Indemnity: From Ancient Assurances to Modern Risk Management

was not the owner, and subsequently, the actual owner sued Adamson for selling the cattle without permission. Consequently, Adamson had to compensate the real owner for the loss. So, he asked Jarvis to cover this loss because his act of selling followed the instructions from Jarvis. The Hon’ble Court ruled in favour of Adamson, upholding this right to expect Jarvis to compensate if things go wrong. This encompassed varied forms of insurance, excluding life insurance. But post enactment of the Indian Contract Act, 1872, the ambit was narrowed down by covering only those losses caused by the conduct of the promisor or any other person. In the case of a contract of indemnity, several small factors play a major role; for instance, existence of a loss, the specified cause of that loss, and the contingent nature of the contract. Both the indemnifier and indemnity holder have certain set of rights,5 but in terms of liability, the indemnity holder cannot hold the indemnifier liable until and unless he/she has suffered an actual loss. This becomes unfavourable for the indemnity holders when a loss is imminent and they don’t have any option to manage that financial turmoil.

The idea isn’t new. It brings us back to the ancient civilisations where people sought ways to protect themselves from losses. Romans had a concept of restitutio in integrum, aimed to restore someone to their original position after suffering a loss.1 It was the English Common law that concreted the concept of indemnity in the 18th century, followed by the cases including Deering vs. Earl of Winchelsea2 which laid the ground rules of the indemnity principles.

Let’s say, you have a big house which you have rented out to a few tenants. Then, in the situation of any damages arising out of the negligence of your tenant, they’ll compensate you proportionally. In simple words, they will assure you to cover the costs in case anything goes haywire. In legal parlance, this act of compensating is called indemnification. As per Section 124 of the Indian Contract Act, 1872, it is a contract where one party promises to save the other from loss/damages caused to him by the conduct of the person who has promised himself, or by the conduct of any other person.3 Thus, essentially, there are two parties involved in this kind of contract, an indemnifier (the person who has the obligation to compensate) and an indemnity holder (the person who has suffered the loss).

Initially, in old English law, the ambit was quite broad as it was defined as a promise to protect an individual from repercussions of an act, whether the promise was explicit or implied. This expansive interpretation was demonstrated in the case of Adamson vs. Jarvis.4 In this landmark case, Adamson, an auctioneer, sold cattle because Jarvis told him to, saying he owned them. But in reality, Jarvis was not the owner, and subsequently, the actual owner sued Adamson for selling the cattle without permission. Consequently, Adamson had to compensate the real owner for the loss. So, he asked Jarvis to cover this loss because his act of selling followed the instructions from Jarvis. The Hon’ble Court ruled in favour of Adamson, upholding this right to expect Jarvis to compensate if things go wrong. This encompassed varied forms of insurance, excluding life insurance. But post enactment of the Indian Contract Act, 1872, the ambit was narrowed down by covering only those losses caused by the conduct of the promisor or any other person. In the case of a contract of indemnity, several small factors play a major role; for instance, existence of a loss, the specified cause of that loss, and the contingent nature of the contract. Both the indemnifier and indemnity holder have certain set of rights,5 but in terms of liability, the indemnity holder cannot hold the indemnifier liable until and unless he/she has suffered an actual loss. This becomes unfavourable for the indemnity holders when a loss is imminent and they don’t have any option to manage that financial turmoil.

This is more than just a legal concept in contemporary times, it stands strong as a practical go-to tool for managing risks and making the operations reliable, relevant and ready for the future events. Be it the industries like construction, or in intellectual property disputes, or any other everyday transactions, this clause pops up to allocate risk. With tremendous growth prospects pertaining to globalization and digitalization, these agreements become more important; but on a parallel note, these aren’t perfect either. Firstly, the existence of vaguely worded indemnity clauses with overly broad language leads to disputes over their interpretation. More than 60% of the contractual disputes arise out of ambiguous contractual wordings.6 Secondly, it has been observed that the individuals as well as entities rely heavily on this clause considering it as a catch-all solution, overlooking alternative risk mitigation strategies.

On the global front, there exists an issue of interpretation and enforcement of indemnity contracts owing to the legislative differences of different jurisdictions. For instance, the United States of America opts for a broader interpretation of these clauses while English law stands on a conservative note, requiring an unambiguous language to enforce such indemnities. These existing differences highlight the deep-rooted cross-border jurisdictional differences as well as potential limitations on indemnity claims.

These challenges and lingering concerns necessitate the need of greater clarity, global harmonization and standardization in indemnity contracts. A fair distribution of risks, avoiding one-sided indemnity clauses, or a combination of indemnity and other limited liability clauses, or a regularly review mechanism to update contractual terms for reflecting the current legal standards and market conditions could be an added advantage. In order to handle the legal quirks of different jurisdictions, even adoption of the international standards like UNIDROIT Principles of International Commercial Contracts7 can make the inter-jurisdictional enforcement smoother. Thus, the clause stands as a strong legal reminder that uncertainties and risk cannot be eliminated but can certainly be managed and mitigated with apt safeguards.