Rights and Duties of Indemnifier and Discharge

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This article is written by Darshika Lodha, a BBA.LLB(Hons.) student of Unitedworld School of Law, Karnavati University.  In this article, she is trying to explain the rights and duties of Indemnifier and discharge.

INTRODUCTION

An indemnity contract essentially involves one party promising to make good its losses to the other. These losses may arise either because of the conduct of the other party or because of someone else and discharge of a contract means termination of contractual obligations.

RIGHTS AND DUTIES OF INDEMNIFIER

The promisee acting within the scope of its authority shall have the right to recover from the promisee-

  1. All damages which may be compelled to pay in any such 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, did not contravene the orders of the promisor, and acted. It would have been wise for him to act in the absence of any indemnity deal, or if the Promisor had allowed him to bring or defend the suit.
  3. All sums which may have paid under the terms of any compromise of any such suit, if the compromise was no 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, or the promisor authorized to compromise the suit.

In Bihal Chandra v. Chattur Sen (AIR 1976 ALL 506), where the seller had promised the purchaser to indemnify him against the fees, it was held, if any, that such indemnity clause would include only the existing fees and not those subsequently imposed, albeit retrospectively.

In Jaswant Singh v. Section of State 14 BOM 299, It has been decided that the rights of the indemnifier are similar to those of a security under Section 141, where it has the right to benefit from all the securities that the creditor has against the principal debtor, whether or not he has been aware of them.

Duties of Indemnity holder= Rights of Indemnifier:

In the following cases, the duties of the indemnifier arise:

  1. Under the contract, there must be a loss to make the indemnifier liable.
  2.  There must be an event of anticipation. Without any occurrence of a prescribed event, the indemnifier shall not be compensated.
  3. Where the right to indemnity is used prudently by the indemnity holder and the orders of the indemnifier are not infringed or where there is no breach of contract.
  4.  If the damages incurred by the indemnifier are not caused by neglect, haphazard conduct.

In Osman Jamal & sons ltd. v. Gopal Purushottam (1928 ILR 56 Cal 262), Repayment after payment is not necessarily covered by the held indemnity. Compensation requires that the party to be compensated should never be called upon to pay.

RIGHTS AND DUTIES OF DISCHARGE

A person is liable to perform the contracted duties until or unless he or she is discharged. If the individual fails to act without being discharged, responsibility for damages shall arise. The contract can be discharged by complete compliance or substantive non-performance of the contractual obligation. There is an “implicit covenant of good faith” in every contract that the parties will act fairly, keep their promises, and not frustrate the reasonable expectations of the other party as to what has been given and what has been received.

Full Performance

  The full performance of the contractual duty shall be subject to the agreement.

  • Nonperformance, Material Breach:

Under UCC Section 2-106(4), a party that terminates a contract breached by the other party is said to have made a cancellation. The cancelling party retains the right to seek redress for breach of the entire contract or any unfulfilled obligation. The UCC distinguishes cancellation from termination, which happens when each party exercises a legal right to terminate a contract rather than for infringement. When a contract is terminated, all executory obligations shall be discharged on both sides, but the right to obtain damages shall survive if there has been a partial violation. Uniform Commercial Law, Section 2-106(3).

  • Substantial Performance

Logically, anything less than full performance, even a slight deviation from what is due, is sufficient to prevent the discharge of the duty and may constitute a breach of contract. In the classical common law: either you did the thing you promised completely, or you did the material breach. But, according to modern theories, an ameliorative theory has been established, called substantial performance: if one side has performed significantly, but not entirely, so that the other side has received a benefit, the non-committal party owes something for the profit it has earned. 

In an important type of conflict over failure to perform, one party claims the right to pay on the ground that it has accomplished its work, while the other party refuses to pay on the ground that there is an uncured material failure to perform. In these situations, it is normal to claim that there has been significant work. The contest here is between the one who claims discharge in respect of the other’s material infringement and the one who claims that there has been substantial performance. The doctrine has no applicability if the violation party has knowingly refused to comply with the contract as if the plumber substitutes a different hawk for the one ordered; the installation of the incorrect faucet is a breach, even though it is of equal or greater value than the one ordered.

  • Anticipatory Breach and Demand for Reasonable Assurances:

If a promiser declares that he will not deliver until the time his performance is due, he is said to have committed an anticipatory violation (or repudiation). Of course, a person can not fail to perform a duty before the performance is due, but the law allows the promisee to treat the situation as a material breach which gives rise to a claim for damages and discharges the obligation to perform the duties required of him under the contract. Related to the concept of anticipatory infringement is the idea that the obligee has the right to seek reasonable assurances from the obligor that the contractual obligations will be fulfilled.

CONCLUSION

Thus, The indemnifier, having fulfilled his part of the promise, has no rights against the third party and may sue the third party only if the assignment is in his favour. On the other hand, infringing discharge is the most unpleasant way to free yourself from duties. Consequently, discharge by infringement also results in damages.

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