Rights and Liabilities of Indemnity Holder

RIGHTS AND LIABILITIES OF INDEMNITY HOLDER

Section 124 of the Contract Act, 1872 defines a contract of indemnity as;

A contract of indemnity is a contract whereby one party promises to save the other party from the losses caused to him by the conduct of the promisor or any other person.

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

Thus the two parties in a contract of indemnity are indemnifier and indemnified and the basic essence of the indemnity contract is to make good the losses occurred by his own conduct or due to the conduct of the third party.

In one of the cases, the concept of indemnity was justified. In this case of Adamson vs. Jarvis, Jarvis directed Adamson to sell the cattle at an auction which was duly executed and when the real owner turned up acclaiming the ownership, Adamson had to pay the damages incurred. The Court held that Jarvis would have to indemnify Adamson for the losses incurred because he was executing the tasks as entrusted by Jarvis and it would be reasonable to presume that all the ramifications that would arise in the future course of execution would be taken care by Jarvis.

Rights of Indemnity Holder

The Rights of Indemnity Holder when sued is dealt under Section 125 of the Indian Contract Act.

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 suit in respect of any matter to which the promise to indemnify applies;
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This principle of Damages paid in suit of providing the indemnity to a person who had acted on the faith of another person has been established long from the year 1873.

In the case of Parker vs. Lewis,

It has been held that, it would be prudent for the person indemnified who has altered his position and faced for that action, to be indemnified and be protected by the third party. A suit is decided against the indemnified and he pays the money to the creditor, the dispute is settled by paying damages, from that instance indemnifier becomes absolutely liable to indemnify him.

In the case of Alla Venkataramanna vs. Palacherela Manqamma,

It has been held by the Court that, It has a binding effect on the indemnifier even though he is not a party to contract because the suit has an indemnified conclusively roped with.

In Anwar Khan vs. Gulam Kasam,
It was held that the measure of damages would be entitled upon the extent to which the person has been indemnified.

  1. All costs which he may be compelled to pay in any such suit if, in bringing or defending it, did not contravene the orders of the promisor, and acted. It would have been wise for him to act in the absence of any indemnity deal, or if the Promisor had allowed him to bring or defend the suit.

When defending a suit, where the question of indemnity is being involved, the indemnity holder is granted a statutory right to claim all incidental costs and damages of the claim which he may be compelled to pay in a suit, from the indemnifier.

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The Courts further expanded the scope of the costs to be incurred and claimed would be recoverable only if they are reasonable in nature.

In Gopal Singh vs. Bhawani Prasad,
The Court held that only those costs can be recovered that are supposed to be incurred by a prudent man which is reasonable in nature.

In Pepin vs. Chunder Seekur Mookerjee,

The Court held that expenses arisen while reducing the claim is a part of the rights guaranteed to the indemnity holder, thus the cost of such a nature can be recovered.

  1. All the 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 authorized him to compromise the suit.

In case of compromise, these rights are arisen. An indemnity holder also has the right to recover all the amounts from the indemnifier which he may have paid under the terms of compromising any suit, if it is not contrary to the orders of the promisor and was the one which it would have been prudent of the promise to make in the absence of any contract of indemnity.

The principle of res judicata could not be brought by the promisor in the case of damages, the promisor cannot dissolve their responsibility that he/ she is not liable for paying the amount in this case.

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In a landmark case;

The Court held that the conditions for the claim by the promise, the compromise should have been put to effect in a bonafide manner and have been resolved without any sort of collusion which has not been impeached as an immoral bargain.

Liabilities of Indemnity Holder

The liabilities of the indemnity holder would be the rights of the indemnifier.

After the indemnity holder is paid for the damages incurred, the indemnifier shall have the rights to all the methods and services i.e. Indemnification can only be done if the loss is occurred to the other party or there is a certainty that the loss would be occurred in the future.

In Gajanan Moreshwar vs. Moreshwar Madan,

It was held that if the indemnified has incurred any liability which is absolute in nature, he is entitled to call upon the indemnifier to save the indemnified from the liability and settle the claims.

Conclusion

Contract of insurance being a good example of indemnity contracts, in consideration of premium, the insurer promises to make good the losses suffered by the assured on the account of destruction of subject matter is an instance how the liability of indemnity holder arises. If the loss caused by events which does not involve the conduct of any person, it cannot be reimbursed under the indemnity contract.

Author: Aathira Pillai,
Dr. D. Y. Patil College of Law, BLS LLB 4th year

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