B.A. LL.B. (Five Years) Sem 5 Contract II 2013 Jun Question Paper with Solutions

For full marks, cover: the definition in section 124, the parties and the illustration; the English idea of indemnity as a promise to save from loss however caused; the differences point by point: the cause of loss (conduct only, so insurance falls outside section 124); express and implied indemnity (sections 69, 145, 222 and 223, Adamson v. Jarvis); the rights of the indemnity holder in section 125 and their conditions; when the indemnity holder may sue: the old English rule "you must pay first" and the Indian rule (Gajanan Moreshwar, Osman Jamal); sections 124 and 125 are not exhaustive; a table.

The Indian definition

Section 124 of the Indian Contract Act 1872 reads: "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." The promisor is the indemnifier and the promisee the indemnity holder.

2. Express and implied indemnity. Section 124 describes an express promise. English law also recognises indemnities implied from the circumstances. Indian law reaches the same result through other sections and the general law.

1. Section 69. A person interested in a payment that another is bound by law to make, who pays it, must be reimbursed.
2. Section 145. The principal debtor impliedly promises to indemnify his surety.
3. Sections 222 and 223. A principal must indemnify his agent against the consequences of lawful acts done in the agency. He must also indemnify him for acts done in good faith at his request.

Adamson v. Jarvis (1827) 4 Bing 66 is the English case on an indemnity implied by law. A man falsely claiming to own some cattle told an auctioneer to sell them. The true owner recovered damages from the auctioneer. The auctioneer recovered his loss from the man, because he had acted in good faith on his request. Section 223 states the same rule for agents in India.

Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, AIR 1942 Bom 302, is the leading case. At the defendant's request, the plaintiff mortgaged property and made himself personally liable. The defendant promised to clear the mortgage, and did not. He argued that the plaintiff had paid nothing and so could claim nothing. Chagla J rejected this. Sections 124 and 125 are not exhaustive. Once the indemnity holder's liability has become absolute, he may compel the indemnifier to discharge it, without paying first. Otherwise an indemnity would often come too late to be of any use. A person facing a large decree may be ruined long before he can raise the money to pay it.

Osman Jamal and Sons Ltd. v. Gopal Purshottam (Calcutta High Court, 1929) applied the same rule. A commission agent bought hessian for the defendants on their promise of indemnity. The defendants did not take delivery, and the seller resold at a loss and claimed it from the agent. The agent recovered the loss from the defendants before it had paid the seller.

5. Not exhaustive. Because sections 124 and 125 are not a complete code, Indian courts fill the gaps with the principles of equity. In practice this brings Indian law close to the modern English position, while keeping the narrower statutory definition.

Conclusion. A contract of indemnity under section 124 is a promise to save another from loss. The loss must be caused by the conduct of the promisor or of another person. Indian law differs from English law in limiting the definition to loss caused by conduct, so insurance falls outside it. It also states the indemnity holder's rights when sued in section 125. Most importantly, Indian courts have rejected the old English rule that he must pay before he can sue. Gajanan Moreshwar and Osman Jamal let him enforce the promise once his liability is absolute. Implied indemnities, such as that in Adamson v. Jarvis, are recognised through sections 69, 145, 222 and 223.