The revival of the Indemnity

Payal Chawla

This article was first published in Bar and Bench on 17.11.2017

In India, while the contracts of indemnity are perhaps the most negotiated clauses in a contract, they are paradoxically the least litigated. The paucity of legal precedence on this subject may be one of the reasons, despite some early pronouncements on the subject.

However, the recent arbitral award, passed in favour of Hindustan Petroleum Corporation Limited (HPCL), an Indian PSU, against M3nergy Berhad (M3nergy) by a three-member arbitral tribunal, which discussed several interesting aspects of contract law and damages including indemnities, may provide a fillip to this rather dormant area of Indian jurisprudence.

On January 9, 2014, the tribunal issued a partial award, inter alia, holding that M3nergy committed breach of the agreement in question and was liable to pay damages to the HPCL/claimants. M3nergy’s counterclaim was also dismissed.

As regards the nature and extent of relief to be granted to the claimants, the tribunal passed a second partial award on September 27, 2017 (Second Partial Award). Damages were also awarded to HPCL on the indemnity provision.

Article 22.3 of the agreement had an indemnity provision which read, “22.3 Each party shall be solely liable for any loss or damage or liability of whatsoever nature when such loss, damage or liability is caused by such Party’s Negligence or Wilful Misconduct and in such event such Party shall indemnify the other Party against all claims in respect of any loss or damage so arising. In no event shall any Party be liable to any other Party for loss of profits or business, or special, indirect or consequential damages”.

The tribunal was of the view that the above clause fell squarely within the definition of s.124 of the Indian Contract Act, 1872 (Contract Act), which reads ‘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 tribunal relying on the settled proposition of law that there is a difference between damages arising from a contract of indemnity and those from a breach of contract, awarded HPCL a whopping US$91.3 million plus 9% interest and rejected M3nergy’s argument that contract excluded claims inter-alia for loss of profits.

The tribunal correctly observed that while compensation awarded under s.73 of the Contract Act cannot be for remote and indirect loss or damage, no such restriction applies to claim for indemnity. The tribunal quoted with approval the observations of Lord Justice Staughton in Total Transport Corporation v. Arcadia Petroleum Limited [(1997) Int. Com. L.R. 11/18] wherein he had stated –  “’Indemnity’ may refer to all loss suffered which is attributable to a specified cause, whether or not it was in the reasonable contemplation of the parties”.

It is now fairly settled law that damages that are awarded under a contract of indemnity are different from those awarded for breach of contract. That indemnity is a wider right than breach of contract was held as early as 1929 in the matter of Osman Jamal v. Gopal Purshottam [1928 SCC OnLine Cal 131].

In cases of indemnity, claim for loss can be made even before the promisee has suffered actual loss and the promisee/indemnified has a right to sue even before incurrence of damage and even as soon as liability to a third party has arisen [Khetarpal Amarnath Vs. Madhukar Pictures, 1955 SCC OnLine Bom 73]. This position was affirmed by the Bombay High Court in 2011 in the matter of Jet Airways (India) Ltd. v. Sahara Airlines Ltd. (2011 SCC OnLine Bom 576).

Interestingly, indemnities can be both express as well as implied. Further, ss. 124 and 125 of the Contract Act are not exhaustive of the law of indemnity [Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (1942 SCC OnLine Bom 29)] and that the courts can apply the principles of equity [Abdul Hussain Shaikh Gulamali Jambawalla v. M/s Bombay Metal Syndicate (1971 SCC OnLine Bom 96)]. Importantly, damages arising from breach of indemnity can also be for consequential, indirect and remote losses, unlike damages arising from the breach of contract.

Furthermore, in breach of contract, it is incumbent on the promisee to prove loss, even in case where damages are liquidated. There is no such requirement for a claim of damages arising out of a contract of indemnity, unless the indemnity clause itself provides for such a restriction. Claims against third parties can be covered under an indemnity provision, whereas damages for breach can arise only against the promisor. However, it is important to mention that a contract of indemnity is a bilateral contract where only the promisor can be made liable for claims brought against a third party by the promisee for acts/omissions of the promisor. A tripartite contract would bring the contract within the domain of a guarantee [(Nagpur Nagarik Sahakari Bank Ltd. v. Union of India) 1981 SCC OnLine AP 19].

The tribunal reiterated the Apex court’s observations in Himachal Pradesh Financial Corporation v. Pawna [(2015) 5 SCC 617] that it “is settled law that a contract of indemnity and/or guarantee is an independent and separate contract from the main contract”. As a sequitur, the tribunal at para 99 of the Second Partial Award observed, “Being independent contracts, they must be interpreted separately, particularly because they don’t deal with same set of promises”. This makes for a distinct difference between indemnity and breach of contract. The latter, unlike an indemnity, is a creature of the main contract.

Awards such as those delivered in the HPCL matter are important additions to augment the development of the jurisprudence on damages and indemnities.

[My compliments to lawyers on both sides. HPCL was represented by Advani & Co. and M3nergy by Amarchand Mangaldas.]

Payal Chawla is the founder of JusContractus a Delhi based full service law firm, with primary focus on arbitrations. The author recognises the assistance of Ms. Hina Shaheen, advocate at JusContractus. For feedback, contact payalchawla@juscontractus.com. 

This article is for informational purposes only, and is not intended to provide, and should not be relied on for legal advice. Readers are advised to seek independent legal advice in accordance with their peculiar facts and circumstances.

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