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Published : February 26, 2015 | Author : aishwaryadiwan
Category : Company Law | Total Views : 7628 | Rating :

Aishwarya Diwan, IV Year, Hidyatullah National Law University # 9406398022

Damages Under Indemnity: A Comparative Analysis of The English & Indian Law Position

“Indemnity”, in the widest sense, is ‘to recompense any loss or liability which a person has incurred, such as one arising from any duty or promise.’[2] Put in simple words, an indemnity is a promise made by one party, called the ‘indemnifier’, to protect the other, called the ‘indemnified’ party; from loss caused to the latter as a result of a specified act or event. The purpose of this is not to merely reimburse the person in terms of any amount paid, but is basically the liability of the indemnifier to save the indemnified from a claim made by a third party.[3] In a sense, indemnity can be said to be a form of insurance to the indemnified party to bear certain risks and loss. For example, an insurer (indemnifier) agreeing to pay for the loss which has been suffered by the insured (indemnified party) as a result of a road accident is an indemnity.
The contract of Indemnity can be said to be a species of contract and Indemnity can be treated as a subspecies of compensation.[4] For a valid contract of indemnity, it must fulfill all the essentials required for a valid contract. Such a contract for indemnity may arise either by an express promise where there is an agreement between parties to indemnify each other or by operation of law. Under the latter, the provisions for such are provided under the Negotiable Instruments Act, 1938. Also, under Section 13 of the Indian Partnership Act, 1932, a firm is bound to indemnify an agent for loss suffered to him while doing any lawful act for the firm. [5]

Damages Under English Law

That a remedy of claim for damages is available to the claimant who has suffered some loss in case of a breach of contract, has been regarded as a fundamental principle under common law. Such damages are designed to compensate for the loss, damage or any injury suffered by the claimant, so as to restore him to his original position.

Basic Concepts under Damages

The following are certain basic concepts which are relevant in our study of damages:
(a) Causation- It simply refers to the requirement that there must be a causal connection between the defendant’s breach of contract and the claimant’s loss.[6] It has been held that the breach of contract need not be the sole reason for the loss suffered so as recover damages, but it should be an effective or dominant cause of such breach.[7]

(b) Remoteness of damage- The damages that can be recovered for a breach of contract are governed by this principle. In case the damage/loss suffered by the claimant is too remote a consequence of the breach, then the defendant is not entitled to pay damages. The general norms under common law for remoteness of damages were laid down in the landmark case of Hadley v. Baxendale.[8] In this case, the court pointed out that only such damages are recoverable “such as may fairly and reasonably be considered as arising naturally, i.e., according to the usual course of things” from such breach itself, or when they are “such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it.”

(c) Mitigation- This has been another principle which limits the amount of damages that can be recovered in case of breach. It stipulates that the person who has suffered a loss must take any reasonable steps available to him to mitigate the extent of the damage caused by the breach.[9] The rationale behind this rule is that a claimant should not be compensated for loss suffered which is not an actual result of the breach, but is because of his own fault.

Usually, the ‘mitigation of damage’ principle comprises of three different rules.[10] Firstly, a claimant can never recover an avoidable loss. Secondly, where the claimant does take reasonable steps to mitigate loss, however, he remains unsuccessful, then he would be entitled to claim damages for such losses. Thirdly, when such attempt to mitigate remains successful, he would not be entitled to recover for such loss or damage.

Applicability of principles of remoteness and mitigation to Indemnity:

Indemnity is generally preferred over other forms of recovery because there remains no hindrance as regard to the quantum of loss that can be recovered. Thus, the claimant can successfully recover all kinds of losses suffered by him as a consequence of a breach of the related indemnity.[11] Traditionally, an indemnity claim was regarded as a debt claim, so principles related to mitigation and remoteness which are generally applicable for damages in case of a breach, were deemed inapplicable in case of indemnity.[12] In this regard, the case of Royscot Commercial Leasing Ltd v Ismail is pertinent.[13] In this case, a director who had provided an indemnity for an equipment lease granted to the company claimed that the lessor should have mitigated the loss suffered by reason of default of the lessee. Rejecting this claim, the court pointed out that “a claim under a contract of indemnity is not a claim in damages at all, but it is a claim in debt for a specified sum due on the happening of an event which has occurred.”

So, traditionally, it was believed that these principles related to remoteness and mitigation do not apply in the case of indemnity, and Royscot was cited as an authority for the same. However, this norm was questioned by the Court of Appeal in The Eurus case.[14] Here, the court held that when indemnity is triggered by a breach of contract, such indemnity, as a matter of construction, covers only foreseeable consequences caused by such trigger. The Court of Appeal affirmed a paragraph from Halsbury's Laws of England stating that the "extent of a person's liability under an indemnity depends on the nature and terms of the contract.”[15]
Thus, it can be concluded that the parties have their own freedom to an agreement containing no provision to the contrary, however, an “express exclusion” will be required to persuade the courts to look into the matter of whether the contractual indemnity in question was intended to cover more than the normal indemnity in terms of damages.

Though the two afore-said decisions might appear to be contrary, yet, it has been suggested that they are reconcilable.[16]

The judgment delivered in The Eurus case, categorically pin-pointed that there remains no inherent indication as to what is covered by an indemnity, as the same is dependent on the individual contract which can vary from one to another. In Royscot, indemnity had specific reference to a sum equivalent to a debt, and since there remains no duty to mitigate in debt like in case of damages, the results varied in these two cases.[17] Thus the conclusion is a little uncertain. Despite this, it appears that the rules of remoteness and mitigation will be applicable to indemnities triggered by reason of a breach of contract.

Also, the legal position related to applicability of such principles to indemnities for loss arising out of specific circumstances/situations is ambiguous, since there remains no authority in this issue. In the Eurus case, it was specifically stated that the court did not address such situations where an indemnity is triggered other than by breach of a contract. However, a common belief exists as to such rules being not applicable in the above circumstances.

Damages Under Indian Law

Relevant provisions under the Indian Contract Act, 1872.
At the outset, it is important to first examine the statutory provisions related to indemnification and the main points of difference between right to indemnification and right to damages. Thus, it is pertinent to study the definition of indemnity as per the Indian Contract Act, 1872. The Act defines indemnity in a narrow sense to mean ‘a contract where the indemnifier agrees to protect the indemnified party from any loss caused to it either by the conduct of the indemnifier himself or by the conduct of any other (third) person.’[18] It is noteworthy to mention that the above definition does not cover within its ambit losses consequential to events which do not depend on the conduct of the indemnifier or any other third person, such as by reason of any event caused by an act of God.[19] Even the Law Commission had taken note of this anomaly in its 13th report and recommended expanding the definition of indemnity by providing for an amendment in the Indian Contract Act so as to bring more clarity and certainty on this issue.[20]

Section 73 of the Indian Contract Act relates to damages which gives the contracting parties a right to claim damages in case of breach of a contract. However, quite often these two concepts are confused with each other, since they seem to coincide with each other in the case of breach of contract. Interestingly, the end result comes out to be the same, even though they are essentially two distinct and unrelated legal concepts[21]
Though, there are many key differences between the two sections, the one concerning quantum of recovery is definitely the most striking. A plain reading of the language of sections 73 and 124 gives an inference that the right to recover a loss out of an indemnity may not necessarily be subject to all the statutory constraints on right to claim damages as set out under section 73, such as the requirement that the loss should be direct, immediate and not remote, thus not covering consequential loss, etc.

Section 124 does not only restrict its scope to loss which has already been suffered by the indemnity holder, but also includes the obligation to save such holder from an expected loss, which would otherwise vitiate the very purpose of an indemnity.[22]

Judicial Precedents regarding indemnity

Bombay High Court

It was held in the case of Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri [23] by the Bombay High Court that the Indian Contract Act is both an amending as well as a consolidating act. Moreover, it is not exhaustive of the law of contract to be applied by the court, as section 124 deals with only one particular type of indemnity which aims to save the indemnity-holder from losses caused by his own conduct or the conduct of any other person. The Court also pointed out that the suffering of actual loss need not necessarily be required to call upon the indemnifier to save the indemnity-holder from his liability, since the basic objective of an indemnity would be jeopardised if the indemnity-holder had to actually wait till a judgment was pronounced incurring his liability before he could obtain relief under indemnity. The Court reiterated the rigour of common law by stating that where the indemnity-holder has incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and pay it off.
The Law Commission of India accepted the view that, to indemnify does not only mean to reimburse in respect of the money paid, but, in accordance with its said derivation, it includes to save from loss in respect of the liability against which the indemnity has been given.[24]

Gujarat High Court

The Gujarat High Court relied upon the the Gajanan Moreshwar judgement [25] in the New India Assurance Company Ltd. vs. The State Trading Corporation of India Ltd. and Anr.,[26] and stated that if the indemnity holder had incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and pay it off.

Madhya Pradesh High Court

In the Vimlabai and Ors. vs Sharif Khan and Ors [27] case it was held by the Madhya Pradesh High Court that the liability of the indemnifier to indemnify would arise only if the same is fastened upon the person who has to be indemnified. If no liability is fastened upon such person, then there would be no occasion to indemnify him as such. In Oriental Fire & General Insurance Co. Ltd. vs Saifuddin & Anr.,[28] it was held that in a contract of indemnity, cause of action would arise only when the damage is suffered by the indemnity-holder and if a suit for enforcement of indemnity by the indemnity-holder is brought before actual loss, it will be considered as a premature suit.

Recently, indemnity clauses have become quite popular and are used widely in commercial transactions, especially due to an increased risk of loss from various sorts of tax liabilities, labour troubles, etc., which are essentially unforeseeable events at the time of entering into contract.

As it is known and specifically provided, one cannot claim compensation for a breach of contract when the loss suffered is indirect and/or remote. However, there remains no such exception for a contract of indemnity. Much is left to the contractual freedom and will of the parties. A typical indemnity clause thus provides for protection against all kinds of losses, claims and liabilities, howsoever arising in relation to the specified transaction.
Thus, the Indian law position seems to be no different from the common law one in this regard, though much depends on the nature and wordings of the contract in question and the Court's inference of the intention of the contracting parties to include consequential losses. Thus it can be concluded that as a general rule, the law usually leans unfavourably towards those who try to avoid liability or seek exemption from liability of their actions, irrespective of where the cause of action arises.

[1] Ananda Chakraverty & Aishwarya Diwan, 4th year, B.A.LL.B(Hons)., Hidayatullah National Law University, Raipur.
[2] Mulla, Indian Contract and Specific Relief Acts, (12th ed., 2001), p. 1716.
[3]AZB Partners, Indemnity: Safeguards against Future Financial loss, LIVE MINT  http://www.livemint.com/Politics/CgtgAEPL8nShjil5zrcERN/Indemnity-safeguard-against-future-financial-exposure.html ( last accessed  Dec. 27th, 2014)
[4] Mulla, supra note 1.
[5] Kishan Lal and Another vs Bhanwar Lal, 1954 AIR 500.
[6] Malik v Bank of Credit and Commerce International SA [1998] 1 A.C 20 
[7] Galoo v Bright Grahame Murray [1994] 1 W.L.R 1360.
[8] (1854) 9 Exch 341. 
[9] Anson’s Law of Contract 28.ed, p. 614.
[10] McGregor on Damages 17.ed, p. 216-217.
[11] Quick Guide, Warranties and Indemnities, ASHURST, https://www.ashurst.com/doc.aspx?id_Resource=4639 (last accessed Jan. 15th, 2015).
[12] Id.
[13] CA 17th May, 1993.
[14] Total Transport Corporation v Arcadia Petroleum Ltd. [1998] 1 Lloyd’s Rep. 351. The issue was also considered at first instance, see [1996] 2 Lloyd’s Rep. 408. 
[15] Id.
[16] Ed Peel: Recent Developments & Current Issues in Contract & Tort p. 22.
[17] Id.
[18] Section 124, Indian Contract Act, 1872.
[19] AZB Partners, supra note 2.
[20] Id.
[21] A. Krishnaswami Aiyar vs. Tatha Raghaviah Chetty and Anr; (1927) 53 MLJ 679.
[22] Id.
[23] AIR 1942 Bom 302.
[24] AZB partners, supra note 2.
[25] Id.
[26] AIR 2007 (NOC) 517 (GUJ.).
[27] 2009 (123) FLR 739.
[28] ILR 2011 MP 2811.

The author can be reached at: aishwaryadiwan@legalserviceindia.com

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