Rights of Indemnity Holder

A contract of indemnity is classified as a contingent contract as it is activated by the occurrence of a specific event initiated by either the indemnifier or a third party. The event and results in the maturity of liability trigger the contract.

To establish a valid contract of indemnity, certain conditions must be met:

• The consideration for the contract must be lawful.
• The object of the contract must be lawful.
• The indemnity holder must suffer a loss.
• The contract is dependent on a particular event.
• The indemnity may be expressed or implied depending on the circumstances.
• All other requirements of a valid contract must be fulfilled.

These conditions must be satisfied for a contract of indemnity to be deemed valid.

Who is an Indemnity Holder? 

In a contract of indemnity, the beneficiary party is known as the indemnity holder. The indemnity holder is the party who receives assurance from the indemnifier regarding potential costs and damages that may occur in the future pertaining to a specific matter. For the indemnity holder to be eligible for compensation, the damage must have occurred due to an event for which either the indemnifier or a third party is liable.

For instance, in the aforementioned example, party A acts as the indemnifier, while party B, who has been promised protection against damages, assumes the role of the indemnity holder. B is considered the beneficiary party in the agreement between them.

Rights of Indemnity Holder When Sued

The indemnity holder in a contract of indemnity is indeed the beneficiary party, and as such, they possess the majority of the rights. The indemnity holder has the right to seek compensation for damages suffered, costs incurred concerning the legal proceedings, and the amount paid as a result of settling the dispute. These rights are outlined in Section 125 of the Indian Contract Act, 1872.

Section 125 of the Indian Contract Act, 1872, enumerates the rights of the indemnity holder, which the indemnifier is obligated to fulfil. These rights include:

• Right to recover damages (Section 125(1)): The indemnity holder has the right to claim reimbursement for the damages suffered.
• Right to recover costs incurred (Section 125(2)): The indemnity holder is entitled to recover the costs incurred in relation to the legal proceedings associated with the matter.
• Right to recover sums paid during compromise (Section 125(3)): The indemnity holder has the right to seek reimbursement for any amounts paid as part of a compromise to settle the dispute.

These rights granted by Section 125 protect the indemnity holder’s interests in a contract of indemnity.

Indemnity Holder’s Right to Recover Damages 

The primary purpose of a contract of indemnity is to compensate the indemnity holder for losses resulting from the occurrence of a specified event. The indemnifier or a third party can trigger this event. According to the provisions of the Indian Contract Act, 1872, the indemnifier assumes the responsibility of paying all damages covered by the contract of indemnity to the indemnity holder.

For instance, let’s consider a scenario where two individuals, A and B, enter into a contract of indemnity. In this agreement, A agrees to indemnify B against potential losses that may arise if a ship used for transporting goods sinks due to human error. If, in this situation, the ship indeed sinks due to human error, A becomes liable to compensate B for the damages incurred. B has the right to recover these damages from A.

Right of Indemnity Holder to Recover Costs Incurred 

The indemnity holder possesses the rights to recover all costs associated with a suit of indemnity from the indemnifier, as it is their entitlement. The fundamental purpose of a contract of indemnity is to alleviate the losses incurred by the indemnity holder. If costs arise in relation to a suit concerning the matter covered by the indemnity, the indemnifier is responsible for bearing those costs. 

However, it is important for the indemnity holder, when bringing up or defending such a suit, to act in accordance with the directives of the indemnifier and to behave as they would have in the absence of the indemnity. The indemnifier must expressly grant the authorization to bring up or defend the suit.

As long as these conditions are met, the indemnifier will bear any costs related to the suit.

For example, let’s consider a contract between two individuals, A and B, where A indemnifies B for losses incurred due to a specific shipment of goods. If a legal suit arises regarding the event that caused the loss, such as an accident, the outcome of that case may have significant implications. In this scenario, the costs incurred in relation to the suit would be recoverable from the indemnifier, as the right to recover such costs is conferred upon the indemnity holder by Section 125 of the Indian Contract Act, 1872. However, it is crucial for the indemnity holder to adhere to the directives of the indemnifier and act as they would have in the absence of the indemnity when bringing up or defending the suit.

Right of Indemnity Holder to Recover Sums Paid under Compromise 

The indemnity holder also possesses the right to recover any sums paid as part of a compromise in a suit, provided that the compromise did not violate specific directions given by the indemnifier. The indemnity holder needs to act in a manner consistent with how they would have acted in the absence of the indemnity or in accordance with the authorization given by the indemnifier to compromise the suit.

For instance, let’s consider a situation where A and B enter into a contract, with A indemnifying B for the completion of a task assigned to B by a third party. If B fails to fulfil the task and the third party initiates legal proceedings, but eventually both parties decide to reach a compromise where B agrees to pay a certain amount, then that sum paid under the compromise is recoverable from A. 

However, it is crucial for B, when bringing up or defending such a suit, to comply with the directives of A and act in a manner consistent with how they would have acted in the absence of the indemnity.

Commencement of Liability of An Idemnifier 

An indemnifier is a party who assumes the responsibility to compensate or protect another party, known as the indemnity holder, against losses or damages that may arise from a specified event or circumstance. 

The m agrees to bear the financial or legal consequences on behalf of the indemnity holder and provides assurance or indemnity against potential liabilities. In simple terms, an indemnifier is the party that offers indemnification or assumes the role of an indemnifier in a contract of indemnity.

The indemnifier’s liability in a contract of indemnity begins upon the occurrence of the trigger event. This event can be initiated by the indemnifier themselves or by a third party. The liability commences with the underlying principle that the indemnity holder must have suffered a loss, and their actions should align with how they would have acted in the absence of the indemnity to mitigate the loss.

To illustrate, let’s consider an example where A indemnifies B against damages to their office. The liability of A arises as soon as a trigger event occurs, resulting in damage to the office and a loss for B.

Regarding the extent of liability in cases where there is an indemnity bond in the form of a bank guarantee, a notable case is Cargill International SA v. Bangladesh Sugar and Food Industries Corpn (1996). In this case, it was determined that when a person cashes an indemnity bond in the form of a bank guarantee, the liability is limited to the value of the bond and does not extend beyond it.

The fundamental principle of the Indian Contract Act, 1872 is that immediate damages are to be compensated for, while remote damages should not be considered. Remote damages are those that are not reasonably foreseeable or directly related to the breach of contract. However, in the case of contracts of indemnity, even remote damages can be accounted for and mitigated by the indemnifier. 

This means that losses that may not be easily foreseeable under normal circumstances can also be taken into consideration when calculating damages in cases of indemnity. This provision aims to ensure that the indemnity holder is adequately protected and compensated for all possible losses arising from the triggering event, including immediate and remote damages.

Case Laws on Rights of Indemnity Holder

Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942) 

In the case of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942), the plaintiff obtained a long-term lease of a piece of land from the Bombay Municipal Corporation, which he later transferred to M. Madan for a limited period. M. Madan began construction on the land and obtained supplies from K.D. Mohan Das. 

However, M. Madan was unable to pay for the supplies and requested the plaintiff to create a mortgage deed in favour of K.D. Mohan Das. The plaintiff agreed and placed a charge on his possessions, including an agreed-upon interest rate and a specified date for the repayment of the principal amount and interest by M. Madan.

Despite several requests, M. Madan failed to pay anything to K.D. Mohan Das and did not have the mortgage deed released as agreed upon. Consequently, the plaintiff, G. Moreshwar, filed a lawsuit against M. Madan seeking indemnity.

The court in this case determined that if the indemnity holder has incurred a definite and absolute liability, they have the right to seek indemnification from the indemnifier. As a result, the defendant was held liable to indemnify the plaintiff for all the liabilities arising from the mortgage and the deed of further charges.

The Secretary of State v. the Bank of India Limited (1938) 

In The Secretary of State v. the Bank of India Limited (1938), the case revolved around a promissory note that had a false endorsement. The broker issued this note, and the bank, acting in good faith, applied for and obtained a renewal of the note from the Public Debt Office. However, the real owner of the promissory note sued the Secretary of State for conversion, and in response, the Secretary of State sued the Bank of India Limited, claiming implied indemnity.

The judgment, in this case, was based on the precedent set in the case of Dugdale v. Lovering (1875). In that case, it was established that when a person performs an act at the request of another. That act is not inherently tortious or known to be so by the person performing it, if the act subsequently causes harm to a third party, the person who performed the act is entitled to indemnification from the person who made the request.

Applying the principle from Dugdale v. Lovering, the court in The Secretary of State v. the Bank of India Limited held that if an act performed at the request of another, which is not inherently wrongful, causes harm to a third party, the person who performed the act is entitled to indemnity from the party who made the request. Therefore, in this case, the bank was entitled to seek indemnification from the Secretary of State for any liabilities arising from the false endorsement on the promissory note.

In summary, the judgment was based on the principle that when an act performed at the request of another is not inherently wrongful and causes harm to a third party, the person who performed the act is entitled to indemnification. Thus, the bank was entitled to claim indemnity from the Secretary of State in The Secretary of State v. the Bank of India Limited case.

Conclusion

The rights of an indemnity holder play a crucial role in ensuring their protection and compensation in a contract of indemnity. The rights of indemnity holder include the rights to recover damages, costs incurred in a suit, and sums paid under a compromise.