Rights Of Indemnifier

Section 124 of the Indian Contract Act, 1872 (hereafter referred to as “the Act”) defines “Contract of Indemnity”. It defines it as such a contract where one party promises to save another from losses caused either by the promisor or another party. In this arrangement, the party that grants indemnity shall be termed as the “indemnifier” and the party to whom the aforementioned protection shall extend shall be known as the “indemnity holder” or “indemnified”.

The following is an illustration providing a picture on what an indemnifier and indemnity holder are as per the Act:

Illustration

Take the following scenario as an example:

Parties To The Transaction

• Indemnifier: Company A
• Indemnity Holder: Company B
• Facts: Company B is entering into a contract with a customer for the supply of software-related services. Now, at this stage, Company B wants to indemnify itself against possible losses due to claims that might arise based on performance resulting from software. Hence, Company B asks from Company A to indemnify it against such losses.
• Contract of Indemnity:
  • Agreement: Company A agrees to indemnify Company B against claims for damages and loss of any kind that may arise based on performance resulting from the software.
  • Terms: If Company B gets the lawsuit from the flaws in its software which leads to Company B getting the loss, Company A will cover the legal costs and any award that may be required to be paid.
• Conclusion: In case the client sues Company B due to loss since the software caused them the loss, Company B will be refunded by Company A since they have an agreement of indemnity. Here, Company A will be the indemnifier while Company B will be the holder of indemnity. It will protect Company B from loss while Company A assumes the risk imparted by the software.

Rights Of An Indemnifier

The Act remains silent about the rights of an indemnifier. It is the duty of the indemnifier to indemnify the indemnity holder. Once the indemnifier has fulfilled his obligations, he takes the position of the indemnity holder. Hence, he becomes a creditor to the indemnity holder. Even though the Act is silent about the rights of an indemnifier, the principle of equity and justice makes up for this. Therefore, rights of indemnifier are as follows:

Right To Information And Control

Section 125 of the Act indirectly supports the right of an indemnifier controlling the proceedings and managing any legal claims which might arise against the indemnity holder by stating the rights of the indemnity holder in case they are sued. The section states that where a case by way of action arises in the course of indemnity, all damages, costs, and sums are recoverable from the indemnifier by the indemnity holder. Thus, the indemnifier has a right to be included in legal processes and judgments that determine his liability in monetary terms.

Right To Subrogation

Whenever the indemnifier has compensated the loss to the indemnity holder, he is entitled to obtain the rights of the indemnity holder against such third parties. This is a well-trodden principle of indemnity law wherein the indemnifier takes the place of the indemnity holder to recover the amount paid under indemnity from the person who was actually liable for the loss. This concept is based on the “doctrine of subrogation”.

In the case of Randel vs. Cochran (1748), Lord Hardwicke recognized the doctrine of subrogation in contract of indemnity. It held that the person originally sustaining the loss was the owner; but after satisfaction made to him, the insurer. No doubt, but from that time, as to the goods themselves, if restored in specie, or compensation made for them, the insured stands as a trustee for the insurer, in proportion for what he paid.

In Simpson vs. Thomson (1877), it was held "The principle which the counsel for plaintiff asks us to apply is that 'well-known principle of law, that where one person has agreed to indemnify another, he will, on making good the indemnity, be entitled to succeed to all the ways and means by which the person indemnified might have protected himself against or reimbursed himself for the loss.'”

The Bombay High Court in the case of Maharana Shri Jasvaisingji Fatesingji vs. Secretary of State for India ILR, held that Section 141 of the Act applies the doctrine of subrogation to contract of suretyship. However, Section 124 and 125 which deals with contracts of indemnity are silent on this point. The Court held that the doctrine of subrogation is applicable on the contract of indemnity as it is based on natural equity, and is thus of general application.

In the case of Union Of India (Uoi) vs. Alliance Assurance Co. Ltd. And Anr. (1963), the Calcutta High Court observed: "the plaintiff, as insurer, having paid the claim for shortage arising under the policy, has by way of subrogation an equitable right to all the claims of the assured against the carrier in respect of the shortage. The contract of insurance against loss is a contract of indemnity. On payment of the amount of the loss the insurer as indemnifier has an equitable right of subrogation to the claims of the assured against the carrier".

In Vasudev Mudaliar vs. Caledonian Insurance Co. And Anr. (1964), the Madras High Court held that while a motor insurance contract, no doubt, is very much like marine or accident insurance, it is essentially about indemnity. As such, whenever the insurer pays an amount to the insured on account of his loss, he gains the right to pursue any claims against third parties responsible for that loss. This right is known as subrogation, whereby the insurer is enabled to assume the position of the insured. It need not specifically be stipulated within the motor insurance policy; instead, it evolves from the basic principles of indemnity.

Right To Be Reimbursed For Unauthorised Actions

If the indemnity holder acts beyond or otherwise outside the scope of the indemnity contract then the indemnifier has no liability to indemnify the indemnity holder for such loss. Section 125(2) of the Act provides that the indemnity holder is entitled to reimburse the costs until the indemnity holder has acted reasonably or there was authority given by the indemnifier. If the indemnity holder fails to fulfil these requirements, then the indemnifier is entitled to reject its claim.

In V. M. Rv. Mr. Ramaswami Chettiar And Anr vs. R. Muthukrishna Iyer And Others (1966), the Supreme Court has held that the liability under the indemnity bond is confined to the actual loss sustained by the plaintiffs arising out of the sale being set aside. Thus, an indemnifier is under no obligation to pay more than his liability.

Right To Contest Unreasonable Settlements

Section 125(3) of the Act provides that a sum paid in the way of compromise or settlement may be recovered by an indemnity holder. Any settlements that are prudent and not against the orders of the indemnifier are going to be considered recoverable. The sums which have been already settled but which the indemnity holder considers unreasonable or unauthorised can remain outside the ambit of the indemnity. Therefore, it remains open to challenge by the indemnifier.

Right To Sue The Third Party

After the indemnifier has indemnified the indemnity holder against the damages, the indemnifier is entitled to have full rights over that property. Simultaneously, the indemnifier has also the right to sue the third party for that property too. The indemnifier cannot sue the third party prior to indemnifying the indemnity holder.

In the case of Burnand vs. Rodocanachi & Ors., (1882) Lord Blackburn held “If the indemnifier has already paid it, then, if anything which diminishes the loss comes into the hands of the person to whom he has paid it, it becomes an equity that the person who has already paid the full indemnity is entitled to be recouped by having that amount back.”

In the case of K. V. Perlyamanna Marakkayar And Sons vs. Banians And Co. (1925), the Madras High Court held that an insurer who pays is subrogated to the rights of an assured against the third party. However, this does not give the insurer the right to sue the third party in his own name. He can sue the third party in the name of the assured.

In Hindustan Corporation (Hyderabad) Pvt. Ltd. vs. United India Fire and General Insurance (1997), the Andhra Pradesh High Court held that the right to sue falls within the doctrine of subrogation.

Therefore, the indemnifier can file a suit against the third party where any surplus is paid to him.

Conclusion

Even though the Act focuses primarily on the rights of the indemnity holder, doctrine of equity and justice protects the rights of an indemnifier. They cannot be made liable beyond the scope for which indemnity was agreed upon. These include their right to control the legal proceedings and to resist unauthorised actions or settlements made. An indemnifier is also entitled to exercise his rights by following his right to subrogation.