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

1
Critical Appraisal of Section 124 125 of Indian
Contract Act, 1872
2

• 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.

3

• 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.

4

• 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 indemnifiers 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 INDEMNITEES NEGLIGENCE IN
  INDEMNITY CONTRACT
• In Metropolitan Co., Inc. VS Gordon Herkenhoff
  Associates2, 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
  detours 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 indemnitees carelessness to hold the
  indemnitee harmless.

5

• 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 indemnitees carelessness. The Court ruled
  The vast majority of instances have resulted in
  conclusions that the parties did not intend to
  include the indemnitees 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
  indemnitees 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 contracts making.
• NO MENTION THAT ITS 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.

6

• 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
  indemnifiers right is the same as that of the
  surety. Even though the Indian Contract Act of
  1872 is silent on the point when an indemnifiers
  liabilities begin, legal declarations such as in
  the case of Khetarpal Amarnath VS Madhukar
  Pictures3 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 promisors act or the conduct of any other
  individual just as ruled in the case of Punjab
  National Bank VS Vikram Cotton Mills4.
  

7

• 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 Madan5 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 Others6, 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 indemnifiers or any
  other persons 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 promisors
  request7 but also for other foresighted
  reasons.

8

•  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 assureds 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 it8. 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 indemnifiers liability
  begins. Based on legal verdicts, it can be stated
  that an indemnifiers 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.

9

• 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
• 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
• Tags Indian Contract Act 1872Read more
  at https//taxguru.in/corporate-law/critical-appr
  aisal-section-124-125-indian-contract-act-1872.htm
  lCopyright Taxguru.in