Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri

Section 124 defines a contract of indemnity as 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. Section 125 then lists what the indemnity holder may recover when sued: damages he may be compelled to pay, costs he may be compelled to pay, and sums paid under a compromise.

Read together and read narrowly, those two sections produce a harsh result and a narrow doctrine. Two questions follow, and Gajanan Moreshwar is the leading Indian authority on both.

First, is s. 124 exhaustive of indemnity in India? On its terms it covers only loss caused by the conduct of the promisor or of some other person. English law is wider: an indemnity there has been described as a promise to save another harmless from loss caused as a result of a transaction entered into at the instance of the promisor, and it covers accidental loss as well as loss caused by conduct. The Indian definition is narrower and seems to exclude indemnity as a cover for accidental loss.

Second, must the indemnity holder actually pay before he can call on the indemnifier? The words of s. 125 are rights of indemnity holder when sued, and they speak of sums he may be compelled to pay. The High Courts divided. The Bombay and Nagpur High Courts held that the indemnifier is liable only after the actual loss has been incurred. The High Courts of Calcutta, Madras and Allahabad held that the indemnity holder can compel payment from the indemnifier even before he has met his liability.

Chagla J. decided both points in favour of the wider view, and did so by a route that is itself worth learning: he began not with s. 124 but with the character of the Contract Act as a whole.

The Act is not exhaustive of the law of contract. The Indian Contract Act is both an amending and a consolidating Act, and it is not exhaustive of the law of contract to be applied by the courts in India. That proposition unlocks everything else, because it means that s. 124 does not occupy the whole field.

Section 124 deals with one kind of indemnity only. It deals only with one particular kind of indemnity which arises from a promise made by the indemnifier to save the indemnified from the loss caused to him by the conduct of the indemnifier himself or by the conduct of any other person. It does not deal with those classes of case where the indemnity arises from loss caused by events or accidents which do not or may not depend upon the conduct of the indemnifier or of any other person, or by reason of liability incurred by something done by the indemnified at the request of the indemnifier.

The indemnity holder need not first pay. On the question that divided the High Courts, Chagla J. observed that if the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from the liability and to pay him off.

Section 124 is not exhaustive of the law of indemnity in India. Because the Contract Act is an amending and consolidating Act and not a complete code of contract, indemnities falling outside s. 124 — those arising from events or accidents not depending on anyone's conduct, and those arising from a liability incurred by the indemnified at the indemnifier's request — are enforceable on general principles. And where the indemnity holder has incurred a liability which is absolute, he may call on the indemnifier to save him from that liability and pay it off; he need not first discharge it out of his own pocket.

If the indemnity holder had to pay first, the promise would be worth little to the person who most needs it. A man who is indemnified against a claim of ten lakh rupees and does not have ten lakh rupees would have no remedy at all: he could not pay, so he could never recover. Chagla J.'s rule makes the indemnity do what the parties meant it to do — it is a promise to keep the promisee out of loss, not merely to reimburse him after he has suffered it.

The condition attached is the safeguard. The liability must be absolute. A merely contingent, disputed or speculative liability will not do; there must be a liability that has crystallised against the indemnity holder. That is the line to draw in a problem question.

Two further points belong with this case because the Act itself is silent on them.

Implied indemnity. The promise to save may be implied as well as express. The Act contains several instances of implied indemnity scattered through it — the seller's position on a breach of warranty being set up in diminution of the price under s. 59, the principal debtor's implied promise to indemnify the surety under s. 145, the bailor's responsibility to the bailee under s. 164, and the principal's duty to indemnify the agent under s. 222.

Rights of the indemnifier. The Act is silent on them. Jurists have compared the rights of the surety with those of the indemnifier and concluded that there are many similarities, and it has been held that the rights of the indemnifier are similar to those of a surety under s. 141, so that on indemnifying he becomes entitled to the benefit of all the securities the creditor had against the principal debtor, whether or not he was aware of them. Once the indemnifier pays for the loss or damage, he steps into the shoes of the indemnified and succeeds to all the ways and means by which the person originally indemnified might have protected himself against the loss. The principle of subrogation is founded on equitable principles and applies here.

It has also been held that the rights of the indemnity holder under s. 125 are not exhaustive, and that he may be entitled to other equitable reliefs as well.

This is a favourite short-note question, and Gajanan Moreshwar supplies the material for it.

| | English law | Indian law | |---|---|---| | Kinds of indemnity covered | Express and implied | Section 124 in terms covers only express contracts of indemnity | | Source of the loss | The conduct of some person, or an accident independent of anybody's conduct | The definition requires loss caused by the conduct of some person, and does not by its terms cover accident | | A contract of insurance | May be assigned | Is an actionable claim |

The practical effect of Gajanan Moreshwar is to narrow the gap in the second row: s. 124 does not exhaust the field, so an indemnity against an event or accident is not for that reason unenforceable in India; it simply falls outside the section and is governed by general principles.