Rights of Indemnity Holder | Law Optional Notes for UPSC PDF Download

Contract of Indemnity

A contract of indemnity is a type of contingent contract that becomes active upon the occurrence of a specific event triggered by either the indemnifier or a third party. This event leads to the maturity of liability, thereby activating the contract.

• The consideration for the contract must be lawful.
• The object of the contract must be lawful.
• The indemnity holder must suffer a loss.
• The contract is dependent on a particular event.
• The indemnity may be expressed or implied based on the circumstances.
• All other requirements of a valid contract must be met.

For a contract of indemnity to be considered valid, these conditions must be satisfied.

Indemnity Holder

In a contract of indemnity, the indemnity holder is the beneficiary party who receives assurance from the indemnifier regarding potential costs and damages related to a specific matter. An example would be Party A acting as the indemnifier and Party B as the indemnity holder, receiving protection against damages for which either the indemnifier or a third party is liable.

Rights of the Indemnity Holder When Sued

• The indemnity holder, who is the beneficiary in a contract of indemnity, holds significant rights. These rights empower them to claim compensation for damages suffered, costs related to legal proceedings, and amounts paid to settle disputes, as per Section 125 of the Indian Contract Act, 1872.
• Section 125 of the Indian Contract Act, 1872, specifies the rights of the indemnity holder, which the indemnifier must honor. These rights encompass:
  • Right to Recover Damages (Section 125(1)): The indemnity holder has the right to demand reimbursement for damages incurred. For example, if the indemnity holder suffers financial loss due to the actions of a third party, they can seek compensation.
  • Right to Recover Costs Incurred (Section 125(2)): The indemnity holder is authorized to reclaim the expenses accrued during legal proceedings concerning the matter. This could include legal fees, court costs, and other related expenses.
  • Right to Recover Sums Paid During Compromise (Section 125(3)): The indemnity holder is entitled to recover any amounts paid as part of a compromise to resolve the dispute. For instance, if the parties agree to settle the issue by each paying a portion of the damages, the indemnity holder can seek reimbursement.
• These rights safeguard the interests of the indemnity holder within a contract of indemnity, ensuring they are fairly compensated for losses incurred.

Indemnity Holder's Right to Recover Damages

• The main objective of a contract of indemnity is to compensate the indemnity holder for losses that arise from a specified event. This event can be triggered by the indemnifier or a third party.
• As per the Indian Contract Act, 1872, the indemnifier undertakes the responsibility of covering all damages specified in the contract of indemnity for the indemnity holder.
• For example, let's imagine a situation where two individuals, A and B, agree to a contract of indemnity. In this agreement, A promises to indemnify B against potential losses if a ship used for transporting goods sinks due to human error.
• If the ship does sink due to human error in the mentioned scenario, A is obligated to compensate B for the resulting damages. B holds the right to claim these damages from A.

Right of Indemnity Holder to Recover Costs Incurred

• The indemnity holder has the right to claim back all expenses related to a legal case from the indemnifier. This is a key aspect of a contract of indemnity, which aims to protect the indemnity holder from losses.
• When the indemnity holder initiates or defends a legal case, they must follow the instructions of the indemnifier and act as they would have without the indemnity. The indemnifier needs to explicitly authorize the legal actions.
• If the above conditions are met, the indemnifier is liable for all costs linked to the legal case.
• For instance, consider a contract between two parties, A and B, where A agrees to indemnify B for any losses resulting from a specific shipment of goods. If a legal dispute arises from the incident, such as an accident, the costs incurred during the legal proceedings can be recovered from the indemnifier.
• The right to recover costs is granted to the indemnity holder by Section 125 of the Indian Contract Act, 1872. It is crucial for the indemnity holder to act in accordance with the indemnifier's instructions when dealing with legal matters.

Right of Indemnity Holder to Recover Sums Paid under Compromise

• The indemnity holder has the right to reclaim any amounts paid as part of a settlement in a lawsuit, as long as the settlement doesn't go against the indemnifier's specific instructions.
• To qualify for recovery, the indemnity holder must act as they would have in the absence of the indemnity or as per the indemnifier's compromise authorization.
• For example, if A indemnifies B for a task and legal action is taken by a third party due to B's failure, a compromise between A and B resulting in a payment by B can be recovered from A.
• In such cases, B must adhere to A's instructions and behave as they would have without the indemnity to ensure a successful claim.

Commencement of Liability of An Indemnifier

• An indemnifier is a party who agrees to compensate or protect another party, the indemnity holder, against potential losses or damages from specific events or situations.
• The indemnifier takes on the financial or legal responsibilities on behalf of the indemnity holder and offers assurance or indemnity against possible liabilities.
• The liability of an indemnifier in a contract of indemnity begins when a triggering event occurs, which can be initiated by the indemnifier or a third party.
• This liability is based on the principle that the indemnity holder must have experienced a loss and acted in a way to mitigate that loss as they would have without the indemnity.
• For instance, if A indemnifies B against damages to B's office, A's liability arises when the office incurs damage due to a triggering event.
• In situations involving an indemnity bond like a bank guarantee, such as in the case of Cargill International SA v. Bangladesh Sugar and Food Industries Corpn (1996), the liability is typically limited to the value of the bond and does not exceed it.
• Under the Indian Contract Act, 1872, the general rule is to compensate for immediate damages and not for remote damages that are not reasonably foreseeable or directly linked to a breach of contract.
• However, in contracts of indemnity, even remote damages can be considered and addressed by the indemnifier to ensure the indemnity holder is adequately protected.
• This provision allows for the inclusion of losses that may not be easily anticipated in the calculation of damages in indemnity cases, aiming to cover all possible losses, whether immediate or remote, for the indemnity holder.

Case Laws on Rights of Indemnity Holder

Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942)

• In the case of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942), the plaintiff leased land to M. Madan who later failed to pay for supplies from K.D. Mohan Das.
• The plaintiff agreed to create a mortgage deed for K.D. Mohan Das but was not repaid by M. Madan, leading to a lawsuit by the plaintiff seeking indemnity.
• The court held that an indemnity holder with a definite liability has the right to seek indemnification from the indemnifier, making the defendant liable to indemnify the plaintiff.

The Secretary of State v. the Bank of India Limited (1938)

• In The Secretary of State v. the Bank of India Limited (1938), a false endorsement on a promissory note led to a lawsuit between the Secretary of State and the Bank of India Limited.
• Citing the precedent from Dugdale v. Lovering (1875), the court ruled that if an act performed at the request of another causes harm to a third party, the performer is entitled to indemnity.
• Applying this principle, the bank was entitled to seek indemnification from the Secretary of State for liabilities arising from the false endorsement on the promissory note.

Conclusion

• The rights of an indemnity holder are essential for ensuring protection and compensation within a contract of indemnity. These rights encompass the ability to recover damages, costs associated with legal proceedings, and amounts paid under a compromise.