INTRODUCTION

A ‘contract’ is an agreement between two or more parties which, if it contains the elements of a
valid legal agreement, is enforceable by law or in other words a ‘contract’ involves exchange of
promise and in case of breach the parties to the contract can avail of legal remedy. The law of
contract in India is governed by the Indian Contract Act, 1872.

MEANING OF VALID CONTRACT

A contract may be defined as an agreement between two or more parties to do or to abstain from
doing an act, and which is intended to create a legally binding relationship. This could be
summarized as ‘an agreement designed to have legal consequences’.

According to Indian Contract Act, “An agreement enforceable by law is a contract”, which
satisfies the following essential elements:

1. AGREEMENT: It involves both offer and acceptance at the same time. Filling up of a
proposal form by the proposer is an offer and the notice of acceptance of the proposal by the
insurer is a valid acceptance of insurance.

2. LEGAL CONSIDERATION: To every contract there must be some legal or lawful

consideration. In insurance, payment of premium is the valuable consideration in return to get a
lump sum on the happening of the event.

3. COMPETENCE TO CONTRACT: If the insured person is of sound mind and has attained
majority (18 years of age) he is said to be competent to enter into an agreement or contract. Also
he must not have been debarred by any law to which he is subject to enter into agreement. An
insurance policy taken on a minor’s life by his legal guardian will constitute a valid contract.

4. LEGAL OBJECT: The object of contract must be lawful. It must not be illegal, immoral or
opposed to public policy. Thus the object of insurance must be lawful. The assured should pay
his premium in time and in turn, the insurer should pay the assured amount at the time of loss or
maturity without causing any unnecessary hardship for the assured. The intention of both the
parties must be a holy one.
5. CERTAINTY: An agreement must not be vague, loose and uncertain. The terms and
conditions must be clearly understood by both. If the proposer turns out to be an illiterate, the
insurer must analyze or make the terms and contracts clear to him. Otherwise, there will be no
mental accord. In insurance the terms and conditions are deemed to be understood as the
proposer gives an understanding on the proposal form. The insurance company issues a printed
policy document which contains all the terms and conditions of insurance contract.

6. POSSIBILITY OF PERFORMANCE: The agreement must be capable of being performed.

A promise to do an impossible thing cannot be enforced. In insurance contract there is every
possibility of its performance. The insurer must be able to pay the money on happening of the
event. The insured is expected to make regular payment of premium; otherwise it would defy the
meaning of the insurance plan.

7. WRITING AND REGISTRATION: The contract law requires certain formalities of writing
and registration etc. For insurance the agreements must be in writing, properly signed, stamped
and registered. These formalities are fulfilled as the proposer makes his proposal through a
printed form, duly signed by him. The insurer issues the original policy document, properly
signed and stamped.

INSURANCE CONTRACT
Insurance is a contract between two parties whereby one party called insurer undertakes, in
exchange for a fixed amount of money on the happening of a certain event. At the same time the
Insurance Contract must fulfill certain other elements relating exclusively to insurance which are
known as Fundamental Principles.

The insurance contract involves:

(a) The elements of general contract.
(b) The elements of special contract relating to insurance.
The special contract of Life insurance involves the following principles:
1. Insurable interest
2. Utmost good faith
3. Material Facts
DISTINGUISHING CHARACTERISTICS OF INSURANCE CONTRACTS
While all the contracts should have the abovementioned four features to be legally binding, an
insurance contract has some special characteristics while at the same time adhering to the above
mentioned features.

The special contract of insurance involves principles:

1) Utmost Good Faith.

2) Insurable Interest.

3) Indemnity.

4) Subrogation

5) Proximate Cause

6) Contribution

7) Warranties.

 A person who is not competent to enter into a contract by reason of the provisions in
Section 11 of the Contract Act, 1872, can still be a beneficiary under a contract of
insurance. A minor’s property may be insured by persons competent to act for him.

 He would be entitled to recover the insurance money.1 The court rejected the defence of
the insurance company that the person on whose behalf the goods were insured was a
minor and allowed the minor to recover the insurance money. A minor is allowed to
enforce a contract which is of some benefit to him and under which he is required to bear
no obligation.2

1
Great American Insurance Co. v. Madan Lal Sonulal, ILR (1935) 59 Bom 656
2
Zafar Ahsan v. Zubaida Khatun, (1929) 27 All LJ 1114
  Section 23 of the Contract Act, 1872 prescribes the requirement that the consideration for
and the object of the agreement must be lawful. It has been held that there is nothing
unlawful in a vehicle insurance policy providing that no compensation would be payable
if the vehicle was being driven at the time of the accident by an unlicensed person or by a
learning license holder.3 Section 64-VB of the Insurance Act, 1938 prohibits the insurer
from entering into a contract unless the premium is paid in advance. The court said that
such a condition could be waived.4

NATURE OF INSURANCE CONTRACT

 The contract of insurance is called an allegory contract because it depends upon an
uncertain event.
 For example, if a house is burnt down or the ship is stranded, the insurer will pay the
value of it. At first sight this would seem to be a wagering transaction, the insurer betting
with the assured that his house will not be burnt or his ship will not sink and giving him
the odds of its value against the premium. It is due to this uncertainty that Lord Mansfield
described insurance ‘as a contract on speculation’.
 According to the modern view, however, insurance contracts are not speculative or
wagering contract. Insurance is not merely a gamble on an uncertain future. It is a
perfectly valid contract for the assured is only, indemnified for his loss and he does not
gain by the happening of the event insured against, he does not make a profit of his loss.
While in a wager no insurable interest is present, in insurance the assured must have an
insurable interest on the subject matter insured. Therefore, although insurance is an
allegory contract depending upon an uncertain event, it is not a wagering or a speculative
contract nor is it a gamble on an uncertain future.
 A contract of insurance is entered as soon as the insurance company accepts, the
premium after the proposal being accepted. The following essential elements are deemed
to be fulfilled after the acceptance of the premium by the insurer. The more important
conditions or elements known as fundamental principles must be satisfied for a valid
insurance contract. Following are the essentials of a contract which should be fulfilled:

3
New India Assurance Co. Ltd. v. Kesavan Ramamurthy, (1977) 2 Andh LD 446 (AP)
4
National Insurance Co. Ltd. v. New Darjeeling Union Tea Co. Ltd., (2001) 1 Cal LT 218 (Cal)
CONTRACT OF INDEMNITY

Contract of Indemnity is a special contract which is mentioned under Indian Contract Act, 1872
in section 124 and 125. It is a contingent contract.

It is defined as ‘A contract of indemnity is a contract whereby 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
person.’

Under an indemnity contract one agrees to assume all responsibility and liability for any injuries
or damages to someone else.

The person who undertakes to indemnify or make the good loss is called the ‘indemnifier’ and
whose loss is made good is called the ‘indemnified’ or ‘indemnity holder’

Example: A contracts to indemnify B for any consequences of any proceedings which C may
against B with respect to certain sum of Rs.200. This is a contract of indemnity. If B is ordered to
pay to C Rs.200, A shall be required to pay this amount to B.

FEATURES OF INDEMNITY

It must be a valid contract.

It must possess all the elements of a valid contract as mentioned under the act.

It is a contingent contract.

It is a contract to make good the loss if any such loss in incurred by the indemnified.

Loss must be caused by human conduct.

The loss which has been caused to the indemnified must be because of the act of a human or his
conducts.

Loss must have actually occurred.

The indemnified should have actually occurred the loss to be an indemnity holder.
Rights under Indemnity

Rights of Indemnity Holder

Damages: In the contract of indemnity, the indemnity holder has the right to recover from all
those damages which he has been promised.

Costs: All costs which he may be compelled to pay in any such suit if, in bringing or defending
it, he did not contravene the orders of the promisor, and acted as it would have been prudent for
him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring
or defend the suit.

Sums: All sums which he may have paid under the terms of any compromise of any suit, if the
compromise was not contrary to the orders of the promisor, and was one which it would have
been prudent for the promisee to make in the absence of any contract of indemnity.

 The English law definition of a contract of indemnity is – “it is a promise to save a person
harmless from the consequences of an act". Thus it includes within its ambit losses
caused not merely by human agency but also those caused by accident or fire or other
natural calamities.
 The definition provided by the Indian Contract Act confines itself to the losses
occasioned due to the act of the promisor or due to the act of any other person.
 Under a contract of indemnity, liability of the promisor arises from loss caused to the
promisee by the conduct of the promisor himself or by the conduct of other person.
[Punjab National Bank v Vikram Cotton Mills].
 Every contract of insurance, other than life insurance, is a contract of indemnity. The
definition is restricted to cases where loss has been caused by some human agency.
[Gajanan Moreshwar v Moreshwar Madan]
 Section 124 deals with one particular kind of indemnity which arises from a promise
made by an 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, but does not
deal with those classes of cases where the indemnity arises from loss caused by events or
 accidents which do not depend upon the conduct of indemnifier or any other person.
[Moreshwar v Moreshwar]

"Contract of indemnity" defined.-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 Indian Contract Act also deals with special cases of implied indemnity –

1. U/s 69 if a person who is interested in payment of money which another is bound by

law to pay and therefore pays it, he is entitled to be indemnified. For instance – if a tenant pays
certain electricity bill to be paid by the owner, he is entitled to be indemnified by the owner.

2. Section 145 provides for right of a surety to claim indemnity from the principal debtor
for all sums which he has rightfully paid towards the guarantee.

3. Section 222 provides for liability of the principal to indemnify the agent in respect of
all amounts paid by him during the lawful exercise of his authority.

NATURE OF INDEMNITY CONTRACT

A contract of indemnity may be express or implied depending upon the circumstances of the
case, though Section 124 of the Indian Contract Act does not seem to cover the case of implied
indemnity.

A broker in possession of a government promissory note endorsed it to a bank with forged

endorsement. The bank acting in good faith applied for and got a renewed promissory note from
the Public Debt Office. Meanwhile the true owner sued the Secretary of State for conversion who
in turn sued the bank on an implied indemnity. It was held that – it is general principle of law
when an act is done by one person at the request of another which act is not in itself manifestly
tortious to the knowledge of the person doing it, and such act turns to be injurious to the rights of
a third person, the person doing it is entitled to an indemnity from him who requested that it
should be done. [Secretary of State v Bank of India].
The plaintiff, an auctioneer, acting on the instruction of the defendant sold certain cattle which
subsequently turned out to belong to someone else other than the defendant. When the true
owner sued the auctioneer for conversion, the auctioneer in turn sued the defendant for
indemnity. The Court held that the plaintiff having acted on the request of the defendant was
entitled to assume that, if it would turned out to be wrongful, he would be indemnified by the
defendant. [Adamson v Jarvis].

Contract of indemnity when enforceable –

The question whether the liability of indemnifier commences only when the indemnified has
actually suffered loss or when there is an apprehension that the indemnified by all chances is
likely to suffer it.

The former view was held in cases like – Shankar Nimbaji v Laxman Sapdu / Chand Bibi v
Santosh Kumar Pal.

Right of the indemnity holder – (Section 125)

An indemnity holder (i.e. indemnified) acting within the scope of his authority is entitled to the
following rights –

1. Right to recover damages – he is entitled to recover all damages which he might have been
compelled to pay in any suit in respect of any matter covered by the contract.

2. Right to recover costs – He is entitled to recover all costs incidental to the institution and
defending of the suit.

3. Right to recover sums paid under compromise – he is entitled to recover all amounts which
he had paid under the terms of the compromise of such suit. However, the compensation must
not be against the directions of the indemnifier. It must be prudent and authorized by the
indemnifier.
4. Right to sue for specific performance – he is entitled to sue for specific performance if he
has incurred absolute liability and the contract covers such liability. The promisee in a contract
of indemnity, acting within the scope of his authority, is entitled to recover from the promisor-

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which
the promise to indemnify applies

(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he
did not contravene the orders of the promisor, and acted as it would have been prudent for him to
act in the absence of any contract of indemnity, or if the promisor authorized him to bring or
defend the suit ;

(3) all sums which he may have paid under the terms of any compromise of any such suit, if the
compromise was not

It is important to note here that the right to indemnity cannot be claimed of dishonesty, lack of
good faith and contravention of the promisor’s request. However, the right cannot be negatived
in case of oversight. [Yeung v HSBC]

Right of Indemnifier –

Section 125 of the Act only lays down the rights of the indemnified and is quite silent of the
rights of indemnifier as if the indemnifier has no rights but only liability towards the
indemnified.

In the logical state of things if we read Section 141 which deals with the rights of surety, we can
easily conclude that the indemnifier’s right would also be same as that of surety.

Where one person has agreed to indemnify the other, he will, on making good the indemnity, be
entitled to succeed to all the ways and means by which the person indemnified might have
protected himself against or reimbursed himself for the loss. [Simpson v Thomson]
Principle of Subrogation is applicable because it is an essential part of law of indemnity and is
based on equity and the Contract Act contains no provision in contravention with [Maharaja Shri
Jarvat Singhji v Secretary of State for India]

CONTINGENT CONTRACTS

According to the Contract Act a contingent contract is one whose performance us uncertain. The
performance of the contract which comes under this category depends on the happening or non-
happening of certain uncertain-events. On the other hand, an ordinary or absolute contract is such
where performance is certain or absolute in itself and not dependent on the happening or non-
happening of an event. A contingent contract is defined as a contract to do or not to do
something, if some event, collateral to such contract, does or does not happen (sec. 31).

Example-

(A) A contracts to pay Rs. 50,000 if B’s house is destroyed by five. This is a contingent contract
as the performance depends on the happening of an event.

(B) A asks B to give loan to M and promises that he (A) will repay the loan if M does not return
it in time.

Characteristics of a Contingent Contract

A Contingent Contract must have three essential characteristics. There are:

(1) The performance of the contract depends on he happening or non-happening of a certain

event in future. This dependence on a probable future event distinguishes a contingent contract
from an ordinary contract.

(2) This event must be uncertain, that means happening or non-happening of the future event is
not certain, i.e., it may or may not happen. If the event is hundred percent sure to happen, and the
contract in that case has to be performed any way, such a contract is not called a contingent
contract.
(3) The event must be collateral or incident to the contract.

Therefore, contracts of indemnity, guarantee and insurance are the most common instances of a
contingent contract.

Rules regarding contingent contracts

To enforce the performance of a contingent contract the following rules have to be followed:

1. Where the performance of a contingent depends on the happening of an uncertain future

event, it cannot be enforced till the event takes place. And if the happening of the event becomes
impossible, such contracts become void (sec. 32).

Example- A contracts to sell B a piece of land if he (A) wins the legal case involving that piece
of land. A loses the case. The contract becomes void.

2. Where the performance of a contingent contract depends on the non-happening of a future

event, the contract can be enforced if the happening becomes impossible (sec. 33).

Example- A agrees to sell his house to B if Y dies. This contract cannot be enforced till Y is
alive.

3. If the contract is dependent on the manner in which a person will act at an unspecified time,
the event shall be considered to become impossible when such person does anything which
makes it impossible that he should so act within any definite time or otherwise than under further
contingencies (sec. 34).

4. Contingent contract to do or not to do anything, if a specified uncertain event happens within

a fixed time, becomes void if the event does not happen and the time expires or its happening
becomes impossible before the time expires [sec. 35(1)].

5. Contingent contract to do or not to do anything, if a specific event does not happen within a
specified time, may be enforced when the time so specified expires and such event does not
happen, or before the time so specified it becomes certain that such event will not happen [sec.
35(1)].

6. Contingent agreements to do or not to do any thing, if an impossible event happens, are void,
whether or not the fact is known to the parties at the time when it is made (sec. 36).