When can an indemnifier be made liable ?

In this article we will discuss two important points one is when can an indemnifier be made liable? second is can he claim to be indemnified before he is demnified ?

There has been a controversy regarding the point, as to whether the indemnifier can be asked to indemnify before indemnity-holder has actually suffered the loss, or his liability arises only after the loss has been suffered by the indemnity-holder.

According to English Common Law, no action could be brought against the indemnifier until the indemnity-holder had suffered actual loss. This situation created a great hardship in those cases where the indemnity-holder was not in a position to meet the claim out of his pocket. Relief was provided to the indemnity-holder in such cases by the Court of Equity. According to the rules evolved by the Court of Equity, it was no more necessary for the indemnity-holder to be demnified before he could be indemnified. In other words, the indemnity-holder can now compel the indemnifier to save him from the loss in respect of liability against which indemnity has been promised.

In an English case, Kennedy L.J. observed: “If it be held that payment is a condition precedent to recovery, the contract may be of little value to the person to be indemnified, who may be unable to meet the claim in the first instance.”

The maxim of law was: “You must be demnified before you can claim to indemnified.” But the law is now different. In Richardson Re, Ex parte The Governors of St. Thomas’s Hospital (1911)2 KB 705, it was observed: “Indemnity is not necessarily given by repayment after payment. Indemnity requires that the party to be indemnified shall never be called to pay….” The Calcutta High Court in Osman Jamal & Sons Ltd. v Gopal Purshottam (1928 ILR 56 Cal 262) followed this principle.

There has been a difference of opinion between various High Courts in India as to whether the indemnity-holder can claim indemnity before he has actually suffered the loss.

According to the view expressed by the Lahore and Nagpur High Courts, a person must be demnified before he can be indemnified, i.e., no indemnity can be claimed until the indemnity-holder has already actually suffered the loss.

The High Courts of Bombay, Calcutta, Madras, Patna, and Allahabad have expressed a different view, and they are in favour of the application of law similar to the one recognized in England by the Court of Equity. According to the decisions of these courts an indemnity-holder can compel the indemnifier to indemnify even before the indemnity-holder has actually suffered the loss.

Referring to the equitable principle and also the desirability of its being followed in India, Chagla, J. while delivering the judgment in the Bombay High Court decision of Gajanan Moreshwar v. Moreshwar Madan A.I.R. 1942 Bom,302, at 304. , observed:

“The Court of equity held that if his (indemnity-holder’s) liability had become absolute, then he was entitled either to get the indemnifier to pay off the claim or to pay into Court sufficient money which would constitute a fund for paying off the claim whenever it was made….I have already held that Ss. 124 and 125, Contract Act, are not exhaustive of the law of indemnity and the Courts here would apply the same equitable principle that the Courts in England do. Therefore, if 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.”

The Law Commission of India has expressed the opinion that “the view expressed by Chagla, J. is correct and should be adopted by the legislature.” The Law Commission recommended that as in English law, “the right of the indemnity-holder should be more fully defined and the remedies of an indemnity-holder should be indicated even in cases where he has not been sued.”

In State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd. A.I.R. 2007 S.C. 2361, the respondent, a co-operative society, having a sugar factory, entered into a contract with one M/s. Pentagon Engineering Pvt. Ltd. for the installation of a paper plant. As per the agreement, the Pentagon furnished a Bank Guarantee/Indemnity for the release. The retention money of 10% from the Proforma Invoices of the material reached at the site. The operative portion of the Bank Guarantee read as “to indemnify and keep indemnified Mula Sahakari Sakhar Karkhana Ltd. against all losses, claims damages actions and cost in respect of such sums which the supplier shall become liable to pay as the terms of the said order.”

Disputes and differences arose between the parties and as a result, the respondent terminated the contract and invoked the Bank Guarantee against the Pentagon. Holding that the document indemnifying the respondent was a contract of indemnity and not guarantee, the Apex Court said that the claim made by the assured on termination of contract need not be honoured by without the proof of loss.

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