Law of Indemnity in India

Indemnity is a special kind of contract by which one party undertakes to save the other party from losses caused due to its actions or actions of a third party. The former party is called ‘indemnifier’ while the party enjoying the protection is called ‘indemnified’. This article seeks to analyze the concept and scope of indemnity in Indian legislation and the factors which may be considered by parties while undertaking indemnity related obligations.

1. Indemnity under Indian Contract Act

In India, contracts of indemnity are governed by Sections 123 and 124 of the Indian Contract Act, 1872 (“Contract Act”). However, it is important to note that these two sections are not exhaustive of the law of indemnity, as it has been held that the Contract Act is both an amending and a consolidating statute, and it is not exhaustive of the law of contract to be applied by the Courts in India[1]. Hence, common law principles would also be applicable to an issue unless there is a contradiction with the Contract Act or judicial decisions rendered by Courts in India[2] and Indian Courts may also apply principles of equity.[3]

2. Scope & Nature of Indemnity

An indemnity has a wider scope than damages arising out of breach of contract. While damages under section 73 of the Contract Act cannot be imposed for indirect, remote losses, indemnity can be invoked for indirect or remote losses.  Further, for claiming damages, a party is required to show that there has been a loss incurred by it. In case of indemnity, the indemnified party can claim relief even before the loss has been incurred[4]. This stems from the legal fact that damages arise out of breach of contract while indemnity arise from the contract itself. But the quantum from indemnity is only to the extent of loss incurred unlike liquidated damages or penalty.

Further, the indemnified party is not required to suffer actual loss before making a claim under a contract of indemnity[5]. In Jet Airways (India) Ltd. vs. Sahara Airlines Ltd. and Ors.[6], the Court held that an indemnity may be worth little if the indemnified cannot enforce an indemnity till he actually pays the liability.

Additionally, unlike damages, the contract of indemnity is an independent and separate contract from the main contract[7]. This essentially means an indemnity clause may survive after termination of the contract and the parties can seek relief even after expiry of the contract.

3. Considerations for Indemnity Clauses

In the light of principles stated above, the following considerations may be kept in mind while undertaking indemnity related obligations.

• For Indemnified Party:
• An indemnified party may consider contractually agreeing to a broader definition of losses and liabilities so that it can be protected against a wider range of losses, by opting for an inclusive definition of the same. In Regional Director, E.S.I.C. v. High Land Coffee Works[8] the Supreme court held that the word ‘include’ is used in interpretation clauses in order to enlarge the meaning of words or phrases occurring in the body of the statute; and when it is so used, these words or phrases must be construed as comprehending, not only such things as they signify according to their natural import but also include. Additionally, losses ‘arising out of’ rather than ‘in connection of’ or ‘result of’ may be included for the purposes of invoking indemnity, provided that the latter categories need to have close nexus with the loss incurred, for achieving the protection of indemnity as upheld by Indian Courts[9].
• An indemnity clause enables a party to be protected even before the loss is incurred. As such, phrases such as ‘hold harmless/protect from liability,’ which protect a party even before loss is incurred, may be used instead of
  terms such as, “compensate” which would mean that only after the claiming party has suffered a loss, shall the indemnifying party ‘compensate’ it.
• Further, it can be stipulated that the indemnity payment obligation shall be triggered as soon as the indemnified party issues a claim notice for the same.
• Finally, although indemnity covers indirect losses, remote losses may be expressly included.

• For the Indemnifying Party
• From the perspective of the indemnifying party, narrowing their indemnifying liability is of utmost importance. A limitation of liability clause operates as a protection against an obligation to provide for indemnity by capping the maximum indemnity amounts which could be claimed by the indemnified.
• Another useful clause is ‘exclusive remedy’ clause which enables the indemnifier to restrict the other party from claiming any remedy other than indemnity, by stating that indemnity can be used to the exclusion of all other rights and remedies.
• Certain exclusions may also be inserted in an indemnity clause. For instance, it can be stipulated that recovery already made under insurance claims would not come under the scope of indemnity.
• The indemnifying party may also consider including that the indemnity clause could not be invoked when the loss suffered by the other party is by its own fault. Any attempt by the indemnified party to include a right to claim indemnity for such losses suffered may be resisted.
• In addition to this, a duty can imposed upon the indemnified party to mitigate losses in order to claim for indemnity. This would ensure that the indemnified party takes all reasonable steps to prevent losses.
• Other tools to consider are baskets and deductibles. They ensure that the indemnifying party could not be bothered for frivolous claim. These clauses make indemnifier liable only when a certain threshold of loss is reached. While deductibles oblige the indemnifier only for the amount above the threshold, baskets make him liable for the entire amount once the threshold is hit.
• Finally, indemnity clauses are generally drafted to exist even after the termination of the main contract[10]. This enables the indemnified to raise an indemnity claim years after the main contract is expired. This could be resolved by inserting a cap on the survival of indemnity clause. For instance, a party could negotiate that the clause would survive till two years after the expiry of the contract.

4. Conclusion

In India, indemnity clauses are heavily negotiated by parties due to their serious commercial implications. The thumb rule for drafting any indemnity clause is that an indemnified may negotiate to widen the definition of liability/losses as far as possible and the indemnifier shall strive to put restrictions on the same. This might appear as a tug-of-war situation but what else is contract negotiation!

The views and opinions expressed in this article belong solely to the author and do not reflect the position of Tatva Legal, Hyderabad.

[1] State Bank of India vs. Moti Thawardas Dadlani and Ors. 2007(109) BomLR483, Gajanan Moreshwar Parelkar vs. Moreshwar Madan Mantri, (1942) 44 BOMLR 703.

[2] Kailash Kumar Kanoria  vs. Shiv Shankar Pasari and Ors. (2009)3CompLJ528(Cal).

[3] Profulla Kumar Bose vs. Gopee Bullabh Sebd, AIR 1946 Cal 159.

[4] Khetarpal Amarnath vs. Madhukar Pictures, 1955 SCC OnLine Bom 73.

[5] Board of Control for Cricket in India vs. Punjab National Bank, MANU/MH/2116/2012, Microwave Communications Ltd. and Ors. vs. Credit Agricole CIB and Ors. I (2017) BC86 (DRAT).

[6] (2011) Vol 113 (3) Bom. L.R. 1725.

[7] Himachal Pradesh Financial Corporation vs. Pawna, (2015) 5 SCC 617.

[8]  (1991) 3 SCC 617.

[9] Doypack Systems (P) Ltd. vs. Union of India, [1988] 2 SCC 299.

[10] Asst. Commissioner of Income Tax vs. Telco Construction Co. Ltd. MANU/IL/0261/2015.