet [1904] 90 LT 234
(CA), the indemnity was against inaccuracy in a copy of lost title deed. Subsequently, the title deed in original was found and it was
discovered that it contained a building restriction, which was not reproduced in the copy. In an action by the promise, there arose the
question as to what amount he should recover. The adjoining owner had filed an action to enforce the deed. The person indemnified sued
the person giving indemnity for compensation for the following items:
• Difference in the value of the land in the light of the restriction
• Cost of removing the building erected after the notice of the true terms of deed
It was held that only difference in the value of the land could be recovered, and also that the plaintiff could not recover for defences
unreasonably put forward in action.

IMPLIED DUTY TO INDEMNITY

1. A duty of indemnity may (as stated above) be created by law, apart from contract Thus, it is the general principle of law that when an act is
done by one person at the request of another and the act is not, in itself, manifestly tortuous to the knowledge of the person doing it, and
turns out to be injurious to the rights of third party, then the person doing it is entitled to an indemnity from the person who requested for the
act should be done. This is the gist of what the Lord Chancellor Earl of Halsbury stated in Sheffield Corpn. v. Barclay [1905] AC 392 (HL).
Thus, as was held in that case, a request to register the transfer of stock imports a promise to indemnify the person registering against the
consequences of the transfer being a forgery. Similarly, if the master of a ship, acting on the instructions of his time charterers, delivers
goods without the production of bills of lading, thereby causing damage to a third party, the time charterers would be liable to indemnify trie
owners - Strathlone Steamship Co. v. Andrew Weir [1934] 40 Commr. Cas. 168.
4.1 The law imposes on a person for whom another person stands surety or bail an obligation to indemnify - Toussaint v. Martinnant [1775-
1802] All ER 338 and Perkins, In re. [1898] 2 Ch. 182. Similarly, the law implies a promise on the part of the principal to indemnify his agent
against any liability which the agent may incur, from the execution of its authority as an agent - Halsbury, 4th edn., Vol. 1, para 807. The
indemnity extends to all liabilities reasonably incurred or discharged by the agent in the execution of his authority : Treitel, Law of Contract
(1966), 553 - Christoforides v. Terry [1924] AC 566 and Thacker v. Hardey [1878] 4 QBD 685. Conversely, in a contract of service, it is an
implied term that the servant should indemnify his master against any liability to third parties incurred by the master, by reason of the servant's
negligence, in doing what he was employed to do - Lister v. Romford Ice & Cold Storage Coy Ltd. [1957] AC 555 and Chitty, Contracts' (1961)
Vol. 2, p. 508, para 1165.

TIME FOR ENFORCEMENT

1. In England, the position regarding the exact moment of time at which the right to enforce indemnity arises has been considered at length by
the writers on the subject -Halsbury, 4th edn., Vol. 20, p. 173, para 315. In law, that is to say in common law, an action on a contract of
indemnity does not normally lie until the promisee has paid the claim of the third person. Where he has paid it, then he can recover it from
the promisor as a debt due to him and (save in certain exceptional circumstances) he may recover it with interest in an action. But a
contract may make a special provision whereunder the right may be enforced even at law, before payment has been actually made by the
person indemnified - Toussaint v. Martinnant [1787] 2 TR 100. Apart from this, an obligation arises in equity as soon as the liability of the
promisee to the third person arises. "Moreover, unless the terms of the contract expressly forbid it, and except in the kind of exceptional
circumstances already referred to, the former rules of equity now prevailing in all courts, enable a person entitled to an indemnity to obtain
relief as soon as his liability to the third person has arisen and before he has made payment." (Halsbury).

INDIAN CASES AS TO ENFORCEMENT

1. In the case of Chunnibhai Patel v. Nathabhai ATR 1944 Pat. 185, it was held that section 125 does not mean that indemnity cannot be
claimed until the claimant has already paid the damages. The Court relied on the judgment of Buckley, LJ in the case of Richardson, In re.
[1911] 2 KB 705 and also the case of Shivlal v. Abdul Salem AIR 1931 All. 754. This case laid down the proposition that where a person
contracts to identify another in respect of any liability which the latter may have undertaken on his behalf, such other person may compel
the contracting party, before actual damage is done, to place him in a position to meet the liability that may thereafter be cast upon him.
6.1 Sometimes, some earlier Nagpur rulings of 1919 and 1956 are cited to support the proposition that a person suing on an indemnity must
have actually paid the amount before he can recover. But this does not appear to be the correct view. For example, in the Calcutta case of
Prafulla Kumar Basu v. Gopee Bullabh Sen AIR 1946 Cal. 159 A N Sen, J held that where A has agreed to indemnify B against any loss or
injury, B is entitled to have recourse to the indemnity and to call upon A to discharge his liability, as soon as the loss or injury becomes
imminent. B is not bound to wait until he actually suffers loss or injury. He noted, that in England, equitable relief had been granted in the
circumstances. In fact, he went to the length of saying that the indemnified person can recover even though no judgment has been passed as
yet against him. If the court were to postpone relief in this fashion, it would encourage litigation ; and that, in his opinion, could not be the
object of law or of equity. When the injury becomes imminent, the indemnity holder can come to the court and ask that he be protected and the
court must decide whether or not the claim of the third party against the indemnity holder is well founded; if it so decides, it must grant relief to
him and not postpone the indemnity holder until a decree has been passed against him.
6.2 In the case Prafulla Kumar Basu's case (supra), the following passage (p. 376) from the English case of Blundell, In re. [1888] 40 Ch. D
370 was quoted with approval:
"What is the right of indemnity ? I apprehend that in equity at all events, it is not the right of a trustee to be indemnified until after he has made
the necessary payment to his solicitor or to the auctioneer or to the stockbroker, but that he is entitled to be indemnified, not merely against
payments actually made, but against his liability, for example, a trustee in whose name shares in a company are standing, is entitled to an
indemnity from his cestui que trust against payment of calls made upon the shares and he is not bound before having recourse to the
indemnity to pay the calls, but he is entitled to come to the court and ask that he may be paid by his cestui que trust personally the amount of
the calls in order that he may be able to pay them"
6.3 Some of the older decisions in India seem to suggest that some courts have taken the view that a person in whose favour indemnity is
executed cannot sue until the person indemnified actually makes payment. However, this does not seem to be the generally accepted view.
Sometimes a Lahore case is cited. In the Lahore case of Sham Sunder v. Chandu Lai AIR 1935 Lahore 975, Din Mohammed, J held that in
section 125 of the Contract Act, the expression 'may be compelled to pay' may either mean 'may have paid' or 'may have been made to pay
under compulsion' or, in the alternative, it may mean 'may be liable to pay'. He preferred the interpretation that a man cannot be said to have
been indemnified, so long as he is not deprived of anything. A mere remote chance of being deprived will not entitle him to realise damages
from the indemnifier. "Any suit brought before the actual loss has accrued will be dismissed as premature." But this ruling nowhere lays down
that the promisee in a contract of indemnity must actually pay before he can recover. All that it stresses is that the liability must have accrued.
6.4 In the case of Gajanan Moreshwar v. Moreshwar Madan AIR 1942 Bom. 302, Chagla, J held that if the person indemnified has incurred a
liability and the liability is' absolute, then he is entitled to call upon the person indemnifying, to save him from that liability and to pay it off. In
that case, the promisor under the agreement of indemnity had promised to discharge a mortgage executed by the promisee in favour of a third
party in a peculiar circumstance. The promisee had secured land from the Municipal Corporation on lease, but transferred the benefit of the
lease with the Corporation in favour of the promisor. Thereafter, the promisor entered into possession of the plot, and commenced to erect a
building thereon. For the expenses incurred in construction, the promisor got executed a mortgage by the promisee in favour of the person
who had supplied the building material. The mortgage had to be executed by the promisee because the land stood in his name. The promisor
undertook that he would be responsible for discharging the mortgage and that, in due course, he would execute another mortgage deed in
favour of the mortgagee in place of the one executed by the promisee. The promisee wrote a letter to the corporation for transfer of the plot to
the promisor, which transfer deal was sanctioned, though no formal lease had been executed by the corporation in favour of the promisor.
Thereafter, on several occasions, the promisee called upon the promisor to get a release of the mortgage, but the latter failed to do so.
Thereupon the promisee sued the promisor on the contract of indemnity to call upon the promisor to get a release of the mortgage. The High
Court held that he was entitled to do so. The following passage from the judgment of Chagla, J will show the reasoning on which the
conclusion was based:
"It is true that under the English common law, no action could be maintained until actual loss had been incurred. It was very soon realised that
an indemnity might be worth very little indeed, if the indemnified (person) could not enforce his indemnity till he had actually paid the he had
actually to wait till a judgment was pronounced and it was only after he had satisfied the judgment that he could sue on his indemnity. It is
clear that this might, under certain circumstances, throw an intolerable burden upon the indemnity holder. He might not be in a position to
satisfy the judgment and yet he could not avail himself of his indemnity till he had done so. Therefore, the court of equity stepped in and
mitigated the rigour of the common law. The court of equity held that if his 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. As a matter of fact, it has been conceded at the bar by Mr. Tendolkar that in England, the plaintiff could have maintained a suit of the
nature which he has filed here; but, as I have pointed out, Mr. Tendolkar contends that the law in this country is different. I have already held
that sections 124 and 125 of the Contract Act are not exhaustive of the law of indemnity and that the courts here would apply the same
equitable principles that the courts in England do. Therefore, if the indemnified has incurred a liability and that liability is absolute, he is entitled
to call upon the indemnifier to save him from that liability and to pay it off.
It is further argued by Mr. Tendolkar that in this case the liability of the plaintiff is not absolute but contingent. Mr. Tendolkar says that there is
nothing to show that if the mortgagee was to sue to enforce his mortgage and the property was sold, there would be any definite for which the
plaintiff would be liable. Mr. Tendolkar overlooks the fact that under both the mortgage and the further charge, there is a person covenant by
the plaintiff to pay the amount due, and it would be open to the mortgagee to sue the plaintiff on the personal covenant reserving his rights
under the security. Therefore, the liability of the plaintiff under the personal covenant is absolute and unconditional, and he would have no
answer to a suit filed by the mortgagee under that covenant."
A guarantee is a promise by a third party to pay the creditor if his debtor fails to meet his liability. The liability of the guarantor is secondary and
that of the debtor, primary. A contract of indemnity creates primary liability for the promisor even if the promisee has no enforceable rights
under the principal contract - Yeoman Credit Ltd. v. Latter [1961] 1 WLR 828. In Britain, a guarantee has to be evidenced in writing while an
indemnity does not have to be: both can be either oral or written in India. Does indemnification mean making good a loss that has already
been suffered or prevention of a damage ? The following are the observations of Kennedy, L] in Liverpool Mortgage Insurance Co.'s, In re.
[1914] 2 Ch. 617, at p. 638: "To indemnify does not merely mean to reimburse in respect of moneys paid but (in accordance with its derivation)
to save from loss in respect of the 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." The
High Courts of Calcutta, Madras, Allahabad and Patna have also held that the indemnity-holder can compel the indemnifier to place him in a
position to meet the liability that may be cast on him, without waiting until he has actually discharged it - Profulla Kumar v. Gopee Ballabh AIR
1946 Cal. 159 and Chunibhai Patel v. Natha Bai AIR 1944 Pat. 185. Judicial Commissioner, Nagpur and the Lahore High Court have taken the
view that the question of indemnification arises only if a loss has been incurred - Sham Sundar v. Chandul Lai 1935 AIR Lah. 974 and
Ranganath v. Pachu Sao AIR 1935 Nag. 147.
The Bombay High Court expressed itself in favour of the latter view in Shankar Nunbaji v. Laxman Supdu AIR 1940 Bom. 161. But this ruling
was not followed by Chagla,} in Gaganan Moreshwar v. Moreshwar Madan AIR 1942 Bom. 302 from which Shri Bakshi has quoted in his
article above. There is no Supreme Court ruling on the subject yet. The terms of the indemnity may vary from case to case. For instance, in V
M R V Ramaswami Chettiar v. R Muthu Krishna Iyer AIR 1967 SC 359, the indemnity bond undertook to reimburse loss sustained if the sale of
the share of a minor in a conveyance made by the father was set aside. Similarly, in Srinivas Gupta v. Hindustan Commercial Bank Ltd. [1967]
37 Comp. Cos. 434 (SC), the issue was the liability of the treasurer of a branch of a bank for the loss of goods accepted as security by the
bank from its constituents. Reference may also be made to the article separately carried out at pp. 307-10 of this issue on encashment of bank
guarantee (P K Mittal) in this connection.
Nothing illegal can be indemnified. Indemnity is also likely to be forfeited where the person to be indemnified commits a fraud on the
indemnifier, e.g., an agent defrauding his principal. Sections 124 and 125 of the Contract Act, which define a contract of indemnity and also
the rights of the indemnity-holder when sued do not embody the whole law on the subject.
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