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SPECIAL CONTRACTS

Shubham Agarwal

SPECIAL CONTRACTS
Sections 124 238

INDEMNITY
&
GUARANTEE
Secs. 124 - 147

BAILMENT
&
PLEDGE
Secs. 148 - 181

AGENCY

Secs. 182

CONTRACT OF INDEMNITY
DEFINITION

Sec.124 A contract of indemnity is a contract


whereby 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.
Illustration: A contracts to indemnify B against
the consequences of any proceedings which C
may take against B in respect of a certain sum
of Rs. 200.

Mr. A, contracts with the government to return

to India from abroad after completing his


studies and serve the Government for a fixed
period. If he returns he is not bound to
reimburse but if he fails to return he is bound
to reimburse as this is a contract of indemnity.
A, lost his original certificates and
approached the University for issue of
duplicate certificates. The University asked A
to furnish an indemnity bond to protect itself
from any claim which would be made by any
person on the original certificates.
Sec. 124 is not exhaustive.

Meaning of Indemnity:
To indemnify means to save from loss
Indemnity means to compensate or save or protect the
person from loss or make the loss good.
There are two parties: A Promisor and a Promisee
A person who promises to make good the losses, i.e.,
the promisor who promises to protect the other person
from loss is called the INDEMNIFIER and the person
who is promised that he shall be protected incase a
loss is suffered i.e., the promisee is called the
INDEMNITY-HOLDER or the INDEMNIFIED .
By a contract of indemnity, a security is provided to the

promisee against any expected loss.

ESSENTIALS OF INDEMNITY
Must contain all the essentials of a valid

contract.
There must be an actual loss suffered, either
by the promisors conduct or by the conduct of
any other person.
The loss must be caused by human conduct
only.
The promise of indemnity may either be
express or implied.
By nature it is a contingent agreement.
The contract is mainly to reimburse the loss
incurred.

There is an undertaking on the part of the


indemnifier to be answerable for the debt or
default of the other.
This undertaking by the promisor is primary and
independent.

Example- 1 : A, a student of Law enters into a


contract with a lawfirm that he would join and
serve the lawfirm for a fixed period. After
completion of his law course he fails to join the
law firm. A is bound to reimburse as this is a
contract of indemnity.

Example 2: The receipt pertaining to certain

goods is lost B while travelling through Indian


Railways. Now, A claims the goods from
Railway company. The Railway Co. asked A to
give an indemnity bond. A gets the goods.
Here A is indemnifier and Railway Co is the
indemnity holder. Later, B the real owner sues
the Railway Co.. Now, the co. can claim
indemnity from A, for the loss caused by his
conduct.

In English law, the concept of indemnity is wider. It

means a promise by a person to save the other from loss


caused by events or accidents which depend or not on the
conduct of any person.
In English Law indemnity means a promise to save a
person harmless from the consequences of an act.
The promise may be express or may be implied from the
consequences of an act.
Thus, a contract of insurance (except life insurance)
where the loss is caused by fire or due to some other
reason is a contract of indemnity under English Law
whereas it is not so under Indian Law.

Law commission of India observed that

indemnity is a claim and not mere


reimbursement. It recommended the
expansion of the definition of indemnity so as
to cover the events not within the control of
any person.

In Gajanan Moreshwar Parelkar vs Moreshwar

Madan Mantri (1942) 44 BOMLR 703 Chagla,


J., held that sec. 124 is not exhaustive. An

Rights of Indemnity Holder when sued


Sec. 125- The promisee in a contract of

indemnity, acting within the scope of his


authority, is entitled to recover from the
promisor All damages : to which the promise to
indemnify applies;
All Costs: as it would have been prudent to
act;
All Sums: which may have been paid under
the terms of any compromise.
Sec. 125 is not exhaustive. Indemnity requires
that the party to be indemnified shall never be
called upon to pay.

The Rights of the indemnity holder have been

explained in the case of - Gajanan Moreshwar


Parelkar vs Moreshwar Madan Mantri (1942)
44 BOM LR 703

(a) The indemnity holder is entitled to recover:

(a)all the damages that he may have been


compelled to pay in any suit in respect of any
matter to which the promise of the indemnifier
applies. For example, if A contracts to
indemnify B against the consequences of any
proceedings which C may take against B in
respect of a particular transaction. If C does
institute legal proceeding against B in that
matter and B pays damages to C, A will be
liable to make

(b) all the costs of suits that he may have had to pay

to the third party provided he acted as a man of


ordinary prudence and he did not act in
contravention of the directions of the indemnifier or
if he had acted under the authority of the
indemnifier to contest such a suit. In the case of
ADAMSON v. JARVIS [1827] 4 BING 66, Adamson was
entitled to recover the money he had to pay.
(c) All the sums that he may have paid under the
terms of any compromise of any such suit provided
such compromise is not contrary to the indemnifiers
orders and was a prudent one or if he acted under
authority of the indemnifier to compromise the suit.
The indemnity holder is also entitled to losses due to
change of law not foreseen by the parties.

Rights of Indemnifier - Rights under Doctrine

of Subrogation. To sue against third party after


indemnifying the indemnity holder. Not to
compensate for losses not covered under
Contract of Indemnity.

The doctrine of subrogation provides that if an

insurer pays a loss to its insured due to the


wrongful act of another, the insurer is
subrogated to the rights of the insured and
may prosecute a suit against the wrongdoer for
recovery of its outlay. The right of an insurer to
be subrogated to the rights of its insured is
typically based upon:
(1) the terms of the policy of insurance; or,
(2) the right of equitable subrogation, i.e., by

operation of law.

A contract of insurance is a contract of

indemnity. Each and every contract of


indemnity had the elements of subrogation,
which is based on the fundamental principle
that in case of loss, the insured shall be
indemnified to the extent of loss and nothing
beyond the loss.
Thus, the doctrine of subrogation is an
automatic, inbuilt, inherent, implied and
incidental to the principles of indemnity,
applicable to all property and liability insurance
but not applicable to personal accident and life
insurance policies, since these are not contract
of indemnity. Every rule of insurance law is
adapted to carry out this fundamental rule.

Commencement of the
Indemnifiers Liability
There are several judgements which have decided

upon the liability of the indemnity holder but the


Indian Contract Act of 1872 is silent on the time
when the liability of the indemnifier commences.
The liability of the indemnifier begins as soon as he
indemnifies the other person. Some High Courts
have been of the view that the indemnifier becomes
liable only when the indemnity holder actually
suffers some loss. Some other High Courts have
held that the indemnifier is liable before the actual
loss. This is considered to be the correct version of
indemnity.

Gajanan Moreshwar v Moreshwar Madan

AIR 1942 BOMBAY 302


In this case the Bombay High Court came to

the conclusion that if the indemnifier is not


liable until the loss has occurred it will be a
burden on the indemnity holder. The Court
held that the indemnifier has to pay as soon
as his liability becomes absolute. If the
indemnified has incurred an absolute liability,
he is entitled to ask the indemnifier to pay off
his liability.

Provisions of the common law on the contract of

indemnity are different as to the provisions in the Indian


law. Earlier there was a maxim used in English law for
the contract of indemnity i.e. YOU MUST BE DAMNIFIED
BEFORE YOU CAN CLAIM TO BE INDEMNIFIED.
The original English rule was that indemnity was
payable only after the indemnity-holder has suffered
actual loss by paying off the claims. I.e. no action could
be brought against the indemnifier until the indemnityholder had suffered actual loss. Only after a loss has
been suffered by the indemnity holder by acting on the
instructions of the promisor or indemnifier and all
damages borne by him in defending the suit or to
prevent it or while compromising on it are paid, then
only afterward he can sue the indemnifier for the
payments of all the costs borne by him. These were the
earlier provisions.

Section 125 of the Act, deals only with the

rights of the indemnity-holder in the event of


his being sued. It is by no means exhaustive
of the rights of the indemnity-holder, who has
other rights besides those mentioned in the
section. It was further discussed that an
indemnity might be worth very little indeed if
the indemnified could not enforce his
indemnity till he had actually paid the loss. If
a suit was filed against him, he had actually to
wait till a judgment was pronounced, and it
was only after he had satisfied the judgment
that he could sue on his indemnity.

It is clear that this might under certain

circumstances throw an intolerable burden


upon the indemnity-holder. He might not be in
a position to satisfy the judgment and yet he
could not avail himself of his indemnity till he
had done so. Therefore the Court of equity
stepped in and mitigated the rigor of the
common law and held that where the
indemnified has incurred a liability and that
liability is absolute, he is entitled to call upon
the indemnifier to save him from that liability
and to pay it off.

Osman Jamal & Sons Ltd. v Gopal Purshottam

1928 I.L.R. 56 CAL 262


In this case a company acted as a commission

agent for another firm and purchased goods on


behalf of the firm. The firm failed to take the
goods. The supplier of the goods was entitled
to recover from the firm damages relating to
breach of contract. However, before the claim
was paid the company went into liquidation.
The court held that the official liquidator was
entitled to recover the damages from the firm
though the company had not paid any amount
to the supplier.

Situation of various types of Indemnity


Creations
An indemnity clause is a contractual transfer

of risk between two contractual parties


generally to prevent loss or compensate for a
loss which may occur as a result of a specified
event.
Indemnity clauses play an important role in
managing
the
risks
associated
with
commercial transactions by protecting against
the effects of an act, a contractual default or
another partys negligence.

Types of Potential Indemnity Recovery.


(1) 3 Basic Types. There are three basic types of

indemnity under which a construction trade


potentially may be pursued:
(a) Express Contractual Indemnity;
(b) Implied Contractual Indemnity and
(c) Implied Non-Contractual Indemnity.
(2) Related Equitable Basis. There is also a related
doctrine of Equitable Indemnity which permits a trade
which allegedly is a concurrent tortfeasor to seek to
obtain partial indemnity from other alleged concurrent
tortfeasors under a comparative fault basis.

Express Contractual Indemnity

Express Contractual Indemnity is based upon a


written agreement by one person to indemnify or
hold another harmless from the legal consequences
of its conduct. The scope of Express Contractual
Indemnity depends upon the wording of the
indemnity language.
In MacDonald & Kruse, Inc. v. San Jose Steel Co., 29
Cal.App.3d 4132 (1972), the court attempted to
classify three types of Express Contractual Indemnity.
Since then, the MacDonald & Kruse classifications
have achieved a life of their own and are the source
for the often heard references to "Type 1" (specific)
or "Type 2" (general) indemnity agreements.

Type 1. A Type 1 indemnity agreement contains

an expression of intent that the indemnitor is to


indemnify the indemnitee for, among other
things, the indemnitee's own negligence, either
standing alone or together with the negligence of
others, including that of the indemnitor. This
type of indemnity agreement has also been
described as a "specific" indemnity agreement.
An example of this clause would be when the
subcontract requires the subcontractor to
indemnify the prime contractor against "any and
all" claims arising out of the performance of the
subcontract save and except claims arising from
"sole negligence or sole willful misconduct of
contractor."

Type 2. A Type 2 indemnity agreement contains a

promise by the indemnitor to indemnify or hold the


indemnitee harmless, but does not expressly provide
that the indemnitee will be indemnified for its (the
indemnitee's) own negligence. A Type 2 indemnity
agreement is often referred to as a General
Indemnity Agreement. Language which has been
found to be a Type 2 or General Indemnity (hold
harmless) Agreement includes promises to indemnify
for liability:
"From any cause whatsoever
"which might arise in connection with the agreed
work"
"caused by or arising out of the operations" of the
indemnitor," or,
"arising out of or in any way connected."

Type 3. A Type 3 indemnity agreement provides

that the indemnitor will indemnify the indemnitee


for liabilities caused solely by the indemnitor's
negligence. If there is any negligence on the part
of the indemnitee or any third party, whether
"active" or "passive," it will bar any claim against
the indemnitor, even if negligent conduct by the
indemnitor contributed to the loss. In this type of
agreement, for example, the subcontractor is
required to indemnify the general contractor only
for the subcontractor's negligence, no one else's
negligence. This agreement would exclude any
responsibility by the indemnitor for the general
contractor's or any other third party's negligence.

Express Contractual Indemnity and Insurance

Coverage. When an express indemnity


agreement applies to a loss and both the
indemnitee's and indemnitor's general liability
insurance policies apply to the loss, in the
absence of a prior written agreement to the
contrary, the indemnitor's policy will be
deemed to provide primary coverage. Such a
loss will not be apportioned between the
insurers pursuant to the other insurance
clauses of the policies.

Express

Contractual Indemnity v. Implied


Indemnity.
When
Express
Contractual
Indemnity applies to a loss, the terms of the
contract typically will control over any
doctrine of implied indemnity. In other words,
the parties' own expression of indemnity in
the contract supersedes any notions of
implied indemnity. If, however, the express
contract of indemnity does not apply to the
loss, implied indemnity is not precluded.

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