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RIGHTS OF INDEMNIFIERS

INTRODUCTION

Indemnity refers to protection against any possible loss or damage. The Indian Contract Act defines an indemnity contract as a contract between two parties where one party (the indemnifier) promises to protect the other (the indemnity holder or indemnified) against any loss incurred by him by the conduct of the promisor himself or by the conduct of any other third party. While the Act defines the nature of an indemnity contract[1] and provides for the rights of the indemnity holder,[2] it is silent about the rights of the indemnifier. But it does not mean an indemnifier has no right to protect his interests and minimise losses when possible. The law of equity and justice makes up for what the statutory law failed to provide.[3] This article discusses the rights of an indemnifier in an indemnity contract, their scope, and application.

RIGHT TO SUBROGATION

One of the earliest rights of the indemnifier that the court of equity established was the right under the doctrine of subrogation. The right to subrogation is the right of an indemnifier to, after indemnifying the assured against all the losses suffered by him, stand in the shoes of the indemnity holder and protect himself through all and any means the indemnity holder would have protected himself.[4] Halsbury’s Laws of England state that subrogation is an inherent right in all indemnity contracts. In 1748, the High Court of Chancery, under the chancellorship of Lord Hardwicke, provided a landmark judgement in the case of Randal v. Cockran,[5] which recognised and justified the application of the equitable doctrine of subrogation in contracts of indemnity. It was held that “The person originally sustaining the loss was the owner; but after satisfaction made to him, the insurer… “from that time, as to the goods themselves, if restored in specie, or compensation made for them, the assured stands as a trustee for the insurer, in proportion for what he paid.” The Court held it to be the plainest equity that the indemnifiers are entitled to; it established that neither the indemnity holder nor the indemnifier could not take undue advantage of the indemnity contract, and they will be entitled to recover only to the extent of losses incurred by them in the performance of the contract.

Later in Simpson v. Thomson,[6] Lord Cairns gave a well-defined rationale for the right of subrogation:“…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 reimbursed himself for the loss.”

This common law doctrine of the right to subrogation in indemnity contracts was widely accepted by the Indian Courts also. In 1890, in the case of Maharana Shri Jasvaisingji Fatesingji v. Secretary of State for India, Justice Jardine held that the rights of an indemnifier in a contract of indemnity were parallel to that of the rights of a surety provided under Section 141 of the Indian Contract Act, 1872.[7] This provides that when an indemnifier indemnifies the indemnity holder against all the losses as per the contract of indemnity, then he becomes invested with all the rights that the indemnified had against the third-party offender because of whose conduct the assured suffered loss or, for that matter any other right the guaranteed had to redeem his loss whether or not he was aware of it.

RIGHT TO SUE

The right to sue on behalf of the indemnity holder is also subsumed under the right of subrogation.[8] Once an indemnifier is subrogated to the rights of an assured, he also gets entitled to sue any person, for instance, the third-party offender, who is liable for the loss suffered by the assured on behalf of the indemnified.

OTHER RIGHTS

Other rights of the indemnifier can be inferred from the provisions of the Indian Contract Act that defines the nature of an indemnity contract and the rights of an indemnity holder. Although the Act does not explicitly provides for any rights for the benefit of the indemnifier, it has to be noted that the provisions of the Act concerning indemnity contracts are drafted in such a way as to safeguard the interests of all the parties to the contract. The indemnifier is only liable to pay for the losses that construe a part of the indemnity contract; they also need not pay more than the actual loss incurred.[9]

 And Section 125, which provides for the rights of an indemnity holder when sued, also provides for the duties of the indemnity holder when sued. Violation of these duties can extinguish the rights provided under the section. Section 125 talks about the right of an indemnity holder acting within the scope of his authority to recover from the indemnifier any costs or settlement paid by him in any suit in respect of any matter to which the promise to indemnify applies with the condition that by doing so, he has not contravened any orders of the indemnifier and has acted prudently as he would have in the absence of any indemnity contract. The promisor has the right to deny payment to the assured if he has violated any of these duties.

CONCLUSION

The silence of the Indian Contract Act about the rights of the indemnifier does not imply that an indemnifier has no right to protect his interests and minimise losses when possible. The law cannot be ignorant towards the interest of any individual. What the statutory law failed to provide for, the law of equity and justice makes up for it, and it has to be noted that the provisions of the Act concerning indemnity contracts are drafted in such a way as to safeguard the interests of all the parties to the contract. An indemnifier in a contract of indemnity has the right to subrogation, the right to sue for damages on behalf of the indemnified, and the right to compensate for the losses to the limit covered in the indemnity contract.

Author’s Name: B Priyanandhine (Indian Institute of Management Rohtak)

References:

[1] Indian Contract Act § 124

[2] Indian Contract Act § 125

[3] Pollock & Mulla on Indian Contract and Specific Relief Acts; with a Commentary, Critical and Explanatory.

Bombay: N. M. Tripathi, 1972

[4] Sheldon, H.N., 1893. The Law of Subrogation. Boston: Boston Book Company

[5] Randal v Cockran (1748) 1 Ves Sen 98

[6] Simpson v. Thomson, (1877) 3 AC 279.

James, Philip S. “The Fallacies of Simpson v. Thomson.” The Modern Law Review 34, no. 2 (1971): 149–62.

http://www.jstor.org/stable/1093972.

[7] Maharana Shri Jasvaisingji Fatesingji v. Secretary of State for India ILR (1890) 14 Bom 299,

[8] Hindustan Corporation V. United India Fire and General Insurance, AIR 1997 AP 347

[9] Ramaswami Chettiar vs Muthukrishna Iyer 1967 AIR 359

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