Loopholes in Section 124 and Section 125 of the Indian Contracts Act By-Siya Sharma
Loopholes in Section
124 and Section 125 of the Indian Contracts Act
Authored By-Siya Sharma
Introduction
Indemnity, in everyday language, means protection from
loss or damage. It is the responsibility of a person to compensate another
person for a specific loss they have sustained. The person or entity who makes
the promise is called the 'Indemnifier', and the person or entity to whom the
promise passes refers to as the 'Indemnified' or 'Indemnity Holder.'
English Law defines Indemnity as a promise to protect a
person from the consequences of an action. Such a promise may be explicit or
inferred from the facts of the situation.[1]
In common law, Adamson V. Jarvis (1872)[2]
was the case which established indemnity; Adamson was an auctioneer instructed
to sell cattle and goods by Jarvis. Jarvis was the principal to whom the owner
handed over the cattle. However, Adamson was under the impression that Jarvis
owned the cattle and the goods. Further, the actual owner held Adamson liable
for conversion and was successful in his case. Adamson had to pay damages and,
in turn, sued Jarvis to indemnify him for the losses he suffered through
damages to reimburse the actual owner.
The outcome of this lawsuit was that Jarvis had to
compensate Adamson damages because there was a lack of disclosure about actual
ownership. As a result, it concluded that the defendant was liable for the
plaintiff's loss and must compensate him following Section 125 of the 2nd
rule.
The Indian Contract Act, 1872, Section 124 defines
Indemnity as a contract by which one party promises to save the other from
loss caused to him by the promisor himself or by the conduct of any other
person.' [3]
The scope of Indemnity in section 124 of the Indian
Contracts Act is much narrower than the common law's understanding of the
contract of Indemnity.[4] When the act is read alongside section 125,
which talks about the promisee's rights, it appears that the promise to indemnify
against a third party's claims or liabilities was the primary source of
concern. The majority of published English cases, even in the late 1800s, dealt
with indemnities in this broad sense or, more specifically, indemnities
resulting from a promisor's violation of contract, which led to a claim being
made by a third party against the promisee. An example of this can be found in Harburg India Rubber Comb Co. v. Martin[5].
It has been
noted that there are several issues and loopholes which are not mentioned in
the two sections of Indemnity under the Indian contract Act. Furthermore, with
the passage of time and development, it has been witnessed that certain
loopholes within the law have been felt over time.
Concerning the above
problems, there are certain loopholes which can be witnessed in section 124 and
section 125 of the Indian Contract Act
1.
The definition of Indemnity
in section 124 is incomplete in some sense. The definition only
includes the contractual obligation of one party to reimburse the other party
for losses and damages that have already occurred or could occur due to their
actions or the actions of a third party. However, a contract is bilateral and
more complex, and this definition only accounts for one party's responsibility
and, more so, just one type of obligation.
2. Section 124 does not include losses brought about
by mishaps or circumstances unrelated to the promisors or any other person's
actions. The question is whether the owner is protected if the employee's
negligence caused the accident. According to the law, any indemnity agreement
will provide compensation where the damages are solely the result of the
contractor's mistake or carelessness. Suppose the owner is found to be
accountable because of the accident. In that case, most countries have a common
law right to Indemnity that applies even if no explicit indemnification
agreement exists, in Criswell V. Seaman Body Corp.[6] the
owner was ruled liable to a subcontractor's employee for failing to uphold the
duty to provide a "safe place" of employment under the Wisconsin
Safe-Place Statute, even though there was no wilful negligence or wrongdoing on
his side.[7]
3. Very little is said about the enforcement of contracts by
the promisee except for concerning lawsuits and compromises. There is no
mention of fair enforcement or punishments.[8] Long before England's legal and equitable system was
consolidated, the act of Indemnity was passed. The nature of the damage
determined whether an indemnified party was entitled to the Indemnity under
English Law at the time. It may be said that in common law, a claim for damages
for contract violation was regularly used to enforce contracts. The indemnifier
had worked to secure the indemnified party from loss by definition; the
agreement would only be terminated if the indemnified party suffered harm. ‘In Gajanan
Moreshwar v. Moreshwar Madan[9]. In this historic judgement, the court said, "The Indian
Contract Act is both amending as well as consolidating Act and is not
exhaustive of the law of contract to be applied by the courts in India".
In this case, the court rejected the defendant's argument that the plaintiff
had no loss and could not make a claim. According to the court, the indemnity
holder may ask the indemnifier to take care of a liability if it has been
incurred and is absolute. As a result, the defendant compensated the plaintiff
for all obligations under the mortgage and deed of additional costs.[10] The court held that Section 124 of the Indian Contract
Act does not apply to those classes of cases where the Indemnity arises from
loss caused by events or accidents that do not or may not depend upon the
conditions but only to one specific kind of Indemnity that arises from a
promise made by the indemnifier to protect the indemnified from loss caused to
him by the conduct of the indemnifier himself or by the conduct of any other
person. It further explained that it was also mentioned that if the indemnified
could not enforce his Indemnity until he had paid the loss, the Indemnity might
not be worth very much at all. If a lawsuit was brought against him, he had to
wait until the verdict was rendered, and only then could he bring an indemnification
claim. In some cases, an unacceptable burden is placed on the indemnity holder.
He might not be able to pay the judgement, but until he did, he could not use
his Indemnity. Because of this, the Court of Equity intervened, tempered the
effects of common law, and decided that if an indemnified party has incurred an
absolute liability, he has the right to request that the indemnifier absolve
him of that obligation and pay it.’[11]
4.
Another issue in
section 124 of the Indian Contract Act is that it only talks about contracts of
Indemnity, which are expressed, or promises of Indemnity, which are expressed.
However, in reality, implied indemnities are also accepted under Indian Law,
and the Law Commission of India recommended these changes in its 13 Report,
1958 on the Indian Contract Act.[12] It is possible to infer implied Indemnity based on the
parties' actions or the facts of the case. It was held in several cases that Indemnity
could also develop by operation of law. Implied Indemnity was very well
highlighted in the case of Secretary Of State vs. The Bank of India[13].
When a broker falsely signed off on a government promissory note. Acting in
good faith, the bank requested and was granted a renewal of a promissory note
from the Public Debt Office. The genuine owner filed a conversion lawsuit
against the Secretary of State in the interim. As a result, the Secretary of
State filed a lawsuit against the bank based on implied Indemnity. It was held
that the person performing an act at the request of another is entitled to
compensation from the person who requested the act if the conduct injures a
third party and is not tortious to the knowledge of the person executing it.
Equitable principles of implied Indemnity were also upheld in K.P.RM Kuppan Chettiar Vs SP. R.M. RM.
Ramaswami Chettiar and Anr[14]
as well as in Debabrata
Ghose vs Jnanendra N. Ghose and Ors[15].
5.
Another issue is that
Section 124 and section 125 of the Indian Contract act have not explicitly
mentioned when the indemnifier liability begins. It has been a matter of
conflict amid various courts. In Osman Jamal & Sons V. Gopal[16],
it was observed that before formally releasing his liability, the plaintiff
was entitled to compensation from the indemnifier. The court held that 'The
repayment does not necessarily give Indemnity after payment. Indemnity requires
that the party to be indemnified shall never be called upon to pay; however, in
Shankar Nimbaji v Laxman Sapdu.[17]
and Chand Bibi v Santosh Kumar
Pal[18],
it was held that the indemnifier obligation does not start until the
indemnified party has experienced damages.[19]
‘Section 125- It includes the Rights of the indemnity-holder when sued. The promisee
in a contract of Indemnity, acting within the scope of his authority, is
entitled to recover from the promisor. The promisee in a contract of Indemnity,
acting within the scope of his authority, is entitled to recover from the
promisor.
All damages which he may be compelled to pay in any suit in
respect of any matter to which the promise to indemnify applies;
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;
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.’[20]
Recommendations to
address the shortcomings of section 124 and section 125 of the Indian Contract
Act
While comprehending the meaning of Indemnity in Gajanan
Moreshwar v. Moreshwar Madan (1942)[21],
the Bombay High Court held that the Indian contract act is not exhaustive and
common law principles must be applied while interpreting Indemnity.[22]
Thus, custom-based regulating principles relevant to contract understanding
will continue to apply to indemnifying terms unless there is a disagreement
with the Contract Act or any legal decisions made by Indian courts.
The Law Commission makes several recommendations from
India's 13 Reports.
1.
The Law Commission believes
that the definition of "implied indemnity" under Section 124 of the
Indian Contract Act has to be updated to encompass additional types of
indemnification, such as damages due to accidents, natural disasters, and other
events. Before recommending a revision to the Indian Contract Act of 1872, the
Law Commission of India noticed and discussed each of the issues mentioned
above in its 13th report. The Commission suggested that Section 124 of the
Indian Contract Act, which defines Indemnity, be amended to include the words
that describe the express and implied nature of Indemnity, as well as
indemnification emanating from actions of objects other than third parties. The
Law Commission notes an "implied contract" of Indemnity in its
report. Although an implied contract may contain an implicit assurance of
Indemnity, it is crucial to distinguish between the two ideas.
2.
It also suggested that Section 125 be amended
to add the necessary language defining the promisor's obligation, which does
not automatically arise when the promisee is harmed.
3.
According to the Law
Commission, the Indian Law of Indemnification, covered in Section 124 of the
Indian Contract Act, is insufficient because it does not outline the many
components of Indemnity. Similarly, it was said of Section 125 of the Indian
Contract Act, where once more, Indian law disregards the promisee's rights.
Courts frequently must rely on the Indian legal system, which is roughly
equivalent to English law in this regard.
4.
The Law Commission also
asserts that not all of the promisee’s rights are contained in the rights
listed in Section 125 of the Indian Contract Act. Some judges and courts have
agreed that the promisee can exercise his right to indemnification and be freed
from any duties imposed by the promisor regardless of whether he has suffered a
loss, but others have disagreed. On the other hand, the Law Commission agrees
with the view taken. The Commission referenced the following to clarify the
idea further, and the judges that agreed with the stance applied the English
Law of Indemnity.
5.
According to various
proposals made by the Indian Law Commission, the contract of indemnification
under sections 124 and 125 of the Indian Contract Act should be expanded to
include several new elements to make it broader. Indian law departs from
English in Indemnity and follows its path in numerous ways. On the other hand,
their similarities greatly outweigh their differences.
The interpretation of the indemnity provision reveals
that there are legal loopholes in Indian law about the true definition of
indemnification. However, these flaws are closed when necessary through
jurisprudence and court proceedings. Reports like the Law Commission of Indian
13 Report, as well as critical judgments like Gajanan Moreshwar v. Moreshwar
Madan[23]
are essential for developing new legal concepts and strengthening those that
already exist. Indian courts should uphold English Law and its regulations, but
not to the point where they are wholly impacted. Every contract lawyer needs
indemnities in their toolkit, which are typically a contentious discussion area
in contracts. In many cases, the legislation governing indemnities is unclear
and convoluted.
Conclusion
While the indemnification provision is well-developed, it
has been found to fall short in several situations where the law, as outlined
in the Indian Contract Act 1872, leaves significant gaps regarding Indemnity's
characteristics.
In addition, Section 124 of the Indian Contract Act 1872,
which defines what an indemnity is under Indian law, only emphasizes one kind
of compensation and completely disregards the need for the judiciary to
coordinate what should be done in circumstances where various indemnities, such
as those resulting from events like storms starting a fire or natural disasters,
failed to incorporate the implicit form of Indemnity. Because a person cannot claim Indemnity until none of the
losses stated in the contract has been incurred, the Indian Law of Indemnity
falls short of expectations in defining and allocating entitlements to the
promisee. This undermines the fundamental idea of indemnification. This creates
a massive issue for the legal system and leaves the said promisee, unable to
make up for the losses on their own, in a vulnerable position.
References
Articles
Burhan, Indian
Law Of Indemnity And English Law Of Indemnity: An Analysis, LEGAL SERVICES
INDIA https://www.legalserviceindia.com/legal/article-5725-indian-law-of-indemnity-and-english-law-of-indemnity-an-analysis.html
Wayne Courtney,
Indemnities And The Indian Contract Act 1872, 27, NATIONAL LAW SCHOOL OF INDIA
REVIEW (2015)
Anand A,
“Analyzing Issues, Gaps And Flaws In Sections 124 And 125 Of The Indian
Contract Act, 1872, And Providing Solutions”
Report
Law Commission
of India, Thirteenth Report, 1872
Case Laws
Gajanan
Moreshwar Parelkar v. Moreshwar Madan Mantri, (1942) 44 BOMLR 703
ADAMSON V. JARVIS
(1827), 4 BING.66:29 R.R 503
Criswell v. Seaman Body
Corp, 233 Wis. 606 (1940)
Harburg India Rubber Comb Co. v. Martin, CA 1902
Secretary Of State vs. The Bank of India, (1938) 40 BOMLR 868
K.P.RM Kuppan Chettiar Vs SP. R.M. RM.
Ramaswami Chettiar and Anr, AIR 1946 Mad 472
Debabrata Ghose vs Jnanendra N. Ghose and
Ors., AIR 1960 Cal 381
Osman Jamal & Sons V. Gopal, AIR 1929 Cal 208, 118 Ind Cas 882
Shankar Nimbaji v Laxman Sapdu, (1940) 42 BOMLR 175
Chand Bibi v Santosh Kumar Pal, AIR 1933 Cal 641
[1] Burhan, “Indian
Law of Indemnity and English Law of Indemnity: An Analysis” (Legal Service
India - Law, Lawyers and Legal Resources)
[2] ADAMSON V. JARVIS
(1827) 4 BING.66:29 R.R 503
[3] Indian Contracts Act, 1872, s 124
[4] Wayne Courtney, 'Indemnities and the Indian Contract
Act 1872' (2015) 27 Nat'l L Sch
India
Rev 66
[5] CA
1902
[6]
Criswell v. Seaman Body Corp., 233 Wis. 606 (1940)
[7] - DR and others,
“Contract of Indemnity and Loopholes” (iPleadersAugust 16, 2021)
[8] Wayne Courtney, Indemnities and the Indian Contract
Act 1872, 27 NAT'l L. Sch. INDIA REV. 66 (2015).
[9] (1942)
44 BOMLR 703
[10] Top A and Tiwari S, "Contract of Indemnity Case Laws -
IJSER” (International Journal of Scientific Engineering and Research (IJSER)
[11] “Burnished
–Burnished ISSN-2582-5534 ISSN-2582-5534” (BURNISHED LAW JOURNAL –
ISSN-2582-5534August 11, 2022
[12] Wayne Courtney, Indemnities and the Indian Contract
Act 1872, 27 NAT'l L. Sch. INDIA REV. 66 (2015).
[13] (1938) 40
BOMLR 868
[14] AIR 1946
Mad 472
[15] AIR 1960
Cal 381
[16] AIR 1929
Cal 208, 118 Ind Cas 882
[17] (1940) 42
BOMLR 175
[18] AIR 1933
Cal 641
[19] “Law of
Contract- When Is the Contract of Indemnity Enforceable” (Legal Service
India - Law, Lawyers and Legal Resources)
[20] Indian Contracts Act, 1872, s 125
[22] LawBhoomi,
“Contract of Indemnity: Meaning, Concept and Nature” (LawBhoomiAugust
19, 2021)