Osman Jamal & Sons Ltd. v. Gopal Purshottam

After reading this judgement, the readers will learn about the concept of indemnity as embodied in the Indian Contract Act and how the same was established through judicial precedents.
CITATIONAIR 1929 Cal 208
COURTHigh Court of Calcutta
JUDGES/CORAMJustice Williams
DATE OF JUDGEMENT19.07.1928

Introduction

Indemnity literally means making good the loss or compensating a person for any loss. Section 124 of the Indian Contract Act of 1872 defines indemnity, as “A contract of indemnity is a contract by which one party promises to save the other from the loss caused to him by the conduct of the promisor himself or by the conduct of any other person.” The person who promises to make good the loss is called the ‘indemnifier’ and the person to whom the promise is made, i.e., whose loss is to be made good is called the ‘indemnified’ or the ‘indemnity-holder’.

Facts

The facts of the case are as follows: A company was acting as the commission agents of the defendants firm and in that capacity bought certain goods for the defendants which they failed to take. The supplier became entitled to recover from the company certain sum of money as damages for breach. The company went into liquidation before paying the claim. The company sued the defendant for the payment.

Issues

The main issue in the case was: When does the indemnifier become liable to pay, or , when is the indemnity holder entitled to recover his indemnity?

Summary of court decision and judgment

It was held that the Official Liquidator could recover the amount even though the company had not actually paid the vendor. The court, however, directed that the amount should be set apart so that it is used in full payment of the vendor in respect of whose contract the company had incurred liability.

The High Courts of Allahabad[1], Madras[2] and Patna[3] have all expressed their concurrence in the principle that as soon as the liability of the indemnity holder to pay becomes clear and certain he should have the right to require the indemnifier to put in a position to meet the claim.

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Analysis

The original English rule was that indemnity was payable only after the indemnity holder, had suffered actual loss by passing off the claim. The maxim of Law was: “You must be damnified before you can claim to be indemnified”. This however results inconvenience to the indemnity holder. In India, there is no specific provision which states when a contract of indemnity is enforceable. There have been conflicts in judicial decisions throughout.

Osman Jamal’s case was among the first Indian Case, in which the right to be indemnified before paying was recognized. In this case Calcutta High Court had an opportunity to re examine the English law. Calcutta High Court propounded new principle as- “ You did not need to be damnify before you claim for indemnify”, and today the position is different after the consensus of sorts has been formed between different High Courts in various cases, and it was held and decided that the indemnified may compel the indemnifier to place him in a position to meet liability that may be cast upon him without waiting until the promisee has actually discharged it.

The process of Transformation is well- explained by Chagla J, of the Bombay High Court in another famous case[4]

“It is true that under English common law no action could be maintained until the actual loss had been incurred. It was very soon realized that an indemnity might be worth very little indeed if the indemnified could not enforce his indemnity till he had actually paid the loss. If a suit was filed against him he had actually to wait till a judgement was pronounced and it was only after he had satisfied the judgement that he could sue on his indemnity. It is clear that this might under certain circumstances throw an intolerable burden upon the indemnity holder. He might not be in a position to satisfy the judgement and yet he could not avail himself of his indemnity till he had done so. Therefore, the court of equity stepped in and mitigated the rigour of the common law. The court of equity held that if his liability had become absolute then he was entitled either to get the indemnifier to pay off the claim or to pay into court sufficient money which would constitute a fund for paying off the claim whenever it was made”.

Conclusion

The judgement of the Calcutta High Court in the Osman Jamal’s case was right, as there is no specific provision which states when a contract of indemnity is enforceable. There have been conflicts in judicial decisions throughout. The original English rule was that indemnity was payable only after the indemnity holder, had suffered actual loss by passing off the claim. This case establishes a principle for the benefit of indemnity holder, as in the absence of any specific provision they were facing so many problems. However the contrary views have also been expressed[5] that indemnity was payable only after the indemnity holder, had suffered actual loss by passing off the claim.

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[1] ShiamLal v. Abdul Salam, AIR 1931 All 754 (India).

[2] Ramalingathudayar v. UnnamalaiAchi, (1915) 38 Madras 791 (India).

[3] Chunibhai Patel v. Natha Bhai Patel, AIR 1944 Pat 185 ( India).

[4] Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, AIR 1942 Bom.302, 304 (India).

[5] Shankar Nimbaji v. LaxmanSapdu, AIR 1940 Bom.161: 42 Bom LR 175 (INDIA).