Open Access Research Article
“COMPARATIVE ANALYSIS OF CONTRACT OF INDEMNITY IN INDIA, THE UNITED KINGDOM AND CANADA.”
Published Paper
Article Details
“COMPARATIVE ANALYSIS OF CONTRACT OF
INDEMNITY IN INDIA, THE UNITED KINGDOM AND CANADA.”
Authored By - Diya Kotak
Jindal Global Law School, O.P. Jindal
Global University
Abstract
The Indian
Contract Act, 1872, was a statutory provision that was established in the
Colonial Era, as a result of which the Act was “largely a codification of the
existing English law”.[1]
However, there was some difficulty in the enforcement of English laws,
considering the fact that India was fundamentally different socially and
politically, the effects of which inevitably transpired into the legal system.
Many of the laws introduced by the British were interpreted differently by the
Indian Courts post-independence, which led to a growing differentiation between
the application of the law in the two countries. The Canadian legal system, on
the other hand, is an amalgamation of both, common law and civil law, adopted
from England and France respectively.[2] The
province of Quebec follows the civil law tradition, while the rest of the
country follows the common law system. Their common law does not exist in the
form of any legislation, but is defined by past judgements.[3] This
paper seeks to critically examine the principle of contractual indemnity across
the jurisdictions of India, the United Kingdom and Canada.
Introduction
The
principle of indemnity was established in the English case, Adamson v.
Jarvis.[4]
Thereafter, the meaning of indemnity in English law came to be “a promise to
save a person harmless from the consequences of an act”.[5]
The English definition of indemnity is broad enough to include “a promise of
indemnity against loss arising from any cause whatsoever”.[6]
The meaning of indemnity in Canadian law is not properly established, but it
could be interpreted as “a contract between two parties whereby one agrees to
cover any liability, loss or damage sustained by the other from some
contemplated act or condition, or damage resulting from a claim or demand of a
third person”.[7]
The Indian definition of indemnity, on the other hand, says that it is “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””.[8]
The English
and Canadian law of indemnity is primarily based on case laws, and there is an
absence of any statutory provision, unlike India, which has the laws of
indemnity thoroughly codified in the Indian Contract Act, 1872. However, the
Indian definition and interpretation of indemnity has often been challenged in
case laws, which in practice, have altered the application of the principle.
Additionally, Indian Courts continue to utilize the principles laid down in English
cases to decide Indian cases. “Despite the attainment of independence in 1947,
the abolition of appeals from India to the Privy Council in 1950, and the
setting up of a Supreme Court in the same year, there does not as yet seem any
indication in the change of attitude of the Indian courts towards English
decisions in the law of contract”.[9]
The United Kingdom & The English Courts
The concept
of indemnity was devised in the United Kingdom, in Adamson v. Jarvis, and
has since evolved into a broad subject through varying interpretations. Since
there is no codified statute to define and lay down the terms of a contract of
indemnity, the scope of the concept is much wider than that of Indian law. The
English usage of the term includes, “promises to save the promise from harm or
loss caused by events or accidents which do not, or may not, depend on the
conduct of any person, or by liability arising from something done by the promisee
at the request of the promisor”.[10]
In the latter case mentioned, a promise of indemnity could be identified from
the nature of the transaction between parties. Like Indian law, English law too
acknowledges that contracts of indemnity may be express or implied, however, the
courts are often slow in deciding matters of implied contracts, as the
obligation is onerous and it “goes against commercial logic to so imply without
laying down properly defined parameters for the purported indemnity”.[11]
The illustrations of implied indemnity in English law include: “where a party
accepts an accommodation bill of exchange upon the drawer’s request; where the
guarantor provides a guarantee to the creditor upon the debtor’s request; and
in some cases at least, where one party requests another party to perform some
act which turns out to be injurious to the rights of the third party”.[12]
English law
also recognizes contracts of indemnity that arise out of legal or equitable
obligations. This circumstance was approved in Corporation of Sheffield v.
Barclay and Others, where it was stated, “where a person invested with
statutory or common law duty of ministerial character is called upon to
exercise that duty on the request, direction and demand of another…, and
without any default on his own part acts in a manner which is apparently legal,
but is in fact illegal and a breach of the duty, and thereby incurs liability
to third parties, there is implied by law a contract by the person making the
request to keep indemnified the person having the duty against any liability
which may result from such exercise of the supposed duty”.[13]
Further, in Eastern Shipping Co. Ltd. V. Quah Beng Kee, Lord Wrenbury said,
“a right to indemnity generally arises from contract express or implied, but it
is not confined to cases of contract. A right to indemnity exists where the
relation between the parties is such that either in law or in equity there is
an obligation upon the one party to indemnify the other. There are for
instance, cases in which the state of circumstances is such that the law
attaches a legal or equitable duty to indemnify arising from an assured promise
by a person to do that which, under the circumstances, he ought to do. The
right to indemnity need not arise by contract; it may (to give other instances)
arise by statute”.[14]
The English Courts have utilized the Sheffield principle to account for
other cases of indemnity, like the “the indemnity from a debtor to a surety,
and from a principal to an agent”.[15]
However, this principle is far too broad and does not cover the specificities
of cases.
In English
law, it has been held that a person may recover under a contract to indemnify
for liability arising out of negligence which is attended by criminal
consequences.[16]
English Courts have even enforced contracts where the criminal nature of the
negligence was aggravated by intoxication, which directly conflicts with the
Canadian principles. However, for the most part, English authority favours the
view that indemnity is usually contractual. The case, Corporation of Sheffield v. Barclay also “ventured a distinction between
a contract of indemnity implied by law and a contract of indemnity implied or
inferred from the circumstances”.[17]
The reason for this distinction is not clear; it is possible that the Courts
were concerned about the voluntariness of an act of acceptance.[18]
The United Kingdom does have stark
differences between India in the field of contract law. For example, ‘bailment’
in the United Kingdom isn’t considered a contractual matter like in India, but
falls under the ambit of tort law. Similarly, “the contractual model does not
easily fit all cases”.[19] Dissatisfaction
with the contractual interpretation of cases pertaining to indemnity prompted
the Courts to attempt to rationalise indemnity on a different basis.[20] In
the matter of the rights of the indemnifier, the English law takes a tortuous
approach. For any breach of contract of indemnity, a settlement is provided.
Unlike
India, the English Courts first examined the nature of the loss suffered by the
indemnified party in order to enforce the indemnity. “The promise to indemnify
was usually construed to be a promise to keep the indemnified party harmless
against the specified loss”.[21]
The enforcement of the contract of indemnity typically occurred in the form of awarding
damages for breach of contract. This contract would be said to be broken when the
indemnified party suffers a loss and it the contract would be said to have been
breached when the indemnifier did not keep the indemnified party ‘harmless
against loss’. If the indemnifier did not indemnify the indemnity holder during
a stipulated time period which may have been specified in the contract, he
would be liable to compensate the indemnity holder, corresponding to the amount
of actual loss suffered.
India & The Indian Courts
The Indian
laws of indemnity are contained in the Indian Contract Act, 1872. The term
indemnity, in the Indian context, means “recompense for any loss or liability
which a person has incurred, such duty arising from an agreement or otherwise”,[22]
and “a contract by which the promisor undertakes an original and independent
obligation to indemnify, as distinct from a collateral contract in the nature
of a guarantee by which the promisor undertakes to answer for the default of
another person who is to be primarily liable to the promisee”.[23] The Indian legal system acknowledges the
validity of both, express and implied contracts of indemnity, as well as
obligations of the parties to each other, “if there is a state of circumstances
to which the law attaches a legal or equitable duty to indemnify or by
statute”.[24]
A contract of indemnity is an independent contract, separate from the main
contract, which classifies it as a special contract.[25]
The Indian
Contract Act does not exhaustively deal with the concept, but only a particular
kind of indemnity, “which arises form a promise made by the indemnifier to save
the indemnified from the loss caused to him by the conduct of any other person,
but does not deal with those classes of cases where the indemnity arises from
loss caused by events or accidents which do not, or may not depend upon the
conduct of the indemnifier or any other person, or by reason of liability
incurred by something done by the indemnified at the request of the
indemnifier”.[26]
One unique feature of the Indian laws on this matter, is that the Indian Courts
recognizes the enforceability of a contract of indemnity before the actual loss
has occurred. It was held in Gajanan Moreshwar Parelkar v. Moreshwar Madan
Mantri, that the indemnity holder need not suffer an actual loss to sue on
his indemnity.[27]
Unlike
Canada, the right to indemnify is not limited to express contractual
agreements, and may arise from both, express and implied contracts. The case, Lala
Shanti Swarup v. Munshi Singh and Ors., the Court held that the contract of
indemnity does not necessarily need to be express; it could be implied from the
circumstances of the case as well.[28]
One landmark judgement pertaining to implied indemnity in the Indian legal
system is Secretary of State for India in Council v. Bank of India, Limited.
The main legal issue of this case was “whether the appellant is debarred from
relying on an indemnity implied under the common law of India, which in this
respect is identical with that of England”.[29]
The High Court of Bombay relied on the precedent set by Lord Halsbury in Sheffield
Corporation v. Barclay that there is a contract of indemnity implied by
law, by the person making the “request to keep indemnified the person having
the duty against any liability which may result from such exercise of the supposed duty”,[30]
and set aside a statutory provision in the Indian Securities Act, 1920, in
order to allow implied contracts of indemnity in India. Additionally, the Law
Commission’s recommended that the words ‘expressly or impliedly’ after
‘promises’ be added in Section 124.[31]
The right
to indemnify may also arise beyond a contract, in cases where “the relation
between the parties is such that, either in law or equity, there is an
obligation upon one party to indemnify the other”.[32]
It can also arise out of a legal or equitable duty in certain circumstances,
the liability for which is based on an implicit contract. The principle of
indemnity is also applicable in cases where an individual who is invested with
a statutory or common law duty has been ordered to exercise that duty on the
request, direction or demand of another person, or if the person desiring
indemnity is acting in the exercise of his free discretion.[33]
The Indian Contract Act leaves the issue of commencement and extent of
liability undefined, so in these matters, English principles are followed.
Indian law draws
a clear distinction between indemnity and damages, despite inevitable overlaps.
“While the right of indemnity is given by the original contract , the right to
damages arises in consequences of breach of that contract”.[34]
The confusion between these two remedies is caused due to the coinciding of a
claim of damages and indemnification.
Canada & The Canadian Courts
Like the
United Kingdom, there is no legislation in Canada that pertains to the
restriction or prohibition of indemnification. The term ‘indemnity’ in the
Canadian context is characterized as a “compensation paid for loss or injury
which can include, among other methods of compensation, cash payments, repairs,
replacement, and reinstatement”.[35]
The
Canadian common law, unlike the other jurisdictions, does not provide a right
to indemnity, and instead allows for the creation of a right to be indemnified,
which may arise by way of a contract or through legislative means.[36]
The Canadian principles of indemnity are also established through various case
laws. Due to the absence of any statutory provision or legislation,
interpreting a case of indemnity is challenging for Canadian courts. As a
general rule, “Canadian courts will seek the true construction of an agreement
to determine the parties’ intentions, and conceivably the parties’ reasonable
expectations”.[37]
As
mentioned in the previous section, English law provides for a right to
indemnify for a liability arising out of negligence. In the Canadian legal
system, the case which serves as an absolute precedent in these matters is Canada Steamship Lines Limited v. The
King, which applied a three part test, now known as the “Canada Steamship
Test”.[38]
This case also laid down the doctrine of contra proferentem. Contra
proferentem provides that “the interpretation of an unclear or ambiguous
provision is to be strictly construed against the party that drafted it".[39]
The Privy Council in this case also noted, “liability for the negligence of
others must surely be imposed by very clear words, if it is to be imposed at
all”.[40]
This test is used for “interpreting an indemnity provision under which the
Crown made a claim of indemnity for losses arising from the negligence of its
own servants”.[41]
The test examines cases pertaining to contractual indemnity while paying
attention to the following three factors;
i.
“If the clause contains language which expressly
exempts the person in whose favour it is made (hereafter called “the proferens”)
from the consequences of the negligence of his own servants, effect must be
given to that provision”.[42]
ii.
“If there is no express reference to negligence, the
court must consider whether the words used are wide enough, in their ordinary
meaning, to cover negligence on the part of the servants of the proferens”.[43]
If a doubt arises, it must be resolved against the proferens in
accordance with Article 1019 of the Civil Code of Lower Canada, which states,
“In cases of doubt, the contract is interpreted against him who has stipulated
and in favour of him who has contracted the obligation”.[44]
iii.
If the wording is ambiguous enough for the above
purpose, the Court must consider whether “the head of damage may be based on
some ground other than that of negligence”.[45]
The third
part of the Canada Steamship test requires the Courts to review and determine
the intention of the parties, to which the approach is “to ask whether the
alternative head of damage was one within the contemplation of the parties”.[46]
The doctrine of contra proferentum is also applied in the case, Alderslade
v. Hendon Laundry, Ltd., where the basis of the application of the doctrine
was laid down by the Court. In the decision of the case, Lord Greene, MR,
stated that if a contracting party wishes, “to limit his liability in respect
of negligence, he must do so in clear terms, and in the absence of such clear
terms the clause is to be construed as relating to a different kind of
liability and not to liability based on negligence”.[47]
It was then held as a necessity in the Canadian courts, that the liability for
the negligence of other parties must be clearly and explicitly imposed in the
wordings of the relevant contracts.
It can therefore
be concluded that the Canadian legal system does not recognize implied
contracts of indemnity, and only considers expressed contracts of indemnity as
valid.
Conclusion
Through an examination of various
case laws and scholarly work, it can be concluded that, although the origins of
the concept on indemnity are the same across these three jurisdictions, they
have evolved to be vastly different in practice. Even still, they are very
similar, years after the conception of the idea.
The analysis across these jurisdictions
can also help one to ascertain that the Indian legal system is arguably the
most efficient in matters pertaining to the contract of. Indemnity, thanks to
the Indian Contract Act, 1872, which provides structure and a basic framework
for the law, while still relying on past cases and precedents. Canada on the
other hand, does not deal with the issue of indemnity very comprehensively, and
seems to be quite regressive, owing to their err in deeming implied contracts
of indemnity as invalid. Perhaps recognizing implied indemnity in the Courts
could extend the accessibility of justice pertaining to such problems, and
would provide for a simpler way to settle matters of implied indemnity. The
English legal system, having numerous precedents, seems to be flourishing, even
without a legislative provision to deal with the issue comprehensively.
All that can be hoped for the future
is that the Indian Contract Act, 1872, undergoes a series of amendments, so
that it can cover issues more exhaustively.
[1] R. N. Gooderson, English contract problems in Indian
code and case law, 16 The Cambridge Law Journal 67–84 (1958).
[2] Department of Justice Canada, Canada's
system of Justice (1993).
[4] Adamson v. Jarvis [1827] 4 Bing 66: 29 RR 503.
[5] Avtar Singh, Contract of Indemnity, Contract &
Specific Relief 591–598 (12 ed. 2020).
[7] Penny L. Parker & John Slavich, Contractual
Efforts to Allocate the Risk of Environmental Liability: Is There a Way to Make
Indemnities Worth More Than the Paper They Are Written On?, 44 SW L.J. 1349
(1991).
[8] The Indian Contract Act, 1872, §124.
[9] R. N. Gooderson, English contract problems in Indian
code and case law, 16 The Cambridge Law Journal 67–84 (1958).
[12] Wayne
Courtney, Indemnities and the Indian Contract Act 1872, 27 National Law
School of India Review 66–88 (2015).
[13] Corporation of Sheffield v.
Barclay and Others [1905] UKHL 556.
[14] Eastern Shipping Co. Ltd. V. Quah
Beng Kee [1924] AC 177.
[15] Wayne
Courtney, Indemnities and the Indian Contract Act 1872, 27 National Law
School of India Review 66–88 (2015).
[16] Abraham Acker, Contracts of Indemnity. Public Policy.
Langley v. Fidelity Insurance Company of Canada, [1935] O. R. 424, 1 The
University of Toronto Law Journal 378–379 (1936).
[17] Wayne
Courtney, Indemnities and the Indian Contract Act 1872, 27 National Law
School of India Review 66–88 (2015).
[18] Wayne
Courtney, Indemnities and the Indian Contract Act 1872, 27 National Law
School of India Review 66–88 (2015).
[19] Wayne
Courtney, Indemnities and the Indian Contract Act 1872, 27 National Law
School of India Review 66–88 (2015).
[20] Wayne
Courtney, Indemnities and the Indian Contract Act 1872, 27 National Law
School of India Review 66–88 (2015).
[21] Wayne
Courtney, Indemnities and the Indian Contract Act 1872, 27 National Law
School of India Review 66–88 (2015).
[27] Gajanan Moreshwar Parelkar v.
Moreshwar Madan Mantri [1942] AIR Bom 302.
[28] Lala Shanti Swarup v. Munshi Singh
and Ors [1967] AIR SC 1315.
[29] Secretary of State for India in
Council v. Bank of India, Limited [1938] 40 BomLR 868.
[30] Corporation of Sheffield v.
Barclay and Others [1905] UKHL 556.
[31] Wayne
Courtney, Indemnities and the Indian Contract Act 1872, 27 National Law
School of India Review 66–88 (2015).
[35] Nick Kangles et al., Risk allocation provisions in
energy industry agreements: Are we getting it right?, 49 Alberta Law Review
339–367 (2011).
[36] Nick Kangles et al., Risk allocation provisions in
energy industry agreements: Are we getting it right?, 49 Alberta Law Review
339–367 (2011).
[37] Nick Kangles et al., Risk
allocation provisions in energy industry agreements: Are we getting it right?,
49 Alberta Law Review 339–367
(2011).
[38] Canada Steamship Lines Limited v.
The King [1952] UKPC 1.
[39] Nick Kangles et al., Risk
allocation provisions in energy industry agreements: Are we getting it right?,
49 Alberta Law Review 339–367
(2011).
[40] Canada Steamship Lines Limited v.
The King [1952] UKPC 1.
[41] Nick Kangles et al., Risk
allocation provisions in energy industry agreements: Are we getting it right?,
49 Alberta Law Review 339–367
(2011).
[42] Nick Kangles et al., Risk
allocation provisions in energy industry agreements: Are we getting it right?,
49 Alberta Law Review 339–367
(2011).
[43] Nick Kangles et al., Risk
allocation provisions in energy industry agreements: Are we getting it right?,
49 Alberta Law Review 339–367
(2011).
[44] The Civil Code of Lower Canada,
1867, §1019.
[45] Nick Kangles et al., Risk
allocation provisions in energy industry agreements: Are we getting it right?,
49 Alberta Law Review 339–367
(2011).
[46] Nick Kangles et al., Risk
allocation provisions in energy industry agreements: Are we getting it right?,
49 Alberta Law Review 339–367
(2011).
[47] Alderslade v. Hendon Laundry Ltd.
[1945] KB 189.
Article Information
“COMPARATIVE ANALYSIS OF CONTRACT OF INDEMNITY IN INDIA, THE UNITED KINGDOM AND CANADA.”
Authors: Diya Kotak
- Journal IJLRA
- ISSN 2582-6433
- Published 2023/07/14
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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