CONTRACT OF INDEMNITY

Meaning

● Indemnity- in general- recompense for any loss or liab which a person has incurred

● Such duty arise from a contract or otherwise

● May arise from contract of indemnity.

● Contract of indemnity in wider sense include all contracts for compensating for the
loss out of promisees’s acts
So this can include- indemnity contracts as well as guarantee contracts

● But in its stricter view- CoI includes only the contracts wherein the promisor
undertakes an original and independent obligation to indemnify- rather than a mere
collateral contract of guarantees
Where- recompense happens only on default

● All insurance con are not- CoI

● In the case where the contract of insurance is not a contract of indemnity, the
amount recoverable is not measured by the extent of the assured’s loss, but is payable
whenever the specified event happens- irrespective of whether the assured in fact
sustains a pecuniary loss or not- as in the cases of life insurance, personal accident
insurance and sickness insurance.

● On the other hand, the amount recoverable is measured by the extent of the assured’s
pecuniary loss in the case of a contract of indemnity.- Insurance for Property

A contract of indemnity is defined under Section 124 of the Indian Contract Act, 1872. It
is a legal agreement wherein one party (the indemnifier) promises to compensate
another party (the indemnity holder) for any loss or damage incurred as a result of
specific events or actions. Understanding this contract is crucial for both legal
practitioners and individuals engaging in contractual agreements.

Essentials of a Contract of Indemnity

To form a valid contract of indemnity, the following essentials must be met:

 ● Two Parties: The contract must involve two parties - the indemnifier and the
indemnified (indemnity holder).

● Promise to Compensate: The indemnifier must promise to compensate the

indemnified for losses incurred.

● Loss Must Occur: The loss must be actual and must occur due to the actions of
the indemnifier or a third party.

● Express or Implied: The contract can be either expressed (written or verbal) or

implied through conduct.

● Valid Contract Requirements: It must satisfy all conditions required for a valid
contract, including consideration, lawful object, and free consent.

Types of Indemnity

1. Express Indemnity: Clearly stated terms in writing or verbally.

2. Implied Indemnity: Arises from the conduct of parties or circumstances

surrounding the agreement.

Nature of the Contract of Indemnity

Indemnity is defined as “protection against damage or loss, especially in the form of a

promise to pay for anything that happens”.

Contract of indemnity 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.

1. Contingent Nature:

● Contracts of indemnity are contingent in nature, meaning that the

obligation to indemnify arises only upon the occurrence of a specified loss.
This distinguishes indemnity from other types of contracts where
obligations may be immediate.
 2. Single Agreement:

● Unlike guarantees, which involve three parties (the creditor, debtor, and
guarantor), a contract of indemnity involves only two parties. The
indemnifier and the indemnity holder enter into a direct agreement.

3. Loss Protection:

● The primary purpose of an indemnity contract is to protect the indemnity

holder from potential losses arising from specific events or actions.

4. Express or Implied Terms:

● Indemnity agreements can be explicitly stated in writing or implied

through conduct. For example, if a contractor assumes responsibility for
damages that occur during construction, this may be inferred as an
implied indemnity.

5. Legal Framework:

● The contract must fulfill all criteria for a valid contract under the Indian
Contract Act, including lawful consideration and free consent.

Feature Contract of Indemnity Contract of Guarantee

Number of Two (Indemnifier and Indemnity Three (Creditor, Principal Debtor,

Parties Holder) Guarantor)

Primary liability lies with

Nature indemnifier Secondary liability lies with guarantor

Purpose To protect against losses To assure payment or performance

Trigger Loss incurred by indemnity holder Default by principal debtor

 Indemnity holder can claim Guarantor can seek indemnification
Rights compensation from debtor

Indemnity not limited to Contracts

The rt of indemnity not limited to contracts

It is extended to all relationship where one party is having the obligation to recompense
for the loss of the other- either under law or equity

Eg; princi and agent, employer employee, etc.,

Indemnity under Other Statutes

1. The Sale of Goods Act, 1930

● This Act includes provisions related to indemnity in the context of sales

transactions.

● For instance, if a seller delivers goods that are not as per the contract,
they may be liable to indemnify the buyer for any losses incurred due to
this breach.

2. The Companies Act, 2013

● Section 197 of the Companies Act allows companies to indemnify

directors and officers against any loss incurred while performing
their duties.

● This provision is essential for encouraging qualified individuals to take up

positions in corporate governance without fear of personal liability.

3. The Negotiable Instruments Act, 1881

 ● Under this Act, parties involved in negotiable instruments (like cheques)
can seek indemnity from endorsers or drawers if they face liability
due to dishonor of such instruments.

4. The Consumer Protection Act, 2019

● This Act provides consumers with rights against manufacturers and

service providers.

● If a consumer suffers loss due to defective goods or services, they may

seek indemnification from the seller or service provider.

5. The Motor Vehicles Act, 1988

● The Motor Vehicles Act mandates insurance for vehicles, which serves as
a form of indemnity for third-party liabilities arising from accidents.
Insurers are required to indemnify victims of accidents caused by insured
vehicles.

Insurance & Indemnity

Contract of Indemnity

● Two Parties: Involves only two parties—the indemnifier and the indemnity
holder.

● Primary Liability: The indemnifier has a primary obligation to compensate for

losses.

● Specific Events: Indemnification is limited to specific events outlined in the

contract.

● No Transfer of Risk: The risk remains with the parties involved; it does not
transfer to a third party.

● Express or Implied: Can be established through explicit terms or implied

through conduct.

Contract of Insurance
 ● Three Parties: Typically involves three parties—the insurer, the insured, and a
third party (beneficiary).

● Secondary Liability: The insurer's obligation arises only when a loss occurs,
making it contingent on risk.

● Risk Pooling: Insurance contracts involve pooling risks among many insured
parties, allowing for risk management.

● Regulated by Specific Laws: Governed by insurance-specific legislation that

outlines obligations and rights.

● Aleatory Nature: The insurer's promise is contingent upon uncertain future

events (e.g., accidents, death).

Legal Framework

● Indemnity Contracts are primarily defined by Section 124 and Section 125 of
the Indian Contract Act. Section 124 states that an indemnity contract involves a
promise to save another from loss caused by the promisor or another person.
Section 125 outlines the rights of the indemnity holder when faced with claims
or lawsuits.

● Insurance Contracts, while they may contain elements similar to indemnity

contracts (especially in cases like marine or fire insurance), are regulated under
the Insurance Act and must adhere to its provisions regarding premiums, claims,
and policy terms.

Rights of the Indemnity Holder

The rights of the indemnity holder are primarily outlined in Section 125 of the Indian
Contract Act, 1872:

1. Right to Recover Damages

2. Right to Recover Costs

3. Right to Recover Sums Paid Under Compromise

Section 125 of the Indian Contract Act, 1872: Rights of Indemnity-Holder When
Sued

This section outlines the rights of the indemnity-holder (the person who is promised
indemnity) to recover specific costs, damages, and sums from the indemnifier (the
person who promises to indemnify) under certain conditions. Here's the detailed
meaning of each subsection:

Subsection (1): Recovery of Damages

Text:
"All damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies."

Meaning:

● The indemnity-holder has the right to recover all damages (monetary

compensation) that they are legally required to pay in a lawsuit arising out of the
matter covered by the indemnity agreement.

● For example:
If a person ("A") promises to indemnify another ("B") against losses arising from
the use of defective goods sold by B, and B is sued for damages, B can claim the
damages from A under this subsection.

Subsection (2): Recovery of Costs

Text:
"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."

Meaning:
 ● The indemnity-holder can recover legal costs (e.g., court fees, lawyer fees) that
they incur in defending or prosecuting a lawsuit if:

1. They followed the instructions (if any) of the indemnifier.

2. They acted prudently (reasonably and carefully), even if there were no

specific instructions from the indemnifier.

3. The indemnifier explicitly authorized them to defend or initiate the

lawsuit.

● This ensures that the indemnity-holder is not burdened with costs for actions
reasonably taken in good faith under the indemnity agreement.

United India Insurance Co. Ltd. v. M.K.J. Corporation (1996)

Facts of the Case:

● Parties Involved:

o The plaintiff was United India Insurance Co. Ltd., an insurance

company providing indemnity and coverage.

o The defendant was M.K.J. Corporation, a company involved in a

construction project.

● Background:
M.K.J. Corporation had taken an insurance policy from United India Insurance
Company. The policy was intended to cover potential damages that the
corporation could incur due to its construction activities, which could lead to
third-party liabilities or property damage.

● Event Leading to the Claim:

During the course of the construction project, M.K.J. Corporation’s activities
resulted in an accident in which a third party suffered damage to property due to
negligence or fault in the execution of the construction work. As per the terms of
the insurance contract, the corporation had hoped that its insurer, United India
 Insurance, would cover the costs related to the damages, including compensation
claims from the third party.

● Dispute:
The insurance company, United India Insurance, refused to indemnify M.K.J.
Corporation for the third-party claim, arguing that the incident did not fall under
the terms of the insurance policy. United India Insurance contended that the
policy did not cover the specific type of damages or the circumstances
surrounding the event, or that the damage was excluded from the policy.

● Claims for Indemnification:

M.K.J. Corporation sought to enforce the insurance policy, demanding that United
India Insurance honor the indemnity agreement and compensate for the third-
party damages. The corporation argued that the insurer was liable under the
policy terms because the loss was caused during the course of construction,
which was explicitly covered by the policy.

● Defendant's Defense:
United India Insurance argued that the event did not fall within the scope of the
policy coverage. Specifically, they argued that certain types of damages or losses
were either excluded by the terms of the policy or were not caused by an
incident that was covered. The insurance company also argued that the
corporation did not act with reasonable care or diligence as expected under the
policy conditions, which would relieve the insurer of liability.

Issue:

The primary issue in this case was whether the insurance company (United India
Insurance) was liable to indemnify M.K.J. Corporation for the third-party damages
caused during the course of construction, and whether the insurer was correct in
refusing to honor the indemnity claim.

Court’s Judgment:

The Supreme Court of India ruled in favor of M.K.J. Corporation, holding that the
insurance company, United India Insurance, was liable to indemnify the corporation for
the third-party damages caused in the course of construction. The Court found that:
 1. Interpretation of Policy: The Court interpreted the insurance policy in favor of
providing the coverage to M.K.J. Corporation since the accident occurred in the
course of activities explicitly covered under the terms of the policy.

2. Scope of Coverage: The insurance company was held liable to provide

indemnity for third-party claims arising from construction work, as the policy
terms did not specifically exclude the incident from coverage.

3. Insurer’s Obligations: The Court emphasized the principle that an insurer

cannot refuse to indemnify the insured without valid grounds, especially when
the policy explicitly covers the type of loss in question.

4. Duty to Act in Good Faith: The Court also observed that the insurer had a duty
to act in good faith and could not deny claims arbitrarily or based on
technicalities, especially when the terms of the policy were clear and the loss
occurred within the agreed coverage.

Key Takeaways:

1. Insurance Contracts and Scope of Coverage: The case emphasizes the

importance of interpreting insurance policies in a way that upholds the intent of
the agreement and the legitimate expectations of the insured. In this case, the
Court ensured that the corporation received indemnification for the third-party
damage as the loss occurred within the scope of the policy.

2. Insurer’s Liability: The judgment reinforced the principle that insurers must act
in good faith and cannot deny claims without valid justifications, especially when
the terms of the policy clearly cover the risk involved.

3. Indemnity: This case clarified that indemnity agreements in insurance policies

should be honored unless there is a valid exclusion or breach of policy conditions.
The insurer’s denial of indemnification in such cases may be challenged if the
loss falls under the covered risks.

Punjab National Bank v. Vikram Cotton Mills (1970)

Facts of the Case:

1. Parties Involved:
 o The Punjab National Bank (PNB) was the plaintiff.

o Vikram Cotton Mills was the defendant, which had an account with the
Punjab National Bank and had entered into a financial arrangement with
the bank.

2. Background:

o Vikram Cotton Mills had a bank account with Punjab National Bank,
which was operated by the mill.

o The mill had obtained a cash credit facility from the Punjab National
Bank. The cash credit facility is a short-term loan arrangement that allows
the borrower to withdraw money up to a certain limit.

3. Issue of Overdrawn Account:

o The Vikram Cotton Mills were allowed to overdraw their account based
on the arrangement of cash credit provided by the bank.

o However, the mill was found to have overdrawn the account beyond
the agreed limit without prior consent or sufficient funds to cover the
overdrawn amount.

4. Breach of Contract:

o The Punjab National Bank claimed that the Vikram Cotton Mills had
breached the terms of their financial arrangement by overstepping the
limits of the cash credit facility.

o The bank argued that the mill had failed to pay back the amount that was
overdrawn and had not adhered to the terms of the loan agreement.

5. Debt Recovery:

o The bank sought to recover the money that was overdrawn from the
account of the mill. The bank filed a suit for the recovery of the sum due to
it, asserting that the mill was in default and had failed to repay the
amount.

6. Claim for Damages:

 o The Vikram Cotton Mills disputed the claim of the Punjab National Bank
and argued that the terms of the agreement had not been fully complied
with by the bank, especially in regard to notification of limits and other
operational matters of the account.

Legal Issues:

The main legal issues in this case revolved around:

1. Breach of Contract: The court had to determine whether the Vikram Cotton
Mills had indeed breached the terms of the contract by overstepping the agreed
limits of the cash credit arrangement.

2. Bank’s Liability: Whether the Punjab National Bank had any liability or had
failed to act in accordance with the contractual obligations related to the
overdraft facility, which may have resulted in damages to the mill.

3. Enforceability of the Loan Agreement: Whether the terms of the cash credit
arrangement were enforceable and if the Punjab National Bank was entitled to
claim the outstanding dues based on the contractual relationship.

Judgment:

● The Supreme Court of India ruled in favor of the Punjab National Bank. The
judgment emphasized the importance of adhering to the terms of the cash credit
agreement.

● Breach of Contract: The court found that the Vikram Cotton Mills had indeed
breached the terms of the contract by overstepping the limits of the cash credit
facility. It was clear from the agreement that the mill was not entitled to draw
beyond the specified limits without prior approval from the bank.

● Bank’s Right to Recovery: The Court held that the bank was justified in
demanding the outstanding dues. The bank had provided the facility based on
certain terms and conditions, and the mill’s failure to adhere to the terms
amounted to a breach, entitling the bank to recover the dues.
 ● Damages: The court also clarified that the bank had the right to recover not just
the principal amount but also any interest or other associated costs that arose
due to the breach of contract by the mill.

Duties of the Indemnity Holder

1. Duty to Act Prudently: The indemnity holder must act as a reasonable person
would in similar circumstances when dealing with claims or suits. If they fail to
do so, they may jeopardize their right to recover damages or costs.

2. Duty to Mitigate Loss: The indemnity holder is expected to take reasonable

steps to minimize the loss or damage for which the indemnity is sought. Failure
to do so may reduce the indemnifier's liability.

State Bank of Saurashtra v. Ashit Shipping Services (2002) AIR SC 1993

Facts of the Case:

No og bill of lading- release of goods on a mere indemnity bond.

1. Parties Involved:

o Plaintiff (Appellant): State Bank of Saurashtra (the indemnifier).

o Defendant (Respondent): Ashit Shipping Services (the indemnity

holder).

2. Background:

o Ashit Shipping Services, a shipping company, was engaged in importing

goods.

o They sought clearance of goods from customs and required the issuance
of a bank guarantee to secure their obligations.

o The State Bank of Saurashtra issued a guarantee on behalf of Ashit

Shipping Services for the clearance of goods, acting as an indemnifier.
 3. Breach of Terms:

o After issuing the bank guarantee, the indemnity holder (Ashit Shipping
Services) failed to act prudently and comply with the conditions of the
contract.

o Their negligence and mishandling of goods resulted in customs

demanding the bank guarantee's enforcement, leading to financial liability
for the bank.

4. Bank’s Claim:

o The bank argued that the indemnity holder failed to act prudently,
violating the implied duty of care in indemnity agreements.

o It sought to recover the amount paid under the guarantee and damages
caused by the indemnity holder's imprudence.

5. Legal Issue:

o Whether the indemnity holder's imprudent actions absolved the

indemnifier (State Bank of Saurashtra) from liability.

Judgment:

1. Supreme Court's Ruling:

o The Court held that the indemnity holder (Ashit Shipping Services) had a
duty to act prudently and in good faith.

o The indemnity holder's failure to act with reasonable care resulted in

avoidable liability for the indemnifier (State Bank of Saurashtra).

o The indemnifier was not liable for losses caused by the indemnity
holder's negligence or imprudence.

2. Principle Established:

o The indemnity holder has an implied duty to act prudently and take
reasonable care to minimize losses.
 o If the indemnity holder's actions are reckless or negligent, the indemnifier
may not be held fully liable for the resultant losses.

Bijli Cotton Mills v. Chhaganlal (1969) AIR 1969 SC 312

Parties:

1. Appellant: Bijli Cotton Mills (Defendant in the original suit).

2. Respondent: Chhaganlal & Company (Plaintiff in the original suit).

Facts:

1. Contract of Supply:

o Bijli Cotton Mills entered into a contract with Chhaganlal & Co. for the
supply of cotton bales.

o The contract stipulated that the cotton bales would be delivered by the
mill in agreed installments within a specified timeframe.

2. Failure to Deliver:

o Bijli Cotton Mills failed to deliver the cotton bales in accordance with the
agreed schedule.

o Chhaganlal & Co. repeatedly demanded delivery, but the mill did not fulfill
its obligation.

3. Market Fluctuation:

o The price of cotton bales rose significantly in the market during this
period.

o Due to the mill’s failure to deliver the goods, Chhaganlal & Co. had to
procure cotton bales at a much higher price from the open market to meet
their own commitments.

4. Claim for Damages:

 o Chhaganlal & Co. filed a suit for damages against Bijli Cotton Mills.

o The damages sought were the difference between the agreed price under
the contract and the higher price they had to pay in the open market.

Legal Issues:

1. Was Bijli Cotton Mills liable for failing to deliver the goods under the contract?

2. Could Chhaganlal & Co. recover damages for the loss incurred due to the higher
price in the open market?

Supreme Court’s Decision:

1. Liability for Breach of Contract:

o The Court held that Bijli Cotton Mills had failed to perform their
contractual obligation without valid justification. This constituted a
breach of contract.

o The mill was, therefore, liable for the consequences of their non-
performance.

2. Measure of Damages:

o The Court applied the principle of compensatory damages under

Section 73 of the Indian Contract Act, 1872, which provides that the
aggrieved party is entitled to compensation for the loss directly and
naturally arising from the breach.

o The Court ruled that Chhaganlal & Co. was entitled to recover the
difference between the contract price and the price at which they had to
procure the goods in the market.

3. Market Conditions:
 o The Court also noted that the rise in market prices was not due to any
extraordinary or unforeseeable circumstances but was a normal market
fluctuation. Hence, the damages claimed were reasonable and foreseeable.

Duty to Mitigate Damages:

The principle of mitigation of damages is codified under Section 73 of the Indian

Contract Act, 1872, which states that the aggrieved party is entitled to compensation
for the loss caused by the breach but must take reasonable steps to minimize the
resulting loss.

In this case:

1. Action by Chhaganlal:
After Bijli Cotton Mills failed to deliver the goods, Chhaganlal & Co. acted
prudently by procuring the cotton bales from the open market to fulfill their
commitments. This was seen as an effort to mitigate the damages arising from
the breach of contract.

2. Court's View:
The Supreme Court upheld that the plaintiff (Chhaganlal & Co.) had acted
reasonably to minimize their loss and was entitled to recover the difference in
price (contract price vs. market price). The Court highlighted that the aggrieved
party must act in good faith and take reasonable measures to mitigate damages
instead of allowing losses to accumulate.

3. Relevance to Mitigation:
The case illustrates that:

o The aggrieved party cannot claim compensation for avoidable losses.

o If the aggrieved party takes reasonable steps to reduce the loss, they are
entitled to recover the difference between the contract price and the cost
incurred in mitigating the damage.
 3. Duty to Notify: The indemnity holder should notify the indemnifier promptly
about any claims or losses that may trigger the indemnification obligation.

Rights and Duties of the Indemnifier

Rights of the Indemnifier

While Section 124 does not explicitly outline rights for the indemnifier, case law
provides clarity on their entitlements:

1. Right to Sue Third Parties: After compensating the indemnity holder, the
indemnifier may have rights over any property involved and can sue third
parties responsible for causing losses.

British India General Insurance Co. Ltd. v. The Indian Oil Corporation Ltd. (1953) 1
SCR 257

Facts of the Case:

1. Parties Involved:

o The Indian Oil Corporation Ltd. (IOCL) was the insured party.

o British India General Insurance Co. Ltd. was the insurer (indemnifier).

2. Incident:

o The Indian Oil Corporation had entered into a contract for the supply of
goods with a third party.

o During the course of transit of the goods, an incident occurred, and the
goods were damaged due to negligence on the part of the carrier.

o The Indian Oil Corporation had an insurance policy with British India
General Insurance Co. Ltd. covering such damages.

3. Claim and Compensation:

o The Indian Oil Corporation lodged a claim with its insurer, British India
General Insurance Co., for the damages sustained by the goods during
transit.
 o The insurer, after verifying the claim, paid the indemnity amount to the
Indian Oil Corporation for the damage caused to the goods.

4. Subrogation Issue:

o After paying the insured party (Indian Oil Corporation), the insurer
(British India General Insurance) sought to recover the amount paid from
the third party (the carrier) who was responsible for the damage to the
goods.

o The insurer argued that they had the right of subrogation as a result of
their indemnity payment to the insured party. In other words, after
paying the insured, the insurer had the right to stand in the shoes of the
insured and pursue the third party (the carrier) for recovery.

5. Dispute:

o The issue arose as to whether the insurer could exercise the right of
subrogation and pursue the carrier for recovery, even though the
insured (Indian Oil Corporation) had not yet taken any legal action
against the third party.

6. Court’s Decision:

o The Supreme Court of India ruled in favor of the British India General
Insurance Co. Ltd., stating that the insurer’s right to subrogation could
not be denied, even if the insured had not yet sued the third party.

o The Court held that upon payment of the indemnity to the insured, the
insurer acquired the right to sue the third party for the amount it had paid
to the insured.

Secretary of State v. G.T. Sarin (AIR 1935 PC 134):

Facts of the Case

1. Background:
G.T. Sarin was appointed as an agent under a contract with the Secretary of State
 for India to collect customs duties for goods imported into British India. Under
this arrangement, Sarin was liable for the payment of customs duties to the
government if the principal failed to pay.

2. Breach by Principal:
Sarin’s principal failed to pay customs duties for certain consignments. As a
result, Sarin, as the indemnified party, paid the dues to the government to fulfill
his obligations under the contract.

3. Claim by Sarin:
After paying the dues, Sarin sought indemnification from his principal under
their agreement. He argued that he was entitled to be reimbursed for the
payment made to discharge the customs duty liability.

National Insurance Co. Ltd. v. Laxmi Narain Dhut(2007)

Facts of the Case

1. Background:
The case revolves around a motor vehicle accident involving a third party and a
vehicle insured by National Insurance Company Ltd. The vehicle owner, Laxmi
Narain Dhut, held an insurance policy covering third-party liability.

2. The Incident:
A motor vehicle accident occurred, resulting in the death of a third party. The
legal heirs of the deceased filed a claim for compensation under the Motor
Vehicles Act, 1988, before the Motor Accident Claims Tribunal (MACT).

3. Defenses by the Insurer:

The National Insurance Company contested the claim, arguing that the driver of
the vehicle at the time of the accident did not hold a valid driving license, thereby
violating the terms and conditions of the insurance policy. The insurer
contended that this breach absolved it of liability to pay compensation.

4. Tribunal's Decision:
The MACT awarded compensation to the claimants and directed the insurance
 company to pay the amount. The tribunal ruled that the absence of a valid
driving license did not affect the insurer’s liability toward third parties under the
Motor Vehicles Act.

5. Appeal to the High Court:

Dissatisfied with the tribunal’s decision, the insurer appealed to the High Court.
However, the High Court upheld the tribunal’s decision, ruling in favor of the
claimants.

6. Appeal to the Supreme Court:

The insurance company appealed to the Supreme Court, challenging its liability
based on the argument of breach of policy terms due to the driver's lack of a
valid license.

Issues for Consideration

1. Third-Party Liability of Insurers:

Whether an insurer can escape liability to third-party claimants if the driver of
the insured vehicle does not hold a valid driving license.

2. Interpretation of the Motor Vehicles Act, 1988:

How the statutory obligation of insurers under the Motor Vehicles Act intersects
with contractual policy terms.

3. Rights of the Insurer Against the Insured:

Whether the insurer could recover compensation paid to the third party from the
vehicle owner (insured).

Judgment

The Supreme Court delivered a nuanced judgment balancing the rights of third-party
claimants, the statutory obligations of insurers, and the rights of insurers against the
insured.

1. Third-Party Liability of the Insurer:

The Court held that the insurer is statutorily obligated under the Motor Vehicles
 Act, 1988, to indemnify third-party claimants irrespective of any breach of policy
terms by the insured. The absence of a valid driving license does not absolve the
insurer from its statutory liability to third parties.

2. Insurer’s Right to Recover:

While the insurer is liable to pay compensation to third parties, the Court
clarified that it has the right to recover the amount paid from the vehicle owner
(insured) if there is a breach of policy terms, such as the driver not holding a
valid license.

3. Balancing Interests:
The Court emphasized that the Motor Vehicles Act prioritizes the protection of
third-party rights. However, it also safeguards the insurer’s interests by allowing
it to recover compensation from the insured in cases of breach.

4. Observations on Licensing:
The Court noted that driving without a valid license is a serious violation. Vehicle
owners must ensure that their drivers are properly licensed to avoid breaching
the terms of the insurance policy.

Legal Issue

The case primarily dealt with:

1. The indemnifier's obligation to compensate the indemnified party (Sarin).

2. The indemnifier’s right to subrogation to recover the paid amount from the third
party (the principal).

Judgment

The Privy Council ruled as follows,

The Secretary of State, as the indemnifier, was bound to indemnify Sarin for the
payment he made. Sarin had lawfully paid customs duties on behalf of the
principal, making his claim valid under the indemnity agreement.
Aspect Right to Sue a Third Party Right of Subrogation

Nature of the Derivative (indemnifier steps Primary (indemnifier acquires the

Right into the insured’s shoes) rights after compensation)

If an insurer pays the insured for damage If an insurer pays the insured for
caused by a third party, it can sue the damage, it can directly sue the third
Example
third party only if the insured has a valid party, stepping into the shoes of the
cause of action. insured.

Timing of Action occurs after the indemnifier Action is taken immediately once
Action compensates the insured indemnity is paid to the insured

The insurer may wait until the insured The indemnifier can immediately
has filed a lawsuit or received pursue the third party once it
Example
compensation before proceeding with compensates the insured for the
the action. loss.

Legal Indemnifier does not have Indemnifier has legal standing as though
Standing original cause of action they were the insured

After compensating the insured, the

The indemnifier may have to
indemnifier can independently pursue the
Example wait for the insured to take
third party, as if they were the original holder
action before taking legal steps.
of the claim.

2. Right to Defend Legal Proceedings: The indemnifier has the right to defend
any legal proceedings arising from events covered by the indemnity agreement.

Also can raise claims against the indemnity holder- in case no proper care.

3. Right to claim costs

4. Right to Subrogation: After compensating the indemnity holder, the

indemnifier is entitled to step into their shoes and pursue recovery from third
parties responsible for the loss.

This right allows the indemnifier to claim damages from third parties who
caused the loss initially.
5. Right to Seek Contribution:

If there are multiple indemnifiers, one who pays may seek contribution from
others based on their respective obligations under the contract.

The Manager, United India Insurance Co. Ltd. v. Dorinco Reinsurance Co. (AIR
2004 SC 1014):

Facts of the Case

1. Background:
United India Insurance Co. Ltd., an Indian insurer, had entered into a reinsurance
contract with Dorinco Reinsurance Co., a foreign reinsurer. Reinsurance is a
mechanism by which an insurance company transfers part of its risk to another
insurance company.

2. The Event:
The case arose from a claim related to a catastrophic accident or event. United
India Insurance had paid the claims of the insured parties in India and sought
reimbursement from Dorinco Reinsurance as per the terms of the reinsurance
agreement.

3. Dispute over Reinsurance Claim:

Dorinco Reinsurance Co. denied its liability under the reinsurance contract. The
dispute centered on whether the terms of the reinsurance contract obligated
Dorinco to indemnify United India Insurance for the specific claims paid out.

4. Initiation of Legal Proceedings:

United India Insurance filed a suit to enforce the reinsurance contract, seeking
reimbursement for the amount it had paid to the insured parties. The primary
issue was whether Dorinco was legally bound to indemnify United India
Insurance under the terms of the reinsurance agreement.

Legal Issues

1. Validity and Scope of the Reinsurance Contract:

Was the reinsurance contract valid, and did it cover the claims in question?
 2. Interpretation of Reinsurance Terms:
Did the terms of the contract specifically obligate Dorinco Reinsurance to
indemnify the claims paid by United India Insurance?

3. Jurisdiction and Enforceability:

Could the contract be enforced in India, given that Dorinco was a foreign
company?

Judgment by the Supreme Court

The Supreme Court of India ruled in favor of United India Insurance Co. Ltd.
The court made the following observations:

1. Reinsurance Contract Enforceability:

The court held that the reinsurance contract was valid and enforceable. Dorinco
Reinsurance was obligated to fulfill its commitments under the reinsurance
agreement.

2. Scope of Reinsurance Agreement:

The court interpreted the terms of the agreement and found that the claims paid
by United India Insurance fell within the scope of the reinsurance coverage.
Dorinco was liable to indemnify the Indian insurer.

3. Doctrine of Utmost Good Faith:

The Supreme Court emphasized the principle of utmost good faith in insurance
and reinsurance contracts. It noted that both parties to the reinsurance
agreement were bound to act in good faith, and Dorinco could not deny liability
without valid reasons.

4. Jurisdictional Concerns:
The court held that the dispute could be adjudicated in Indian courts, despite
Dorinco being a foreign entity, because the contract had significant connections
to India, including the insured risks and claims being based in India.

Duties of the Indemnifier

 1. Duty to Compensate for Damages: The indemnifier must compensate for all
damages as promised in the contract. This duty arises as soon as a loss occurs
due to specified events.

2. Duty to Cover Legal Costs: The indemnifier is obligated to pay all costs incurred
by the indemnity holder in relation to claims covered by the contract.

3. Duty Not to Interfere: The indemnifier should not interfere with how the
indemnity holder manages claims or legal proceedings unless authorized by
them.

Commencement of Liability

1. General Principle:

● Traditionally, under common law, the liability of an indemnifier

commenced only after the indemnity-holder had suffered an actual loss.
The principle was encapsulated in the maxim: "you must be damnified
before you can claim to be indemnified."

Hindustan Steel Works Construction Ltd. v. State of Orissa (1972) 1 SCC 27

Full Facts of the Case:

The Hindustan Steel Works Construction Ltd. (HSWCL) entered into a contract with
the State of Orissa for the construction of a steel plant. During the execution of the
work, disputes arose between the two parties regarding the interpretation and
performance of the contract. The primary issue was related to the payment for the work
completed by HSWCL and the compensation for losses or damages incurred by HSWCL
due to the State of Orissa’s actions.

HSWCL argued that it was entitled to indemnification from the State of Orissa for
certain expenses incurred due to actions by the state, including the payment for
additional labor costs and material shortages. The indemnity was claimed under the
terms of the contract, which specified that the state would compensate HSWCL for
losses caused due to delays or other defaults in performance by the state.

However, the State of Orissa disputed the claim, arguing that the indemnity could not be
granted because the loss or damage had not yet materialized or been fully incurred by
HSWCL. The issue was whether the claim by HSWCL for indemnity was premature, as
the actual damage or loss had not yet occurred when the claim was made.

Issue Before the Court:

The primary issue before the Supreme Court was whether HSWCL's claim for
indemnity was premature, as the indemnity under the contract could only be invoked
after the actual loss or damage had occurred.

Court’s Analysis and Ruling:

The Supreme Court examined the terms of the contract between HSWCL and the State of
Orissa, as well as the nature of indemnity claims. The Court held that:

1. Indemnity Claims Must Be Based on Actual Loss or Damage: The Court

emphasized that an indemnity holder is entitled to make a claim only after the
actual loss or damage has occurred. A claim for indemnity before the loss or
damage has materialized is premature and cannot be enforced.

2. Speculative or Potential Loss Cannot Trigger Indemnity: The Court clarified

that indemnity clauses are meant to cover actual losses or liabilities, not
speculative or potential ones. HSWCL's claim was premature because it was
based on the possibility of losses that had not yet occurred.

3. Indemnity Clauses Are Contingent on Loss: The Court reiterated that

indemnity is a contingent right that arises only when the indemnified party
suffers actual loss. Since HSWCL had not yet suffered the losses or expenses it
was claiming indemnity for, the claim was premature.

Court’s Decision:

The Supreme Court ruled that the claim for indemnity was premature, as it was
based on speculative or potential losses. The indemnity could only be claimed once the
actual loss or damage was suffered by HSWCL. Therefore, the Court dismissed HSWCL's
claim for indemnity at that stage of the proceedings.

Key Takeaways:

● Indemnity Claims are Contingent: A claim for indemnity can only be made
once the loss or damage has been actually incurred, not before.

● Premature Claims are Not Actionable: Claims made before the occurrence of
the loss are considered premature and cannot be enforced.

● Nature of Indemnity: Indemnity protects the indemnified party against actual

losses, not potential or speculative ones.

● However, this approach has evolved. Courts have recognized that

requiring actual loss before enforcing indemnity can place undue burdens
on the indemnity-holder.

2. Judicial Interpretation:

● The commencement of liability is now understood to begin when the

indemnity-holder's liability becomes absolute and certain, even if no
payment has been made yet.

Osman Jamal & Sons v. Gopal Purushottam (1928)

Full Facts:

Parties Involved:

● Osman Jamal & Sons (Plaintiff): A firm engaged in business.

● Gopal Purushottam (Defendant): A person who entered into a contract with

Osman Jamal & Sons.

Background:
The case arose out of a contract for the sale of goods. The parties involved had
entered into an agreement where Osman Jamal & Sons agreed to sell goods to Gopal
Purushottam. The agreement stipulated certain terms and conditions regarding the
delivery, quality, and payment for the goods.

However, Gopal Purushottam did not take delivery of the goods as per the contract.
Due to the breach of the agreement by Purushottam, Osman Jamal & Sons suffered a
financial loss because the goods could not be sold to other buyers due to the specific
nature of the goods. The firm was forced to hold the goods, incurring storage costs and
other related expenses.

The Dispute:

The plaintiff, Osman Jamal & Sons, filed a suit for indemnity against the defendant,
Gopal Purushottam, claiming that due to his breach of the contract, they had suffered a
loss. They sought compensation for the damages they incurred due to Purushottam’s
failure to fulfil his obligations under the contract.

The key issue was whether Purushottam was liable for the losses suffered by Osman
Jamal & Sons, and whether the breach of contract led to an indemnity claim for the
expenses incurred by the plaintiff.

Key Legal Issue:

The primary legal issue was whether Osman Jamal & Sons was entitled to claim
indemnity for losses suffered as a result of the breach of contract by Gopal
Purushottam. In this context, the court had to determine the scope of indemnity and
whether the losses claimed were directly attributable to the defendant’s breach.

Court's Decision:

The court ruled in favor of the plaintiff, Osman Jamal & Sons. The court found that
Purushottam’s failure to fulfill his contractual obligations caused the plaintiff to
suffer a loss. As a result, the court held that the plaintiff was entitled to claim indemnity
for the damages incurred due to the breach of contract.
The ruling reaffirmed the principle that an indemnity holder can claim compensation
for losses resulting from the breach of contract or the failure of the other party to
perform its obligations under the contract.

Principle Established:

The key legal takeaway from the case is the enforceability of indemnity claims in cases
where the other party has breached the terms of the contract, resulting in actual
financial loss for the indemnity holder.

The case underscores that indemnity claims can arise not just from direct losses, but
also from incidental losses resulting from the breach.

3. Equitable Principles:

● Courts have intervened to mitigate the harshness of requiring actual loss

before enforcement. They have recognized that if a party's liability has
become absolute, they should not be denied recovery simply because they
have not yet paid.

● This reflects a shift towards equitable principles where fairness dictates

that claims be enforceable as soon as liability is established.

Conditions for Commencement of Liability

1. Trigger Event Occurrence:

● Liability commences upon the occurrence of an event that triggers the

indemnity agreement.

● For example, if A indemnifies B against damage to B's property, B can

claim against A as soon as damage occurs.

2. Absolute and Certain Liability:

● The liability must be clear and unequivocal for the indemnifier's

obligation to arise.
 ● If there are uncertainties regarding whether a loss will occur or its extent,
the indemnifier may not be held liable.

3. Indemnity Holder's Conduct:

● The conduct of the indemnity holder plays a role in determining liability

commencement. If the holder acts prudently and in accordance with the
terms of the contract, they can claim against the indemnifier once their
liability becomes absolute.