Rights of indemnity holder

INTRODUCTION

Indemnity, when we go through the literal meaning, is when one party decided to do good to the other party by promising him to compensate for the loss suffered by him due to the act of a third party. This concept is as simple as the definition says, but the difference happens when this concept is applied in different fields. In this project, Indian perspective on indemnity is described along with the rights of the indemnity-holder. English law, from which this concept evolved, is explained in brief and the concept of indemnity in China and Singapore is discussed in detail afterwards. The main matter of difference when we compare all three laws is the difference of implementation. In India, indemnity is a very narrow concept and is kept aloof from Insurance point of view. But in all the remaining laws, indemnity is included in the Insurance contracts and hence, it gives a wider form of interpretation.

The project initially familiarizes with the concept of indemnity in the Indian contracts act of 1872, then English law, followed by Chinese law and last, the Singapore law. The project will undertake an elaborate study of all the above mentioned laws and will compare it amongst each other. The project will be limited to indemnity and the rights of indemnity-holder along with the duties of the indemnity-holder (because rights come with certain duties).

English law was taken for the study because the concept of indemnity in the Indian Contracts act came from the English law, Singapore and China also took the English law as the basis for enacting their indemnity clauses. 

INDEMNITY - INDIAN CONTRACTS ACT 1872

INDEMNITY

Indemnity is “a duty to make good any loss, damage or liability incurred by another[1],” or alternatively “the right of an injured party to claim reimbursement for its loss, damage or liability from a person who has such duty[2].”

Indian Contracts Act, 1872 can be divided into two parts, (1) general principles of law of contract and (2) special kinds of contracts, which can be further, divided into,

1. Contract of Indemnity and Guarantee
2. Contract of Bailment and Pledge
3. Contract of Agency

Since the enactment of this act was during the British era, the influence of the English common law on this act is quiet visible. Even though this project is about the Rights of the Indemnity holder as per section 125 of the Indian Contracts act, the existence of this whole section is dependent on section 124, which defines indemnity. But the concept of indemnity, or the way this concept has been defined is different when we compare Indian law with laws of other countries.

According to Section 124, ‘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 ’. Indemnity is a two way contract to protect the other party from any contingency, but does not involve the act of god (Force Majeure)[3].

For example: A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity[4].

The person who promises to indemnify is called the ‘indemnifier’, and the person in whose favor such a promise is made is known as the ‘indemnified’ or ‘indemnity holder’.

SECTION 125- RIGHTS OF THE INDEMNITY HOLDER

“The promisee is entitled to recover from the promisor-

1) All damages which he may be compelled to pay in any such 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 promise to make in the absence of any contract of indemnity, or if the promisor is authorized him to compromise the suit [5]”.

1. No contraventions of promisors
2. Acted prudent in the absence

DUTIES OF THE INDEMNITY-HOLDER

Even though the duties of the indemnity-holder is not mentioned in any Section per se, we can say that the indemnity-holder have some implied duties. For example, it is the duty of the indemnity-holder to comply to the terms and conditions of the contract and any alteration can enable the indemnifier to reject the claim of indemnification.

Judicial Interpretation

1. Sham Sunder v. Chandu Lal[6]
2. Ranganath v. Pachusao[7]

In both these cases, the court held that, the indemnity holder can only make the indemnifier liable, when he actually suffered the loss. That is a person must be demnified before he can be indemnified.

But in the case of:

1. Gajanan Moreshwar V. Moreshwar Madan[8]
2. Prafulla Kumar V. Gopee Ballabh Sen[9]
3. Ramlinga v. Unnamolai[10]
4. Chuni Bai V. Nathu Bai[11]
5. Abdul Majeed V. Abdul Rashid[12]

The courts held that, even before suffering the actual loss, the indemnity -holder can compel the indemnifier to indemnify. In these cases, the court preferred to apply the perspective similar to that of the law recognized in England, which will be dealt in detail in the coming topics.

SECTION 145-IMPLIED PROMISE TO INDEMNIFY SURETY (GUARANTEE)

Section 145, ‘In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the 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[13]’.

As per this section, once the surety makes the payment to the creditor, it is the responsibility of the principal debtor to indemnify the surety.

INSURANCE CONTRACTS

Insurance contracts, according to the Indian Contracts Act, do not come under the purview of Section 124. This is basically because as per Indian law; a contract of indemnity is a promise to save another person from the loss that might occur due to the conduct of the third party, and insurance is a contract to compensate for the loss arising out of contingency which may include fire, earthquake etc.  

INDEMNITY-ENGLISH LAW

English Law gives a comprehensive definition for indemnity. According to English law, indemnity is "A promise to save another harmless from loss caused as a result of a transaction entered into at the instance of the promisor[14]." 

From the above definition it would be seen that it covers the loss caused by accidents and events not depending upon the conduct of any person. This definition is wide when compared to the Indian definition and here implied indemnity is also included.

Judicial interpretation

1. Prafulla kumar V. Gopee Ballabh[15]
2. Gajanan Moreshwar v. Moreshwar Madan[16]

In these cases, the court upheld the English definition, when it comes to the right of the indemnity -holder.

A contract of insurance in covered under the concept of indemnity , basically because, in English law, the law of indemnity  includes, compensating the indemnity -holder for all the loss suffered- due to human agency or any other agent, fire or accident. However, life insurance contract doesn’t come under the ambit of Section 124. This is because, insurance money is not paid based on the loss suffered due to the act of the third party. It is paid either on the expiry of a stipulated time or after the death of the party.

CONTRACT OF INDEMNITY - CHINA

When compared to the form of indemnity in India, the contract of indemnity is limited to insurance contracts in China (Insurance Law of the People's Republic of China), exclusive of life insurance contracts. In India insurance contracts are not considered as a contract of indemnity, basically because insurance is a contract of contingency and is not limited to the fault of human being (third party).

When we analyze the laws or statutes of China, namely the Insurance Law of the People's Republic of China, the Guaranty Law of the People's Republic of China and the Contract Law of the People's Republic of China, traces of indemnity can be seen only in the insurance law and nothing other than this mentions anything about the concept of indemnity.

In Chapter 1- General Provisions, Article 1 talks about the concept of indemnity in insurance contract as “…..whereby an insurance applicant, as contracted, pays insurance premiums to the insurer, and the insurer bears an obligation to indemnify him for property loss or damage caused by the happening of a contingent event[17]…”

Chapter II- Insurance Contracts,

Section 1- General Provisions

Article 10 says who should indemnify who, who the insurer is and who the insured in the contract of insurance is. The section says, “The insurer means the insurance company, which enters into an insurance contract with an applicant and is obligated to make indemnity or pay insurance benefits [18]”.                   

Article 17 imposes the duty on the insured (indemnity -holder) to not conceal any facts related to the subject matter, and if disclosed the insured loses his right to be indemnified. The article says, if the insured fail to make honest or unconcealed discloser of the material information about the subject matter of insurance, in the happening of the event, the insurer can escape from performing his part of the contract, i.e., indemnifying the insured.Article 23 says that when a claim is lodged with the insurer, the insured should give all material information proving his loss.Article 24, 25 and 26 talks about the duties of the insurer in conducting the enquiry of the matter within stipulated period of time and if the insurer come to the conclusion that the facts are not enough to grant the claim, he shall give a notice to the insured declining the same.Article 28 says that, if the insured lies that the event occurred, the insurer can terminate the contract of insurance and not refund the premium amount[19]. And also if the insurer suffered any loss, he claim damages from the insured.Article 27 imposes a duty on the insured in the form of a limitation clause in exercising the right. It says “with respect to insurance other than life insurance, the right of the insured or the beneficiary to claim for indemnity or payment of insurance benefits shall lapse if the insured or the beneficiary fails to exercise such right within two years from the date the insured or the beneficiary is aware of the occurrence of the insured event[20]”.

Section 2- Contract of Property Insurance                                                     

Article 43 says the event happened and it resulted only in a partial damage or loss to the subject matter of insurance, after being indemnified by the insurer, the insured or the insurer within 30 days may terminate the contract of insurance, unless otherwise specified in the contract.          

Article 45 says, “when the occurrence of the insured event results from the loss or damage to the subject matter of insurance caused by a third party, the insurer may, from the date when indemnity is paid to the insured, exercise by subrogation the right of the insured to demand indemnification against the third party up to the amount of indemnity paid. After the occurrence of the insured event referred to in the preceding paragraph, the insurer may, when paying indemnity, deduct there from a corresponding amount, which the insured has received as indemnity from the third party. The right to indemnity by subrogation exercised by the insurer in accordance with the first paragraph shall in no way affect the insured’s right to indemnity against the third party for the portion un-indemnified [21]”.

This Section can be considered as the most important section, as far as indemnity is concerned. This is because; this section gives the right to the insurer (indemnifier) to get indemnified, from the third party (because of whom the damage has been caused), by exercising subrogation. 

Article 46 says that “if the insured waives the right to indemnity against the third party after the occurrence of the insured event and before the insurer pays the indemnity, the insurer shall bear no obligation for indemnity. If the insured, without the insurer’s consent, waives the right to indemnity against the third party after indemnity is paid by the insurer, the waiver shall be invalid. The insurer may deduct a corresponding sum from the amount of indemnity if it is not able to exercise the right to indemnity by subrogation due to the fault of the insured[22]”.

CONTRACT OF INDEMNITY - SINGAPORE

As compared to India and China, in Singaporean laws, indemnity is a concept that has left traces in different areas. For example, the concept of indemnity can be found in (1) Commercial Law, Ch.24 Insurance Law, (2) Commercial  .15 Law of Agency and (3) Commercial LawCh.22 Banking and Finance.

Commercial Law, Ch.24 Insurance Law,

Section 2

24.9.6 Says that the amount of the claim should be decided or valuated before entering into the contract and if not the amount of the claim will be valued or calculated on the basis of the loss suffered, on the basis of the place and time of loss. If the amount is already agreed by the insurer and the insured, the actual loss, even if it’s greater or lesser than the agreed amount, the agreed amount shall be paid by the insurer. And the loss recoverable by an insured is determined by the type of policy coverage taken out[23].

24.9.11 says, “The most appropriate method of indemnification will depend on the specific circumstances of the case, and the actual loss suffered must be determined as a question of fact [24]”.

Section 11

24.11.1 As per Brett L.J: “The contract of insurance....is a contract of indemnity. And this contract means that the assured, in the case of a loss against which the policy has been made, shall be fully indemnified but shall never be more than fully indemnified [25]”.

24.11.2 To this end, insurers are entitled to the right of subrogation on indemnity  policies as premised on the general principle of unjust enrichment, and the right of subrogation will give the insurer a proprietary interest in the proceeds of a settlement between the insured and a third party [26].

24.11.3 This clause basically gives the insured the right to receive compensation from both the third party and the insurer. That is, if the insured claimed compensation from the insurer and he subsequently got the claim, he can still ask for compensation from the third party, because of whom he suffered loss. So this clause allows an insured person to profit from his own loss[27]. However, it bears noting that an insurers right of subrogation only exists in respect of any insured risks[28], and does not extend to any sums of money received by way of gift[29], unless proven that such gift was to mitigate the effects of his loss [30].

24.11.4 Second, an insurer who has indemnified the insured can step into the shoes of the insured and accordingly pursue any right or cause of action available to the insured. As a fundamental rule, an insured is disallowed from doing anything that will prejudice the insurer’s rights of subrogation. For instance, an insured cannot voluntarily give up his contractual or tortious rights against a third party or admit liability, and he would otherwise be accountable [31].

Commercial LawCh.15 Law of Agency

Section 6

15.6.1 As the agent is an intermediary, generally, once the principal and third party are brought into a contractual relationship, the agent drops out of the picture, subject to any issues of remuneration or indemnification that he may have against the principal, and more exceptionally, against the third party. Generally, agents are entitled to be indemnified for all liabilities reasonably incurred in the execution of the agents´ authority[32].

Commercial LawCh.22 Banking and Finance

(1) Guarantees usually drafted to take effect as both a guarantee and an indemnity.

22.9.10 ‘In Singapore, guarantees is usually drafted in such a way as to take effect as both a guarantee and an indemnity. For example, the guarantee may include a clause which states that, aside from his obligations as a guarantor, each guarantor agrees to indemnify the bank against all claims, losses, etc. which the bank may suffer in relation to the advances to the borrower. In this way, each guarantor has also entered into a contract of indemnity with the lender [33].

(2) Indemnifier’s liability independent of existence of a principal debtor’s obligation

22.9.11 ‘A contract of indemnity is a contract by one party to keep another harmless against loss. Unlike a guarantee, the liability of an indemnifier is independent of the existence of a principal debtor’s obligation[34]’.

(3) No requirement for indemnity to be in writing or in a deed

22.9.12 ‘there is no requirement for an indemnity to be in writing or in a deed, although for reasons explained above, it is usual practice for an indemnity to be executed as a deed and for the execution to be attested[35]’.

COMPARISON- INDIA, ENGLISH LAW, CHINA & SINGAPORE

When we compare all the four laws, it is essential; to exclude India because of its absence in the insurance contract. Except India, in all the other laws, indemnity is more involved in insurance contracts. Even though in Singapore indemnity is not just limited to insurance, indemnity clause in insurance contract is stronger. In India, indemnity is mentioned as a whole individual topic and it has been mentioned in bits in concepts like guarantee (where the principal debtor is supposed to indemnify the surety after making the payment to the creditor- implied indemnity), agency (where the principal is supposed to indemnify his agent for all the loss he suffered during performing his task/duty) and partnership (where if a partner has done something for the firm and as a result he suffers some loss, the firm is supposed to indemnify him).  When we compare English law with Indian, we can see that even though the Indian Contracts Act is an adaptation of English law, English law recognizes Indemnity in insurance contracts. That is according to the English Law, indemnity in insurance is recognized because as compared to Indian law, indemnity is not just a claim for the loss cause due to the act of the third party. Under English law a person can be indemnified against the act of human and non-human acts. But life insurance has been excluded, basically because the insurance money is not paid just on the occurrence of a contingency. Insurance money is paid either on the expiry of the time-period or on the death of the party (insured).

In China, the concept of indemnity is just narrowed down to insurance and a comparison with indemnity under Indian Contacts Act is not possible. But when we compare it with the Singaporean law, it can be identified that Article 45 is quiet relevant and a similar provision is visible in the Singaporean law as well. Article 45 says that the insured (indemnity-holder) has the right to claim indemnity from both the third party and the insurer, for the loss cause by the act of the third party. And the insurer can also ask for indemnification from the third party. Or if the insurer has not yet paid the insured, he can deduct the amount the third party is supposed to pay the insured and then pay the remaining.

Section 2, 24.11.3 of the Singaporean insurance law also has the same provision and according to this section it can be concluded that, the insured is making profits out of the loss he suffered.

The connection between the English law, law of China and Singaporean law is quiet visible, basically because of the presence of indemnity provision in Insurance contracts. But in India it is limited to certain minor concepts.   

CONCLUSION

This project covers all the aspect of the rights of the indemnity holder and the effect of the same on certain specific concepts, and also compares and analyzes it on the basis of different laws in different countries. Through this project it was possible to analyze the implication and interpretation of a simple concept in various countries. Even though the English law is the base for all there Indian, Chinese and Singaporean laws, there are massive differences in the applicability of law. Even though there is existence of the same terminology, the formulation and implication is different. From this project, it can be concluded that the notion of India in defining indemnity as a concept excluding insurance is not accepted internationally. In both China and Singapore, and also in the traditional English law, indemnity is a part of insurance agreements and is something that cannot be separated. In India, the definition itself limits its application to human conduct, and thereby excludes insurance. Even though by insurance it is the same in all laws, in India, the concept of the insurance company or the insurer indemnifying the insured or the applicant is not recognized. It is recommended that, in India as well Insurance should be brought under the wider ambit of indemnity and indemnity should stand as the base for all insurance agreements.    

BIBLIOGRAPHY

1. The Indian Contract Act, 1872
2. Dr. R.K.Bangia, “contract 2”
3. Black’s Law Dictionary
4. https://www.linkedin.com/pulse/drafting-effective-indemnity -clause-under-english-law-yasmine-afifi
5. http://heinonline.org/HOL/LandingPage?handle=hein.journals/hastlj13&div=24&id=&page=
6. http://www.kilpatricktownsend.com/~/media/G%20Ross%20Allen.ashx
7. http://www.npc.gov.cn/englishnpc/Law/2007-12/12/content_1383720.htm
8. http://www.singaporelaw.sg/sglaw/laws-of-singapore/commercial-law/chapter-24
9. http://www.singaporelaw.sg/sglaw/laws-of-singapore/commercial-law/chapter-22
10. http://www.singaporelaw.sg/sglaw/laws-of-singapore/commercial-law/chapter-15#top

• [1] Black’s Law Dictionary

• [2] ibid

• [3] Section 124, Bare act, Indian contracts act 1872

• [4] Illustration section 124, Bare act, the Indian contracts act 1872

• [5] Section 125, bare act, the Indian contracts act 1872

• [6] AIR 1935 Lahore 974

• [7] AIR 1935 Nag 117

• [8] AIR 1942 Bom. 302

• [9] ILR 1944, 2 Cal 318

• [10] 38 Mad 791

• [11] 22 Pat 625

• [12] AIR 1936 All 598

• [13] Section 145 bare act, the Indian contracts act 1872

• [14] Business Law, R S N Pillai, Bagavathi p, 108,

• [15] ILR (1944) 2 Cal. 318

• [16] AIR 1942 Bom. 318

• [17]http://www.npc.gov.cn/englishnpc/Law/2007-12/12/content_1383720.htm, last visited on 22/09/2016

• [18] Ibid

• [19]Supra footnote 17

• [20] ibid

• [21] ibid

• [22] Supra footnote 17

• [23]http://www.singaporelaw.sg/sglaw/laws-of-singapore/commercial-law/chapter-24, last visited on 22/09/2016

• [24] ibid

• [25] in Castellain v Preston (1883) 11 QBD 380

• [26] Supra footnote 23

• [27] ibid

• [28] ibid

• [29] In Burnand v Rodocanachi [1882] 7 App. Cas. 333

• [30] In Stearns v Village Main Reef Gold Mining Co [1905] 10 Com Cas 89

• [31] Supra footnote 23

• [32] ibid

• [33] Supra footnote 23

• [34] ibid

• [35] ibid