INTRODUCTION
The Indian Contract Act of 1872 (the Act) defines a contract of Indemnity as a promise made by the promisor to do good the loss incurred by the promisee due to the promisor’s conduct or that of any other person.[1]
The language of Section 124 of the Indian Contract Act, which defines Indemnity prima facie, suggests that an Indemnity contract shall be ‘express’, i.e., clearly communicated between the parties and freely consented. It naturally follows that the Section does not contemplate an implied contract of Indemnity, inferred without a positive assertion by the parties.
However, this is far from the case because, contrary to this reasoning, there are Indian judgements that read an implied contract of Indemnity between parties even when their conduct did not express such an arrangement.[2] This blog analyses the position by examining the bare provision on Indemnity and case laws on the subject matter. The ultimate aim of the blog is to reveal the juridical basis for the Indian courts to undertake the exercise of reading an implied contract of Indemnity, given the silence that Section 124 holds on the subject matter.
THE ENGLISH AND INDIAN POSITION ON THE NATURE OF LOSS
The law about Indemnity under the English common law remains a body of largely uncodified principles.[3] Meanwhile, the Indian Contract Act[4] codifies the Indian position.[5] It also codifies some specific forms of Indemnity.[6]
The English position is broader than the Indian position regarding the types of loss indemnified. The English law allows any loss to be indemnified, including (i) acts of people and (ii) acts of nature,[7] while the Indian Indemnity contracts under Section 124 are limited to loss arising from the former. Thus, the Section reads as follows —
“the conduct of the promisor himself, or by the conduct of any other person…”[8]
To illustrate the difference, suppose there is an agrarian landowner whom a flour mill offers to grow and sell the wheat. However, he is unwilling to accept because the workers often resorted to strikes to enhance their wages, delaying the crop and resulting in losses in the form of higher wages. The flour mill, urgently needing the wheat, assures the landowner that any loss accruing to him due to such strikes or other situations would be made good by the flour mill. The landowner agrees and contracts labour to start the plantation.
Due to a strike when cutting the crop, the owner had to pay a higher wage to complete his part of the contract. The loss arising from such actions of third persons, i.e., the labourers, would be covered by the contract of Indemnity between the parties, both in English and Indian law.
In another situation, though the workers did not go on strike, some crops were damaged due to heavy rains. Here, the English law would find the claim acceptable. However, the Indian position would not allow it under a contract of Indemnity, which is limited only to the conduct of persons, natural or legal.[9]
IMPLIED INDEMNITY UNDER ENGLISH LAW
Implied Indemnity has had a firm basis in English law through precedents such as Adamson v Jarvis[10] and Sheffield v Barclay.[11] These cases culled out a category of cases wherein the English courts readily read an implied contract of Indemnity — i.e. where one bona fide party has acted upon the request of another party. However, the action proves to be injurious to the rights of a third party who seeks compensation from the bona fide party.[12] In such cases, the courts have read an implied contract of Indemnity, asking the requesting party to compensate the loss of the acting party.
A fact of particular importance is that this contract is implied in terms of law and not of the parties’ conduct and intention.[13] Thus, the court does not read the implied contract of Indemnity because the parties’ conduct revealed such an intention but instead for doing justice to the bona fide party based on principles of equity and prevention of injustice.
Hence, an Indemnity contract implied in law supersedes even the parties’ conduct contrary to such an agreement. The case of Dugdale v Lowering can illustrate this principle.[14] Party A had possession of some trucks. Party B and Party C had contested the ownership of these trucks. B directed A to give them the trucks as they had the legal title to the same, but A asked for an Indemnity to effect the transfer. Without replying to A’s demand for Indemnity, B made repeated instructions to A to give them the possession. A finally transferred the trucks when B threatened to file a case of conversion. In a lawsuit, C proved before the court that it had the legal title to the trucks and got damages for the trucks’ price from A. As the requesting party, B had to indemnify A as it had incurred liability by violating the rights of a third party, even when B never expressed the intention to be bound by such an agreement.
The above analysis summarizes that an implied contract of Indemnity is an established concept in the common law of England. How far does it fare within Section 124?
HOW TO INTERPRET S-124?
The interpretation of Section 124 of the Indian Contract Act, 1872 must be within the overarching context of the legislation itself—i.e., is the Act exhaustive legislation on the subject matter of contracts? The preamble of the Act clarifies that it is not. The Act only defines and amends “certain parts” of the law of Contracts,[15] with the British common law as its reference. Thus, the aspects of contract law left unaddressed by the Act would be deemed governed by the common law itself, while the ones falling under the scope of the Act often have the effect of either refining or disregarding the English position. For example, Section 25 departs from the English position that an act done voluntarily in the past cannot be a valid consideration for a subsequent promise.[16]
The Section 124, which defines a contract of Indemnity, is reproduced as follows —
“A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a contract of Indemnity.”[17]
The language of the Section makes it clear that the indemnified loss shall be caused only by the conduct of a person and thus, by the express mention of the term ‘person’, departs from the English position. However, on the other hand, the provision maintains silence in the case of an Implied Indemnity. The words ‘contract’ and ‘promise’ may suggest that they refer only to an express contract but in the presence of provisions that especially mention the term ‘express or implied’, such an interpretation would be untenable.[18] Further, the terms ‘contract’ and ‘promise’ are broad enough to encompass ‘express or implied’ contracts or promises. Thus, given the non-exhaustive nature of the Indian Contract Act and the silent language of the S-124, it is concluded that the provision does not bar Implied Indemnity and continues to be governed by the principles developed under Common Law.
The case laws on the subject matter further substantiate this contention. The Secretary of State of India v Bank of India is a leading case.[19] Herein, the Privy Council followed the same reasoning as Dugdale v Lowering.[20] It upheld the rule that when one A asks B to do a particular thing on instruction, request or demand which is per se not illegal, then when B, who is a bona fide party, performs the action but causes damage to third party C, it is implied by law that A had to indemnify B against any loss caused to due to C’s claim for compensation.
CONCLUSION
The Indian Contract Act is non-exhaustive legislation. It defines and amends only certain parts of contract law developed under the Common law system. The parts left untouched would be governed by the rules of Common Law unless expressly barred.
Section 124 of the Act diverges from the English position by constricting the type of Indemnified loss to accruing only on account of a ‘person’. This divergence manifests in the Section’s language; thus, the provision amends English law.
The Section remains silent regarding implied Indemnity. The legislation’s non-exhaustive nature and the precedents developed after its enactment provide the juridical basis for courts to imply an Indemnity contract in law to do equity and ensure justice, which has a minimal scope.
Author(s) Name: Bhavya Gujral (NALSAR University of Law, Hyderabad)
References-
[1] The Indian Contract Act 1872, s 124
[2] Secretary of State of India v Bank of India (1938) 40 Bom LR 868
[3] Wayne Courtney, ‘Indemnities And The Indian Contract Act 1872’ [2015] 27(1) NLSR 66, 66
[4] The Indian Contract Act 1872, s 124
[5] The Indian Contract Act 1872, s 125
[6] The Indian Contract Act 1872, s 222
[7] Nida Tahever Khan, ‘The Twilight of Contract of Indemnity in the Contract Act, 1872: A Critical Analysis’ [2022] 2 Jus Corpus LJ 278, 279
[8] Indian Contract Act 1872, s 124
[9] Wayne Courtney, ‘Indemnities And The Indian Contract Act 1872’ [2015] 27(1) NLSR 66, 69
[10] Adamson v Jarvis (1827) 4 Bing 66
[11] Sheffield v Barclay 1905 AC 392 (HL)
[12] Westropp v Solomon (1849) 8 CB 345; Bank of England v Cutler (1908) 2 KB 208 (CA); Royal Bank of Scotland Plc v Sandstone Properties (1998) 2 BCLC 429 (QB). See also Cadbury Schweppes Plc v Halifax Share Dealing Ltd 2006 EWHC 1184 (Ch)
[13] Eastern Shipping Co. Ltd. v Quah Beng Kee 1924 AC 177, 182-83
[14] Dugdale v Lowering (1875) LR 10 CP 196
[15] The Indian Contract Act 1872, preamble
[16] The Indian Contract Act 1872, s 25(2)
[17] The Indian Contract Act 1872, s 124
[18] The Indian Contract Act 1872, s 187
[19] Secretary of State of India v Bank of India (1938) 40 Bom LR 868
[20] Dugdale v Lowering (1875) LR 10 CP 196
