Critical Appraisal of Section 124 & 125 of Indian Contract Act, 1872

INTRODUCTION:

Indemnity in a literal sense means protection against loss.  In an indemnity contract, one party – the indemnifier – promises to reimburse some other party – the indemnified – for the damage experienced by the other. A contract of indemnity is a formal contract between two parties in which one pledges to protect the other from loss. Section 124 of The Indian Contract Act, 1872 defines, “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”.

The definition specified by the Indian Contract Act is very limited but surely expands the scope of indemnity to include the guarantee of indemnity for losses incurred for any reason whatsoever. Thus, except for life insurance, any sort of insurance was a contract of indemnity; nevertheless, Section 124 of the Indian Contract Act of 1872 makes life insurance a contract of indemnity. Except for life insurance, every insurance arrangement is an indemnity contract. The term is limited to circumstances when the loss was caused by human action.[1] The Indian Contract Act of 1872, on the other hand, narrows the scope by defining the contract of indemnity.

Section 125 of the Indian Contract Act, 1872 includes:

Rights of indemnity-holder when sued.— The promise 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.

An indemnity holder is permitted to collect all losses that he may have been forced to pay in any suit relating to any subject specified in the agreement. He is subject to reimbursement for all costs incurred in the establishment and defence of the litigation. He is allowed to claim all sums paid under the consent decree of such claim. However, the reimbursement must not go against the indemnifier’s wishes. It must be reasonable and permitted by the indemnifier. If he has acquired absolute duty and the contractual agreement covers such liability, he is allowed to sue for a particular performance. In an indemnification contract, the promisee has the right to claim from the promisor if he acts within the extent of his authority. When acceptance of an indemnification contract is obtained through coercion, fraud, or deception, the contract is unenforceable at the choice of the person whose permission was obtained in this manner. The goal of the contract must be legitimate, according to the Indian Contract Act,1860.

CONTENT:

• ADMITTANCE OF INDEMNITEE’S NEGLIGENCE IN INDEMNITY CONTRACT: In Metropolitan Co., Inc. VS Gordon Herkenhoff & Associates[2], the Town of Santa Fe and the Metropolitan Paving Company were sued for damages by a group of property owners who claimed the latter was negligent in the construction of a diversion. The city had filed a third-party lawsuit against the engineering company that drew up the diversion plans. The engineering firm argued in its motion for summary judgement that, even if it was negligent in preparing the plans, it was immune from liability because the paving company did agree in its contract with the town to indemnify and save pretty benign the city and its architect from all suits arising out of the detour’s construction. The district court granted overview judgement, and the Supreme Court upheld it, saying that the indemnification provision did not have to expressly include actions resulting from the indemnitee’s carelessness to hold the indemnitee harmless.

The goal of all jurisdictions’ interpretations of indemnity provisions is to figure out what the parties’ intentions are. However, the propensity to interpret such clauses is against including the indemnitee’s carelessness. The Court ruled “The vast majority of instances have resulted in conclusions that the parties did not intend to include the indemnitee’s negligence in the indemnity provision, regardless of the rule of interpretation adopted”. The problem is that a majority of courts appear to fall somewhere in between these extreme ends, requiring something less than an express reference to the indemnitee’s neglect where the intent to include such neglect is not precluded by contract language and such intent becomes apparent upon consideration of the parties and the object that induced the contract’s making.

• NO MENTION THAT IT’S NOT NECESSARY FOR A CONTRACT OF INDEMNITY TO BE IN WRITING: Although a contract should not always be in writing to be legally binding, there have always been exceptions to the rule in the law. There are a variety of other agreements that must be in writing or demonstrated in writing to be enforceable, in addition to contracts of indemnity. This means that if the debtor does not pay, the person who ensures the debt(s) of the other is liable for the debt. Such an agreement, however, will not be implemented unless it is documented in writing. This section is tight and only applies if the guarantor stands up as a subsidiary debtor if the primary debtor fails to meet his commitments. Conversely, if the guarantor assumes principal liability, this would be an indemnity rather than a guarantee. The difference between the two is that a guarantee is a contingent, arising only if the principal debtor fails to pay. An indemnity, on the other hand, is not conditional, and the indemnifier is liable for the obligation from the start. The distinction between these two kinds is significant because a guarantee is not enforceable unless it is evidenced in writing, whereas an indemnity does not have to be in writing.
• SECTION 125 IS SILENT ABOUT THE RIGHTS OF INDEMNIFIER: Section 125 of the Act simply sets out the rights of the insured and says nothing about the rights of the indemnifier, as though the negotiate on behalf has no rights and is only liable to the indemnified. In a rational order of matters, if we examine Section 141, which deals with surety rights, we can easily assume that the indemnifier’s right is the same as that of the surety. Even though the Indian Contract Act of 1872 is silent on the point when an indemnifier’s liabilities begin, legal declarations such as in the case of Khetarpal Amarnath VS Madhukar Pictures[3] indicate that the liabilities of an indemnifier begin when the liability of the indemnity-holder becomes absolute as well as certain.
• SECTION 124 RESTRICTS TO TWO PARTIES ONLY: Section 124 of the Indian Contract Act states “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.” The definition specified by the Indian Contract Act is limited to losses caused by the promisor’s act or the conduct of any other individual just as ruled in the case of Punjab National Bank VS Vikram Cotton Mills[4].
• NO EXCEPTIONS TO ACT OF GOD: Section 124 of The Indian Contract Act does not include any provision which relates to any of the procedures to be followed when the contract of indemnity breaks not because of the misconduct of either of the parties, but by any other cause which is not in the control of humans such as an Act of God. According to the Indian Contract Act, the Indemnifier is not obligated until the insured person has sustained a loss.  If the indemnified party has not fulfilled his obligation, he may persuade the indemnifier to compensate him for his loss. The judgment in the landmark case of Gajanan Moreshwar vs. Moreshwar Madan[5] observed that if the indemnified has acquired a liability and the liability is absolute, he is completely dependent on the indemnifier to rescue him from the liability and clear it off. Just in the case of New India Assurance Company Ltd. Vs Kusumanchi Kameshwra Rao & Others[6], it excludes those groups of circumstances in which the indemnification comes from losses caused by external factors or accidents that are not or may not be the result of the indemnifier’s or any other person’s activity.
•  SILENT ON OVERSIGHT OF DEFAULT: The contract of indemnity is contingent in nature and is enforceable only when an actual loss occurs. There is no provision to include the procedure to be followed when one can oversight the default in the contract of indemnity, which does not necessarily mean due to lack of honesty, good faith, or contravention with the promisor’s request[7] but also for other foresighted reasons.
•  NO MENTION OF THE PRINCIPLE OF SUBROGATION WHICH IS DULY FOLLOWED AT DEFAULT: The theory of subrogation grants the surety the right to obtain the benefit of the assured’s rights and remedies against third parties relating to the damage only to the proportion that the insurer has compensated and made the loss good. It should not be permitted for the insured to benefit from his loss. If an insured can sue for and get damages for a loss while also receiving coverage for the same loss, the insured would benefit from the loss. The Subrogation Principle is applicable since it is a vital aspect of indemnification law and is founded on equity, and Section 125 of the Indian Contract Act, 1872 does not contain any clause that contradicts it[8].
• NO PROVISIONS RESTRICTING MINORS AND PEOPLE OF UNSOUND MIND TO ENTER INTO THE CONTRACT OF INDEMNITY: There are no provisions to negate a minor party or a person of unsound mind from entering into a contract of indemnity. The problem is that it does not even specify whether a minor or a person of unsound mind should be restricted from entering into a contract of indemnity or not. It just remains silent which makes it prone to misuse. It should mention a definite criterion for a person to become the insurer or surety in a contract of indemnity, as not every other person is eligible to become an insurer.
•  COMMENCEMENT OF LIABILITY OF INDEMNIFIER: The Indian Contract Act of 1872 is silent on when the indemnifier’s liability begins. Based on legal verdicts, it can be stated that an indemnifier’s liability begins when the liability of the indemnity holder gets absolute and certain. Alternatively, if the indemnity-holder has incurred an absolute liability despite having paid nothing, he has the right to seek reimbursement from the indemnifier.
• CASE OF IMPLIED INDEMNITY: Depending on the circumstances, an indemnification contract may be stated or implied, albeit Section 124 of the Indian Contract Act does not appear to cover the scenario of inferred indemnity. It should enact additional provisions to resolve this concern when raised.

CONCLUSION:

Following an assessment and thorough evaluation of Sections 124 and 125 of the Indian Contract Act 1872, it is concluded that there are many flaws between these sections that need to be re-amended or re-structured as there are no metrics on which we can find decent merit to the potential application of these laws and are highly susceptible to gross misuse and misinterpretation of these laws. As a result, it is also stated that the aforementioned topics must be given significant consideration to close the gaps.

REFERENCES:

• Gajanan Moreshwar vs. Moreshwar Madan [(1942) 44 BOMLR 703]
• Metropolitan Paving Co. v. Gordon Herkenhoff & Associates, Inc., 66 N.M. 41, 341 P.2d 460 (1959)
• Khetarpal Amarnath VS Madhukar Pictures [AIR 1956 Bom 106, (1955) 57 BOMLR 1122]
• Punjab National Bank VS Vikram Cotton Mills 1970 AIR 1973 1970 SCR(2) 462
• Gajanan Moreshwar vs. Moreshwar Madan [(1942) 44 BOMLR 703]
• New India Assurance Company Ltd. Vs Kusumanchi Kameshwra Rao & Others [Civil Appeal No. 4856 of 1984]
• Yeung Vs HSBC [PC (1980)]
• Maharaja Shri Jarvat Singhji v Secretary of State for India [(1913) 15 BOMLR 27]

[1] Gajanan Moreshwar vs. Moreshwar Madan [(1942) 44 BOMLR 703]

[2] Metropolitan Paving Co. v. Gordon Herkenhoff & Associates, Inc., 66 N.M. 41, 341 P.2d 460 (1959)

[3] Khetarpal Amarnath VS Madhukar Pictures [AIR 1956 Bom 106, (1955) 57 BOMLR 1122]

[4] Punjab National Bank VS Vikram Cotton Mills 1970 AIR 1973 1970 SCR(2) 462

[5] Gajanan Moreshwar vs. Moreshwar Madan [(1942) 44 BOMLR 703]

[6] New India Assurance Company Ltd. Vs Kusumanchi Kameshwra Rao & Others [Civil Appeal No. 4856 of 1984]

[7] Yeung Vs HSBC [PC(1980)]

[8] Maharaja Shri Jarvat Singhji v Secretary of State for India [(1913) 15 BOMLR 27]