7 Quick Tips Regarding Contract Of Indemnity

What is Contract Of Indemnity?

Contract of indemnity meaning is a special kind of contract. The term ‘indemnity’ literally means “security or protection against a loss” or compensation. According to Section 124 of the Indian Contract Act, 1872  “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.”  

Example: P contracts to indemnify Q against the consequences of any proceedings which R may take against Q in respect of a certain sum of money.

OBJECTIVE OF CONTRACT OF INDEMNITY

The objective of entering into a contract of indemnity is to protect the promisee against unanticipated losses.

PARTIES TO THE CONTRACT OF INDEMNITY

A contract of indemnity has two parties.

1. The promisor or indemnifier
2. The promisee or the indemnified or indemnity-holder

The promisor or indemnifier: He is the person who promises to bear the loss.

The promisee or the indemnified or indemnity-holder: He is the person whose loss is covered or who are compensated.

In the above-stated example,

• P is the indemnifier or promisor as he promises to bear the loss of Q.
• Q is the promisee or the indemnified or indemnity-holder as his loss is covered by P.

Read Also: What are the Remedies for Breach of Contract

ESSENTIALS OF CONTRACT OF INDEMNITY

1. PARTIES TO A CONTRACT: There must be two parties, namely, promisor or indemnifier and the promisee or indemnified or indemnity-holder.
2. PROTECTION OF LOSS: A contract of indemnity is entered into for the purpose of protecting the promisee from the loss. The loss may be caused due to the conduct of the promisor or any other person.
3. EXPRESS OR IMPLIED: The contract of indemnity may be express (i.e. made by words spoken or written) or implied (i.e. inferred from the conduct of the parties or circumstances of the particular case).
4. ESSENTIALS OF A VALID CONTRACT: A contract of indemnity is a special kind of contract. The principles of the general law of contract contained in Section 1 to 75 of the Indian Contract Act, 1872 are applicable to them. Therefore, it must possess all the essentials of a valid contract.

• NUMBER OF CONTRACTS: In a contract of Indemnity, there is only one contract that is between the Indemnifier and the Indemnified.

• RIGHTS OF PROMISEE/ THE INDEMNIFIED/ INDEMNITY HOLDER

As per Section 125 of the Indian Contract Act, 1872 the following rights are available to the promisee/ the indemnified/ indemnity-holder against the promisor/ indemnifier, provided he has acted within the scope of his authority.

1. RIGHT TO RECOVER DAMAGES PAID IN A SUIT [SECTION 125(1)]: An indemnity-holder has the right to recover from the indemnifier all damages which he may be compelled to pay in any suit in respect of any matter to which the contract of indemnity applies.
2. RIGHT TO RECOVER COSTS INCURRED IN DEFENDING A SUIT [SECTION 125(2)]: An indemnity-holder has the right to recover from the indemnifier all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit.
3. RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE [SECTION 125(3)]: An indemnity-holder also has the right to recover from the indemnifier all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.

Read Also: Frustration of Contract

COMMENCEMENT OF LIABILITY OF PROMISOR/ INDEMNIFIER

Indian Contract Act, 1872 does not provide the time of the commencement of the indemnifier’s liability under the contract of indemnity. But different High Courts in India have held the following rules in this regard:

• Indemnifier is not liable until the indemnified has suffered the loss.
• Indemnified can compel the indemnifier to make good his loss although he has not discharged his liability.

In the leading case of Gajanan Moreshwar vs. Moreshwar Madan(1942), an observation was made by the judge that “ If the indemnified has incurred a liability and the liability is absolute, he is entitled to call upon the indemnifier to save him from the liability and pay it off”.

Thus, Contract of Indemnity is a special contract in which one party to a contract (i.e. the indemnifier) promises to save the other (i.e. the indemnified) from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person. Section 124 and 125 of the Indian Contract Act, 1872 are applicable to these types of contracts.

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10 Small But Important Things To Observe In Section 139 Of Negotiable Instruments Act

Section 139 of Negotiable Instruments act, 1881

As per the prevailing laws in India, under the Indian Evidence Act, every person until proven guilty is presumed to be innocent. Section 139 of Negotiable Instruments Act, 1881 talks about the liability of a person who is issuing a cheque which has been dishonored. Such a person is presumed to be guilty until and unless he proves his innocence. When an offense under section 138 is constituted, there is a set of admitted facts and situations where it is presumed that the person is guilty.[3]

In Krishi Vikas Kendra v Mukund[4], the amount due was paid partly by the accused. This amounts to a transaction made and the court held that the burden of proof is on the accused to prove his innocence with respect to dishonored cheque.

Under section 139 there is a presumption that a cheque presented is for a discharge of the liability of debt either partially or wholly. And until and unless the respondent purposes any purpose other than the discharge of liability, it shall be presumed under section 138.[5] The accused person cannot merely escape by saying it was only given as security and the day cheque was issued there was no liability towards the person.[6]

Once the presumption of liability is rebutted, the burden of proof shifts to the complainant to prove that the same cheque was issued for discharge of liability.[7] In the case of Rangappa v. Sri Mohan[8], it was held that if to any fact the accused has not replied in the statutory notice (notice under section 138) proves to be a merit for the complainant side.

This presumption is governed by the rule of evidence which is dealt by in section 118(a) of chapter XIII. Section 140 talks about the possible grounds which may not be allowed as a ground of defense for prosecution under section 138.

In the case of Krishna Janardhan Bhat v. Dattatraya G. Hedge[9],

“Presumption of innocence as human rights and the doctrine of reverse burden which is granted under section 139 should be balanced with respect to the facts of each case, material evidence on record and governing statutes of law.”[10]

For it is a presumption only with regard to existing debts. So, if the amount on the cheque exceeds the amount which is due to the person, then section 138 and section 139 shall not be attracted, this was held in the case of Angu Parameswari Textiles P Ltd. v. Sri Rajan and co.[11]

On the reading of this section, it is pertinent to highlight that court which is taking cognizance should be prima facie satisfied that the case is attracted under this section. The drawer of the cheque gets a chance to rebut this presumption at the trial.[12]

In the case of Kishan Rao v. Shankargouda[13], the SC held that section 1309 cannot be merely rebutted by denial. It has to be proved. The matter in controversy shall be proven to be denied with evidence.

This presumption is however not available to a money lender. He has to prove the fact of due of loan and liability through other evidence and not merely by a presumption of being guilty.[14]

The initial burden after discharged, Section 139 comes into the picture. In the case of A.B.M raja Sah v. B.M.S. Srinivas Sah[15], it was held that once signatures on the cheque were verified by the drawer and he s presumption arose and the accused couldn’t explain the liability. The court ordered the accused to pay twice the amount of the cheque and no sentence was passed.

CONCLUSION

When a cheque which was issued for discharge of liability or debt whether in whole or in part, shall under section 139 be presumed that the accused is liable for the offense under section 138 and thus the accused is under the burden of proof to prove its innocence.

[1] Added by the Banking, Public Financial Institutions and Negotiable Instruments Laws (Amendment) Act, 1988

[2] Goa Plast (P) Ltd. V. Chico Ursula D’Souza, (2004) 1 BC 246 (SC)

[3] R. Sankaralingam v. Union of India; (1997) 1 BC 541

[4] (2007) 3 BC 542

[5] K. I George v. Muhammed Master

[6] K.N.Bena v. Muniyappan (2006) 4 BC 287

[7] Pine Products Industries v. RP Gupta and sons

[8] (2010) 11 SC 441

[9] 2008 (1) SCALE 421

[10] M.L. Tannan’s Banking Law and Practice in India, Student Edition, 2015

[11] (2002) 1 BC 99 (mad)

[12] Modi Cements Ltd. v. Kuchil Kumar Nandi, (1998) 1 BC 421 (SC)

[13] Criminal Appeal No. 803 of 2018

[14] M. senguttuvan v. Mahedevaswamy, (2007) 4 BC 708 (Kant)

[15][15] (2007) 4 BC 649 (Mad)