The Author, Pragyanshu Gautam is a 2nd year Law Student at Hidayatullah National Law University, Raipur .
Can indemnity damages be paid by indemnifier before the actual damages caused?
Subsequently, English Common Law1 says “that indemnity2 was payable only after the indemnity-holder3 had suffered actual loss by paying off the claim.” The maxim of law was: “you must be damnified before you can claim to be indemnified.”4 But what about the worth that would be very less if the indemnified could not enforce his indemnity till he has actually paid the loss? That’s another thing “if a suit was filed against the indemnifier” then he had to actually wait for a “court judgment to be pronounced and it was only after he had ‘satisfied’ the judgment that he could be sued on his indemnity.”
Hence, on the other side “it is clear that under certain circumstances might put an unbearable burden on the indemnity-holder as he might not be in a position to satisfy the judgment and in current state he could not avail himself of his indemnity till he had done so.” Therefore, to balance on both sides, the court of equity5 stepped in to reduce the strictness of common law.
In a situation, “the court of equity held that if the indemnifier6 liability had become ‘absolute’ then he was entitled to either of the things to get the indemnifier to pay off the claim or pay the sufficient money into the court which would add up to a fund whenever it was claimed to paid off.” It is the up-to-date law as this process of change was given in detail by Justice Chagla of the Bombay High Court in the case of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri.7
Thus, then why does common law or statutory law (same as the equitable principles of the England courts) have to be relied on unless there is a conflict between the judicial decisions by court or contract act? Answer and Conclusion for this part: After analyzing the above case I come to a conclusion that the court took the right decision as the extent of the liability would be absolute than he has to be entitled to pay the indemnifier. There can be a situation where the liability can arise due to some act by the indemnity holder so he should pay the same to the indemnifier because the indemnifier promises the indemnity holder to restore him in the original situation (S.125 where there is suit or litigation). In absence of the conflict in any judicial decisions rendered by the court with the contract act, the “common law will prevail and rely on.”
In addition to this, considering the said remark by the Bombay High Court Judgment, what the law of indemnity in contract and its difference from liquidated damages can be interpreted?
Law of “indemnity” in a contract is “defined in S.124 of the Indian Contract Act.” It is defined like this: “A contract by which one party promises to save the other party from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person or third party, is called a contract of indemnity.” An illustration can be, where a vendor promised to the vendee to be liable if the title to the land was disturbed was held as one indemnity, in the case of Mangladha Ram v. Ganda Mal.8
Two of the cases where the scope of “indemnity” is restricted are where there is a promise to indemnify against loss, caused (a) by the promisor himself, or (b) by any other person. The definition excludes the scope where cases of loss arise from “accidents” like fire or untoward perils of the sea like - collision, sinking and all. Secondly, as in “the case of Adamson v. Jarvis”9 where the cattle was sold under the instruction of the “wrongful owner” itself that is outside the purview of this definition. Such a case of a loss is covered under the S.223 of the act, which provides the indemnity between principal and agent, after the request made by the promiser. The promise of a demnity as contemplated by the section, may be implied10 or express indemnity.11 Specific answer on indemnity depends on the indemnity clause either oral or in writing connected to “S.125 of the act, the rights of the indemnity holder in specific situations.”12
Contractual indemnity: Most of the contractual agreements such as lease, construction contracts, vendor agreements contain indemnification or “harmless clause.” In this clause the indemnifier agrees to bear the responsibility for the specific events such as losses, damages or liabilities to indemnity holders. This handout (quantity of financial aid given to a person or an organization) provides an overview of “contractual indemnity” clauses and “issues affecting their enforceability.”13
Difference between damages and indemnity? The major point of difference between them is that “damages can be claimed only for the loss arising out of actions of the parties to the contract upon breach of a contract and indemnity can be claimed for the loss arising out of action” of ‘third party.’
The next difference is “that damages can be only claimed for breach of contract whereas in indemnity the breach of contract is not necessary.” As the indemnity is claimed for the loss arising out of action of ‘third party’ so it not necessarily may result from the breach of contract.14
Liquidated damages (foreseeability and reasonability compensation of a breach): “S.74 of the Indian Contract Act deals with the liquidated damages where the damages are not predetermined or assessed in advance.”15 It is a sub-part of the damages which includes the amount of money parties designates during the formation of a contract or at the time of signing, that establishes the damages taken as compensation upon a specific breach of contract (e.g. late performance). Consequently, “the stipulation for increased interest from the date of default may be a stipulation by a way of penalty.”
Indemnity on the other hand, is the sub-part of compensation, which it has independent standing and that should be enforced connected with S.91 (evidence is reduced in the form of document itself) and S.92 (evidence of oral agreement excluded) of Indian Evidence Act. As in the definition of indemnity it is the conduct of the promisor himself or by the conduct of a third party where the contract is made by which one party promises to save the other from loss caused to him.
Statutory (common) damages or indemnity damages?
Section 124: Advantages of indemnity over statutory damages: As it clearly states that the indemnity clause “entirely shifts the risk of future loss to the third party or the indemnifier.”
Secondly, the obligation of reasonability, foreseeability and remoteness do not arise in the case of indemnity as a contract to indemnity is a “separate contract itself” and does not bring an interlinked concept of duty to mitigate. In indemnity the “breach is refusal to indemnify itself” rather than the “specific event” (as such in statutory damages) which led the indemnified party to seek the indemnity.
In damages where the sufficient rationale “has to be demonstrated between the breach of a contract event and the damage suffered, the approach to establish is much lower in case of an indemnity and there is no burden to prove the actual loss before claiming indemnity.” This has been inferred from the fact that ‘indemnity holders can sue the indemnifier even before the incurring any actual damage or loss that an indemnity is not necessarily given by repayment after payment.’16 Why not statutory damages (anyway available in the Indian Contract) instead of indemnity? “To contractually determine the extent of damages the well-drafted and substantially limited indemnity provisions may be used over the statutory provisions.”17 Such a clause can be set out under the two illustrations:
- Indemnification as an exclusive remedy: As the name of the clause suggests the right to indemnification18 that is an exclusive remedy for any breach “in relation to the transaction contemplated under this agreement and exclusion of other rights and remedies such as those arising in tort or statutory.”
- Limitations of liability or damages: (S.125) This clause states the amount and the conditions of the total liability stipulated for the indemnity provisions shall be limited. Indemnity “can be used as the basis while determining” the “extent of damages.”
Conclusion: Currently, there is no such exclusive remedy clause, but as the damages hinges “on the principle of foreseeability, the court may be inclined towards the indemnity as to compensate the loss.” Though there are specific “obligations that arise pursuant to an indemnity clause.” Besides, the extent of the liability “depends on the nature and terms of the contract and each must be governed by its own circumstances and facts.”
References:
1. It is the unwritten common law which comprises civil and criminal law, each having its own branch of court and procedure and is applicable in England.
2. Its literal meaning is “security from the hurt or damage or loss. In contract law, it is a “contractual obligation” of one party to compensate the incurred loss to another party due to the act of the indemnifier or any third party.
3. The person for whose protection it is given or the person for whom the loss is recovered is called the “indemnity-holder” or “indemnified.”
4. Avatar Singh, in CONTRACT AND SPECIFIC RELIEF (2020).
5. It is a type of a court that hears the case which involves the remedies other than the monetary damages such as writs, injunctions, specific performance and sets the base of the judgment on the principles of equity or fairness.
6. AIR 1942 Bom 302: (1942) 203 IC 261.
7. The person who gives the indemnity or promise to compensate for a loss is called an “indemnifier.”
8. AIR 1929 Lah 388.
9. (1827) 4 BING.66:29 R.R 503.
10. The Secretary Of State v. The Bank Of India Limited (1937-38) 65 IA 286: AIR 1938 PC 191: (1938) 175 IC 327.
11. Express contractual indemnity is a “written agreement by one person to indemnify or hold another harmless from the legal consequences of its conduct.”
12. La Litigation Lawyers.com. 2021. Express and Implied Indemnification | Los Angeles Real Estate Lawyers. [online] Available at: [Accessed 25 April 2022].
13. Amtrust Financial.com. 2021. Contractual Indemnity. [online] Available at: [Accessed 25 April 2022].
14. Mondaq.com. 2021. Indemnity Vs Damages - Corporate/Commercial Law - India. [online] Available at: [Accessed 25 April 2022].
15. Liquidated damages, https://en.wikipedia.org/w/index.php?title=Liquidated_damages&oldid=1012678097.
16. Jet Airways (India) Limited v. Sahara Airlines Limited and Ors, 2011 (113) Bom LR 1725.
17. Nishithdesai.com. 2021. Nishith Desai Associates: Revisiting The Indemnity V/S Damages Debate. [online] Available at: [Accessed 26 April 2022].
18. JD Supra. 2021. Indemnification as an Exclusive Remedy | JD Supra. [online] Available at: [Accessed 26 April 2022]
