Commencement of Liability of Indemnifier

Introduction

The Indian Contract Act, 1872 does not clearly state when the liability of the indemnifier begins. This issue has been clarified through judicial decisions.

The law now recognises that the indemnity holder need not wait for actual loss before claiming indemnity.

Meaning / Definition

The liability of the indemnifier begins when the liability of the indemnity holder becomes absolute (certain and fixed).

This means:

• The indemnity holder does not need to actually pay the loss
• It is enough if the liability has become certain

The purpose is to ensure that the indemnity holder is protected from being forced to pay from his own pocket.

Modes or Types

Liability After Actual Loss

Under the old English rule, the indemnifier was liable only after the indemnity holder had actually suffered loss by making payment.

This rule followed the principle:
“You must be damnified (suffer loss) before you can claim indemnity.”

Liability When Liability Becomes Absolute

Under modern law, followed in India, the indemnifier becomes liable as soon as the indemnity holder’s liability becomes absolute.

The indemnity holder can:

• Ask the indemnifier to pay the amount, or
• Ask the indemnifier to arrange funds to meet the liability

Important Case Law

• Gajanan Moreshwar Parlekar v. Moreshwar Madan Mantri
  It was held that indemnity holder can compel the indemnifier to pay as soon as liability becomes absolute, even before actual payment.

• Osman Jamal & Sons Ltd. v. Gopal Purushottam
  The court held that indemnity means the indemnity holder should not be required to pay first and then recover.

Practical Example

X promises to indemnify Y against any loss from a lawsuit filed by Z.
The court orders Y to pay ₹5000 to Z. Even before paying, Y can ask X to pay the amount because the liability has become certain.

Summary

• The Act is silent on when indemnifier’s liability begins
• Liability starts when indemnity holder’s liability becomes absolute (certain)
• Actual payment is not necessary to claim indemnity
• Old English rule required actual loss before claim
• Modern law protects indemnity holder from paying first
• Supported by judicial decisions in India