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Sunday, August 29, 2010

Law of Contracts - “Double Indemnity-Contractual Indemnity Clauses Revisited”


Introduction


The concept of Double Indemnity as an important aspect of the Contract of Indemnity has not yet been adopted and adapted by the Courts in India.  As a consequence of the classical concept of two physical individuals, having equal bargaining power, freely and voluntarily entering into the contract, control over the terms of the contract was limited to the minimum. In the present century, the use of double indemnity clauses in indemnity contract has become very common and it is arguable that a customer who contracts on such standard terms has been imposed on him and does not really agree to them at all. Indemnity agreements are regularly used to allocate risk between parties on construction projects. Recently, some doubt has surfaced as to whether the language found in a typical indemnity agreement is sufficient to require indemnity in situations where the indemnifying party (the indemnitor) is without fault.

Double indemnity Clauses in Indemnity Contracts—these types of contracts are found in our everyday parlance and of course we forget to notice them in our day-to-day life and how it goes on to affect our lives. These form of contracts have been in existence since ancient times like Construction projects etc., which are in existence even now and has taken a much complex form even today. Even in this era of technology and modernization there has opened up various avenues for the double indemnity clauses like in insurance contracts, project contracts etc. Now the question arises as to whether there is reasonability between two parties when they are executing an agreement through an indemnity contract and as such the restriction or exclusion, reflexive indemnity clauses.

There are clearly identifiable steps in the interpretation of contracts. First, the parties’ common intention (that which they wanted to regulate) is sought; next, an attempt is made to build up a picture of the relevant conditions, whether they be common or legally required (those which, given the circumstances, the parties would have wished to establish, on either rational or legal grounds); finally, the judge may end up applying legal provisions far removed from the parties’ ex ante common will, such as the contra proferentem rule, whose purpose is to prevent the use of unintelligible terms through the threat of applying, in each such case, an interpretation in favour, not of whoever is responsible for creating such unintelligibility, but of the other party.

Opinions differ and in this regard one school of thought says that double indemnity clauses are an advantage whereas it is a disadvantage and it should be done away with. They come to this conclusion as because a double indemnity contract is a universal contract having or enumerating the same set of terms and conditions and the concept of vicarious liability coming up in Contraction Contracts. Now in such type of contracts the question that arises is that whether the other party has that same bargaining power or the freedom of contract as the terms and conditions are one sided. As such through this project report an attempt is being made to answer this basic problem and thus reach to a definite end in the course of this research.

                                                                 Indemnity


Chief Justice Brian (1478): "The intent of a man cannot be tried, for the devil himself knows not the intent of a man."


Contracts are generally concluded by offer and acceptance. Now according to dictionary meaning, indemnity is a protection against loss, esp. in the form of a promise to pay, or payment for loss of money, goods, etc. It is a security against, or compensation for loss etc.  For instance, A contracts to indemnify B in respect of a certain sum of 200 Rupees. This is a contract of indemnity. In a contract of indemnity, the person who promises to indemnify is known as “indemnifier”, and the person in whose favour such a promise is made is known as “indemnified” or “indemnity holder”.

According to Section 124 of the Indian Contract Act, a contract of indemnity means “a contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person”. This provision incorporates a contract where one party promises to save the other from loss which may be caused, either
(i)                 By the conduct of the promisor himself, or,
(ii)               By the conduct of any other person.

This definition covers indemnity for loss caused by human agency only. It does not deal with those classes of cases where the indemnity arises from loss caused by events or accidents, which do not or may not depend upon the conduct of the indemnifier or any other person, or by the reason of liability incurred by something done by the indemnified at the request of the indemnifier. In fact, however there are two types of indemnity clauses- they are the reflexive indemnity clause and the insurance indemnity clause. Where the former indemnity requires B who has successfully sued his fellow-but defaulting—contracting party A to indemnify A. such clauses correspond very much to Viscount Dilhorne’s description of an indemnity clause as “the obverse of an exempting clause.”[1] The latter type of indemnity clause, the insurance indemnity is triggered off when third party X recovers against contracting party A, or exceptionally when the third party fails to recover and the indemnity is relied on to cover the costs of litigation, the indemnity which is a term of the contract between A and B requires B to indemnify A.

Thus a combination of these two types of indemnity could give rise to another form of indemnity i.e. an indirect reflexive indemnity. For example suppose A, a Site Developer, contracts to do building work for B; A employs sub-Contractor X. X negligently injures B and B sues X directly and recovers damages. X invokes an insurance indemnity against A and A invokes a similar indemnity against B. it is also theoretically possible to have a straight-forward indirect indemnity: A and B have a contract, A is in default vis-à-vis a third party X. the contract with A requires B to indemnify X. For example Section 4 of the Unfair Contract Terms Act 1977[2], applies only where a person deals as consumer and only where the liability incurred is for negligence or breach of contract. Within these limitations the section covers both our reflexive indemnity and insurance indemnity clause. Section 4(2) makes this very clear.[3]

Now although Section 4 looks very clear to the untrained eye, but looking more closely we see that a tricky point of interpretation arises. Suppose B who deals as consumer has entered into a contract with A which contains an indemnity clause in A’s favour. A negligently injures a third party X, and X can now successfully claim from A and A claims from B. extending this example suppose A employs a sub-contractor C, and it is C who injures X. now X will now successfully claim from C and C from A and A from B. To put things mildly, the same problem would arise if C negligently injured B who duly claimed from A, thereby giving rise to an indirect reflexive indemnity against himself.

INSURANCE CONTRACT, IF CONTRACT OF INDEMNITY

INDIA
It has been noted above that section 124 recognizes only such contract as a contract of indemnity where there is a promise to save another person from loss which may be caused by the conduct of the promisor himself or by conduct of any other person. It does not cover a promise to  compensate for loss not arising due to  human agency. Therefore a contract of insurance is not covered by the definition of section 124. Thus if under a contract of insurance, an insurer promises to pay compensation in the event of loss by fire, such a contract does not come under the purview of section 124. such contracts are valid contracts, as being contingent contracts as defined in section 31.

In United India Insurance Company v. M/s. Aman Singh Munshilal,[4] the cover note stipulated delivery to the consignor. Moreover, on its way to the destination the goods were to be stored in a godown and thereafter to be carried to the destination. While the goods were in the godown, the goods were destroyed by fire. It had been held by the court that the goods were destroyed during transit, and the insurer was liable as per the insurance contract.

ENGLAND

Under English law, the word ‘indemnity’ carries a much wider connotation than given to it under the Indian Contract Act. It includes a contract to save the promisee from a loss, whether it be caused by human agency or any other event like an accident and fire. Under English law, a contract of insurance (other than life insurance) is a contract of indemnity.

Life insurance contract is, however not a contract of indemnity because in such a contract different considerations apply. A contract of life insurance, for instance, may provide the payment of a certain sum of money either on the death of a person, or on the expiry of a stipulated period of time (even if the assured is still alive). In such a case, the question of amount of loss suffered by the assured, or indemnity for the same does not arise. Moreover, even if a certain sum is payable in the event of death, since, unlike property, the life of a person cannot be valued, the whole of the amount assured becomes payable. For that reason also, it is not a contract of indemnity.

Indian Contract Act does not specifically provide that there can be an implied contract of indemnity. The Privy Council has, however, recognized an implied contract of indemnity also.[5] The Law Commission of India in its 13th Report, 1958 on the Indian Contract Act, 1872, has recommended the amendment of Section 124. According to its recommendation, “The definition of the ‘Contract of Indemnity’ in Section 124 he expanded to include cases of loss caused by events which may or may not depend upon the conduct of any person. It should also provide clearly that the promise may also be implied.”

Rights of Indemnity Holder

In a suit against the indemnity holder, he may have been compelled to pay damages, and incurred costs, etc. In his own turn, he can bring an action against the promisor (indemnifier) to recover damages and costs, etc. paid by him, if the indemnifier has promised an indemnity in such a case. The provision in this regard is contained in Section 125, which reads as under:
“Right of indemnity-holder when sued. - 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 contrary to the orders of the promisor, and was one which it would have been prudent for the promise to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.”

When can an indemnifier be made liable? Can he claim to be indemnified before he is demnified?

There has been a controversy regarding the point, as to whether the indemnifier can be asked to indemnify before the indemnity-holder has actually suffered the loss, or his liability arises only after the loss has been suffered by the indemnity-holder.

According to English Common Law, no action could be brought against the indemnifier until the indemnity-holder had suffered actual loss. This situation created a great hardship in those cases where the indemnity-holder was not in a position to meet the claim out of his pocket. Relief was provided to indemnity-holder in such cases by the Court of Equity. According to the rules evolved by the Court of Equity, it was no more necessary for the indemnity-holder to be demnified before he could be indemnified. In other words, the indemnity-holder can now compel the indemnifier to save him from the loss in respect of liability against which indemnity has been promised.

There has been a difference of opinion between various High Courts in India as to whether the indemnity-holder can claim indemnity before he has actually suffered the loss.

According to the view expressed by the different courts, that a person must be demnified before he can be indemnified, i.e. no indemnity can be indemnified, i.e. no indemnity can be claimed until the indemnity-holder has already actually suffered the loss.
Whereas the high Courts of Bombay[6], Calcutta[7], Madras[8] and Allahabad [9] have expressed a different view, and they are in favour of the application of law similar to the one recognized in England by the Court of Equity. According to the decisions of these courts, an indemnity-holder can compel the indemnifier to indemnify even before the indemnity-holder has actually suffered the loss.

Referring to the equitable principle and also the desirability of its being followed in India, Chagla, J. while delivering the judgement in the Bombay High Court decision of Gajanan Moreshwar v. Moreshwar Madan[10], observed:

The Court of equity held that if his (indemnity-holder’s) 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…..I have already held tat Section 124 and 125, Contract Act, are not exhaustive of the law of indemnity and the Courts here would apply the same equitable principle that the  Courts in England do. Therefore, if the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save him from that liability and to pay it off.”

The Law Commission of India in its 13th Report, 1958, has expressed the opinion that “the view expressed by Chagla J., is correct and should be adopted by the legislature.” The Law Commission recommended that as in English Law, “the right of the indemnity-holder should be more fully defined and the remedies of an indemnity-holder should be indicated even in cases where he has not been sued.

Now all the reported cases on indemnities in fact involve insurance rather than reflexive indemnity clauses and nearly always the point in issue is whether or not a negligent proferens (the party for whose benefit the indemnity purports to operate) can rely on the indemnity. An insurance indemnity clause in a commercial contract, like an exemption clause is usually aimed at apportioning insurance risks. A reflexive clause may also fulfill this function. Until recently, however this has received little open recognition in the courts. Perhaps because of the more obviously commercial context of indemnity clauses than of exemption clauses there is, however, a competing line of authority. It holds that the overriding consideration is the intention of the contracting parties as expressed in their contract. If the parties have used words which are apt to allow the indemnity to operate in favour of the negligent proferens then effect must be given to the clause. This is the orthodoxy of “The Freedom of Contract”.

Double Indemnity-An Analysis

Indemnity agreements are regularly used to allocate risk between parties on construction projects. Recently, some doubt has surfaced as to whether the language found in a typical indemnity agreement is sufficient to require indemnity in situations where the indemnifying party (the indemnitor) is without fault.

Courts have a legitimate paternalistic function, even relative to commercial contracts, to ensure that powerful commercial parties do not abuse their bargaining strength by foisting indemnity clauses on weaker parties. Another answer is that negligent parties should be allowed to answer personally for their default, and not be allowed to pass on the risk to an innocent party. Against these responses, of course, there are well-rehearsed objections. The problem with the courts having an interventionist role is that commercial parties simply will not know where they stand. The collective message of these decisions is clear: Parties should take care to ensure that the language in their indemnity agreements properly states the scope of indemnification intended.[11]

Three recent California Court of Appeal cases have addressed this issue. Yet, despite substantially similar language in each of the agreements at issue, the cases reached different outcomes. In two cases, the courts held that the agreements required indemnification even though the subcontractors were not at fault. In the other case, the court ruled that the language of the agreement was not explicit enough to require indemnification without a finding of fault.

A typical indemnity agreement is designed to shift liability to the party who is thought to be more actively or primarily responsible for the events giving rise to the liability. Subcontractors commonly are required to indemnify a general contractor for any acts for which the general contractor is less than 100 per cent responsible. But in some cases, the subcontractor is no more at fault than the general contractor. In these cases, the question of whether the agreement requires indemnification becomes one of interpretation. As a result, courts examine the language that parties use in their agreement to determine their intent -- even if they did not actually consider the possibility of indemnification without fault.

The first case in the recent trilogy of opinions is Continental Heller Corp. v. Amtech Mechanical Services, Inc.[12]. There, Amtech, Continental's subcontractor installed a valve manufactured by a third company in the course of its work at a meat-packing plant. The valve failed and caused an explosion that injured employees and damaged property. The agreement required Amtech to indemnify Continental Heller for loss “which [arose] out of or [was in] any way connected” with Amtech's “acts or omissions” in the performance of its work. While the court agreed that Amtech did not install the valve negligently, it found that Continental Heller did not need to show that Amtech was at fault in order to claim indemnity. The court, following the explicit language in the agreement, found that Continental Heller was entitled to indemnity because Continental Heller's loss was connected to Amtech's act of installing the valve.
The Continental court also remarked on the commercial context of the case as well as issues concerning public policy. Both Amtech and Continental were large, sophisticated firms that had carefully negotiated their indemnity agreement. Thus, the court felt Amtech had ample opportunity to negotiate the terms of its indemnity obligations. Moreover, Amtech's subcontract was worth $1.2 million while it only was required to indemnify Continental for $20,000. The court seems to have relied upon these factors to support its broad interpretation of the indemnity agreement.

In Heppler v. J.M. Peters Co.,[13] class action plaintiffs, standing in the shoes of the developer, sought indemnity from three subcontractors who worked on a residential development. The indemnity agreements provided that the subcontractors would hold the contractor harmless from all claims “arising out of or in connection with the Subcontractor's... performance of the Work.” While neither negligence nor fault was explicitly referenced in the indemnity provision, the court nevertheless ruled that fault on the part of the subcontractor was a prerequisite for indemnity based on other clauses in the contract. It noted that the language did not “evidence a mutual understanding of the parties that the subcontractor would indemnify... if it was not negligent.” Although the language in the agreement was substantially similar to that in Continental Heller, the court explicitly distinguished the two cases based on the language found in their respective agreements. Significantly, it noted that the agreement in Heppler did not contain the “any acts or omissions” language found in the agreement in Continental Heller.
The Heppler court also focused on the commercial context of the indemnity agreement and the public policy concerns it raised. In contrast to Continental, the subcontractors signed pre-printed form agreements prepared by the more sophisticated developer. Further, if the subcontractors had been forced to indemnify the developer, they truly would have been "saddled with ruinous liability" amounting to over $5.3 million. These facts supported the court's restrictive interpretation of the indemnity agreement at issue.

Finally, in Centex Golden Construction Co. v. Dale Tile Co.,[14] Centex, the general contractor, sued Dale Tile, the subcontractor, for indemnity based on defective tile work on a commercial building. At trial, the jury found that Dale Tile had not been negligent in its work on the project, but the court ruled for Centex on its indemnity claim. As in Continental Heller, the Court of Appeal agreed that under the agreement, Centex did not need to show fault on the part of Dale Tile to prevail. The indemnity agreement stated that all work performed by Dale Tile "shall be at the risk of SUBCONTRACTOR exclusively." The court found that, even more than the language in the agreement in Continental Heller, this expression by the subcontractor was sufficient to provide indemnity in the absence of fault. As in Continental Heller, the Centex court further justified it’s ruling by noting the case's commercial context and the absence of public policy concerns.
In each of the three cases, the courts were careful to note that “the intention of the parties is to be ascertained from the 'clear and explicit' language of the contract,” and that when interpreting indemnity agreements, “the courts look first to the words of the contract to determine the intended scope of the indemnity agreement.” While none of the agreements explicitly addressed the subject of indemnity when the subcontractor was without fault, each of the courts confidently stated that their interpretation of the language in the agreements was consistent with the "intention" of the parties.
To be sure, parties to indemnity agreements should not have to rely on a court's skill at creative interpretation in order to achieve a favorable result. The lesson learned from these decisions is that typical indemnity agreements may be ill equipped to deal with claims that do not arise out of the indemnitor's fault. Thus, parties to construction contracts should take care that their true intentions on the issue of indemnity are manifested in clear and explicit language.

In a construction project in Florida, if an individual or the individual’s agent acts wrongfully by action or inaction that results in property damage or personal injury, a contractor, lower tier contractor, architect, engineer, or material supplier will indemnify that person and hold them harmless for their own wrongful act, omission, or default. Except for the year 2000, clauses containing such indemnifications were and are enforceable in Florida if certain conditions were met, which are described below. This concept of indemnification for one’s own wrongful acts is discussed in an article at 68 A.L.R.3d 7 (1976), and raises interesting questions.[15]


Is it fair for one person to be responsible for the wrongful or negligent acts of another person? Is the answer to this question any different if the person agrees to take on that responsibility by a contract? Is it reasonable to believe that most people signing construction contracts understand that they are indemnifying the other side from their own negligence? For those people in construction who sign such contracts and understand what an indemnity clause is, there are three basic schools of thought on whether a contractual undertaking to hold someone harmless from that other person’s own wrongful acts is fair.

One school of thought, adopted in several states in the U.S is that the concept of holding someone harmless from that person’s own wrongful acts is simply wrong, not fair, against public policy, and should not be enforced in any event.

The second school of thought, at the other end of the spectrum, is that people in the construction business should be able to understand the terms to which they are agreeing. If they don’t comprehend their responsibility, they should obtain advice to allow them to understand before agreeing to an indemnity undertaking. Further, the parties to a contract should be free to allocate the risks arising out of a construction project as they see fit and there is nothing wrong with an individual agreeing to be responsible for the property damage or personal injury that another person causes if the indemnitor willingly subscribes his name to such an indemnity clause.

The third school of thought (a middle ground) is that such indemnity clauses are subtle, not easily understood, and, in order to be enforceable, they should include some limitation on, or warning regarding, the duty to hold someone harmless from that person’s own wrongful acts. Such indemnity should be distinguished from an indemnity for one person to hold another harmless from actions done by the first party, or others working under him. While that may be addressed by contract, it is also addressed in the common law, known as common law indemnity. The subject of this article regards holding one harmless from property damage or personal injury that such individual causes. There is no common law indemnity for that situation. Indemnity for that only arises when agreed in a contract. Florida law evolved from having no statute addressing such clauses (pre-1972), to requiring monetary limits or specific consideration for such clauses as a condition of enforceability (1972-2000), to subtly making such clauses unenforceable for all construction parties (2000-2001), to making them enforceable for construction parties so long as there is a monetary limit on the indemnity of not less than $1,000,000 per occurrence, which limit must “bear a reasonable relationship to the contract,” is “a part of the project specifications or bid documents, if any,” and has other limits on intentional, reckless, and wanton acts.[16]

In Aschenbrenner v. United States F. & Guarantee Co.,[17] Mr. Justice Stone delivered the opinion of the Court. Petitioner, a beneficiary of a policy of accident insurance issued to her husband by respondent, brought this suit in the District Court for Northern California to recover under the double indemnity provisions of the policy. At the trial liability was conceded for the single amount stipulated to be paid in the event of the insured's death by accident, but double liability was contested on the ground that the insured, at the time of the accident, was not a passenger on a common carrier within the meaning of the double indemnity provisions of the policy. A judgment entered upon a verdict for the petitioner for the double liability was reversed by the Court of Appeals for the Ninth Circuit, which directed that judgment be reduced by one-half. 65 F.(2d) 976. Certiorari was granted.[18]

The policy provided for payment of a specified amount in case of loss of life of the insured resulting from accidental bodily injury, and for payment of double that amount 'if such injury is sustained by the insured while a passenger in or on a public conveyance (including the platform, steps or running board thereof) provided by a common carrier for passenger service. The insured, which had in his possession a ticket entitling him to transportation, arrived at the railroad station platform just as the train started to move out of the station. There was testimony from which the jury might have found that, while the train was moving at a speed of seven to ten miles an hour but was still within the station and opposite the platform, with vestibule doors open, the insured jumped onto the lower step of a car, his hand grasping the handrail, and that he continued for a brief time, while the train moved about twenty feet, to stand with both feet upon the step but with a small part of his body or clothing projecting beyond or outside the vestibule until it brushed against a bystander on the platform in a manner causing the insured to lose his hold and fall to his death.

The trial judge instructed the jury that if the insured held a ticket entitling him to ride as a passenger, and in attempting to board the train while in motion he stood with both feet upon the step, he was a passenger and entitled to recover under the double indemnity clause. The only question which it is necessary to decide here is whether the insured was a 'passenger' at the time of the accident within the meaning of the policy. The Court of Appeals ruled that he was not[19]; it reached this conclusion by applying the term as it was said to be defined in the law of common carriers.

The Court of Appeals thought that the evidence here would have made no case for the jury in a suit against the carrier, and therefore concluded that the trial judge should have directed a verdict for the insurer on the issue of double indemnity. “No doubt intending passengers who are injured in attempting to board a moving train, unless they were invited to do so, are not usually entitled to recover from the carrier. But it is not clear that such cases turn on the existence or non-existence of the passenger-carrier relationship.”[20]

And in the case of the insured, who had come upon the station platform intending to be a passenger, it may be that negligence in jumping uninvited onto the moving train would bar his recovery from the carrier without resort to the artificial assumption of a hiatus in that relationship during the brief interval required for boarding the train. The notion of such a suspension of the passenger-carrier relationship has been rejected in allowing recovery upon policies insuring against injury while traveling as a 'passenger' on a railway train, both where the passenger alighted from the train at an intermediate stop and was injured in attempting to return to the train after it started to move again.

But it is unnecessary here to follow the niceties of legal reasoning and terminology applied in negligence suits against common carriers, for we are interpreting a contract and are concerned only with the sense in which its words were used. The phraseology of contracts of insurance is that chosen by the insurer and the contract in fixed form is tendered to the prospective policyholder who is often without technical training, and who rarely accepts it with a lawyer at his elbow.[21] So if its language is reasonably open to two constructions, that more favourable to the insured will be adopted, and unless it is obvious that the words are intended to be used in their technical connotation they will be given the meaning that common speech imports.

That the stipulation to be construed is one for double indemnity calls for no different conclusion. It has been argued that such a provision contemplates a risk which is comparatively slight, and that therefore it should be strictly construed.[22] It may be that the insurer assumes little additional risk; but the terms of the clause disclose an inducement to insure set forth in attractive detail. The policy contains no exceptions exempting the insurer from liability if the injury is caused by negligence of the insured, or restricting the liability to accidents occurring only after a point of safety has been reached, and the steps of a car are specifically included in the place where injury insured against may occur. Nothing in the policy gives any hint that words in this clause are used more narrowly than those in any other. The insurer has chosen the terms, and it must be held to their full measure in this clause, as in any other, whether its promise be for more or less. The Decision was reversed.

In Petrofina (UK) Ltd v. Magnaload [23], the tragic background to this action is, of course, well known. On the evening of 6 July 1988 the Piper Alpha oil platform which was located in the North Sea some 110 miles north-east of Aberdeen was destroyed in a massive conflagration. 166 persons lost their lives and many of those who survived suffered varying degrees of injury or trauma. The accident was the worst disaster in the history of the British off-shore oil industry.

Following the accident the families of the deceased and the survivors presented claims against the platform operators Occidental Petroleum (Caledonia) Ltd (OPCAL). As is so often the case these claims were threatened to be brought not in Scotland, but in Texas. Here it was perceived that damages, substantially higher than those likely to be awarded in Scotland, might be awarded.

Negotiations took place throughout the Autumn of 1988 between representatives of the victims and lawyers appointed by OPCAL's Insurers. Eventually an agreement was arrived at whereby OPCAL would pay damages to victims to be assessed on a "mid-Atlantic basis". This represented an approximate mid waypoint between Texas and Scottish levels of damages. These damages were met by OPCAL's liability Insurers subject only to the usual deductibles and a self-insured gap in coverage which became known as "the Oxy gap".

Having paid out very substantial sums in damages OPCAL's Insurers sought to bring in the name of OPCAL (which had, by then, been re-named Elf Caledonia Ltd) a series of subrogated claims against the various contractors whose employees were killed or injured. These claims were based on the terms of certain indemnities contained in the contracts under which the contractors were employed. The contracts were subject to Scottish Law.
At the end of an extremely lengthy trial Lord Caplan arrived at what, to the insurers involved, seemed to be a quite extraordinary conclusion. He held that
"My conclusion ...is that the Insurers of OPCAL and their Participants do not have any rights of subrogation in respect of the indemnities granted by the Contractors. [OPCAL] no longer have any title or interest to sue the Contractors. This means that if Insurers wish to recover their outlay this would have to be by way of a separate action based on contribution."
This finding has, not surprisingly, caused considerable concern amongst many Insurers and their advisors. It is, however, important to clarify from the outset the scope of this finding. In particular it should be understood that Lord Caplan is not saying that in all Scottish cases rights of subrogation do not exist. Nor that in Scotland subrogated claims must be brought in the name of Insurers and not their assured.

Far from it, in fact, Lord Caplan expressly reaffirmed the well known principles of subrogation. These apply just as much to Scottish cases as they do to English ones. Lord Caplan's judgment does however raise an important issue as to the nature of subrogated claims and the circumstances under which they can be brought.

The subrogation issue arose very late in the hearing. The first time it was raised was on the last day of the defendants closing submissions on day 381 of the trial. Rumour has it that one of the Scottish defence counsel thought up the point late in the trial whilst having a well earned soak in his bath. Whether he leapt out of the bath with the cry of “och aye eurekais not known but it is certainly an ingenious argument. In order to understand the issue it is necessary to briefly look at the origins and history of the doctrines of both subrogation and contribution.

The concept of subrogation is a very old. It dates back to Roman law under which a third party, who met a debt for which someone else was liable, was able to be subrogated to the rights of the creditor against the debtor. The principle has been recognised in English law for many centuries. The exact origins and basis of the doctrine has, however, long been the subject of judicial debate. It seems to have been accepted for at least the last 100 years that the doctrine is based on the nature of a contract of indemnity and is not unique to contracts of Insurance. There are however two distinct schools of thought. The first consider that its origins lie in principles of equity. The second consider that the insurers rights of subrogation arise out of terms implied by the operation of law into the contract of insurance. [24]

In the vast majority of cases the question of which school of thought is correct is little more than of academic interest. Whatever the precise background of its origins the rationale and basic principles are well known. The rationale is twofold, both firmly based on the concept of fairness. First, that an assured should not be able both to make a recovery under the terms of his policy from his insurers and keep the proceeds of any recovery that might be made from a wrongdoer whose negligence or breach of contract caused the loss. Secondly, that the wrongdoer should not be relieved of his liability merely because the assured has been prudent enough to take out insurance.

From this desire to ensure fairness the basic principles of subrogation have evolved. In particular the rights of insurers to bring a subrogated claim against a wrongdoer arise on payment by the insurers under the policy. They can only be exercised in the name of the assured. The insurer is subrogated to any claim which the assured is entitled to bring to diminish his loss (provided those rights are connected with the subject matter of the insurance).

There are however limitations. For example, where the assured has caused his own loss, but has a claim under a policy, the insurers cannot seek any set off as against their assured as wrongdoer. Similarly there are practical restrictions on bringing subrogated proceedings in the name of one assured against a negligent co-assured who also has an interest in the subject matter of the insurance. Such claims sometimes (but not always) fail by reason of circuity of action see. Other examples can be found where under the terms of the policy Insurers waive their rights of subrogation against an identified party.

 Richard Aikens QC wrote an excellent article in the May 1997 edition of the 'British Insurance Law Association Journal' in which he explained in some depth the circumstances whereby underwriters are or are not able to bring a subrogated claim in the name of one co-assured against another.

Further, it is important to distinguish a genuine subrogated claim brought in the name of the assured against a wrongdoer from a claim for contribution. Claims for contribution can arise whenever a party has rights of indemnity against more than one person. The most common examples of a claim for contribution happen when assureds have taken out double insurance. The basic principles of double insurance are well known although in practice they can create considerable difficulties. It is perfectly lawful for an assured to insure any subject matter in which he has an insurable interest as many times as he likes. Provided, of course, that the purpose of such double insurance is not fraudulent. This does not mean that the assured can recover more than his loss. In a case where an assured is over-insured by reason of double insurance he will be limited to recovering his actual loss and no more. He has however (subject to express policy terms) the right to choose which of his insurers he wishes to recover from.

If the paying insurer had no remedy against his co-insurers this could lead to an injustice. The courts, however, provide an equitable solution. The insurer is not entitled to make a subrogated claim in the name of his assured under the alternative policies. However, subject to some rather complex rules and the precise terms of the relevant policies, the paying insurer is often entitled to make a claim against his co-insurers for an equitable contribution. This claim has to be distinguished from a subrogated claim as it is brought in the Insurers own name and is not for the full sum insured under the alternative policies.
The difficulties OPCAL's insurers have experienced flow directly from the doctrine of contribution. The subrogated claim being brought by insurers in the name of the Piper Alpha's operators against the contractors was being made pursuant to the terms of the relevant contracts which existed between them. Although the precise terms varied between the various contractors they all contained a series of indemnities a representative example of which reads:
"The contractor shall indemnify, hold harmless and defend [OPCAL] ...against any claim, demand, cause of action, expense or liability (including but not limited to costs of litigation) arising ...by reason of ...Injury to or death of persons employed by... the contractor ...irrespective of any contributory negligence, whether active or passive, of the party to be indemnified, unless such injury or death was caused by the sole negligence or wilful misconduct of the party which would otherwise be indemnified."
The applicability of this clause was hotly contested by the contractors who argued that the deaths and injuries suffered by their employees were caused either by the sole negligence of OPCAL or by their wilful misconduct. Lord Caplan however found that the disaster was not caused by the sole negligence of OPCAL, nor by their wilful misconduct. Importantly, he also held that the loss was not caused by the wrongdoing of any of the contractors who were defendants to the action.

In his judgment Lord Caplan recorded the fact that insurers who paid out in the first instance should either be able to recover their whole outlay through subrogation or a proportionate part of their outlay through contribution. He went on to say that, obviously they could not do both as the remedies were mutually exclusive. Having confirmed that, in respect of a claim against a wrongdoer, subrogation is the appropriate remedy he went on to state:
"If a party enjoys the benefit of two or more indemnities granted to him to cover a particular loss then if that loss emerges he can choose to recover from which of the indemnifiers he chooses. If he recovers his whole loss it is difficult to see upon what principle he retains a right to enforce his indemnity against the non-paying indemnifier. His loss has been satisfied. There is no established principle that I am aware of that would entitle him to enforce his loss from the contractor as there is in a case of a wrongdoer."

Accordingly Lord Caplan held that the only claim to survive was OPCAL's own claim in respect of the uninsured "Oxy gap". There can be no doubt that this decision took insurers by surprise, but on analysis it is not as outrageous as the response of certain insurers might suggest. It is, however, in many respects a troubling case. This is not least because of the fact that this issue did not emerge until very much the eleventh hour of the trial. It would seem that the defence team argued that they were unaware that the claim was being brought by underwriters exercising their rights of subrogation. That this emerged only during the course of the trial and that they responded promptly once they learned of the fact. Frankly this does not sound very credible. Surely it must have been clear to all that OPCAL were insured for this loss.
Whatever the explanation it meant that an important and novel point was dealt with very much as an afterthought. Lord Caplan did not even have the benefit of seeing the policies under which OPCAL were insured so that he could consider any provisions that might of been of relevance. The claimants were unable to put their house in order by bringing a claim in insurers names as an alternative cause of action. It would seem likely that any such claim is now time barred.

An appeal is almost inevitable. However until such time as the Court of Appeal give their views there is one certain lesson for all insurers and their advisors. So all that can be said is that one should be beware of the double indemnity.

In Osman Jamal & Sons Ltd. v. Gopal Purshottam,[25] a company was acting as the commission agents of the defendant 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.

It was held that the Official Liquidator could recover the amount even though the company had not actually paid the vendor. This is where the double indemnity clause came into prominence and it is because of this that the court 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.[26]

The case of Manning v AIG Europe (UK) Ltd.[27]was brought by the liquidator in the aftermaths of the collapse and liquidation of the Save group of petrol retailers. The parent company, Save Group plc, bought petrol and sold it on to a subsidiary company, Save Service Stations Ltd which owned 400 petrol stations. The group also loaned money to the stations, creating substantial inter-company debts.
In 1997, Save provided a bond to Customs & Excise which deferred payment of VAT due on the petrol. This bond was entered into on the group's behalf by a third party, AIG Europe, on the condition that Save would indemnify AIG for various losses in certain circumstances. The deed of indemnity also contained a subordinated debt clause.

When the Save group subsequently entered liquidation AIG argued that the subordinated debt clause gave precedence to their £10 million debt over the £165 million inter-company debts. Given that the entire assets of Save amounted to £54.5 million, the issue of where the debts ranked was of critical importance to AIG, Save and other creditors.

The court confirmed the pre-eminence of the 'pari passu' principle in insolvency, which required that that all debts are to be treated equally, but it added that a creditors' rights could be subordinated to that of another by contract.

However, the group's liquidators argued that the indemnity was not a true subordinated debt but a priorities agreement between certain creditors, such that those not party to the contract should not be prejudiced by it. They argued that the indemnity infringed the 'pari passu' principle by effectively removing a major asset of the group to the detriment of its creditors.

Mr. Justice Lloyd agreed but he said in legal terms “the indemnity does not involve the diversion of an asset of Group, but rather its suppression by subordination.” He continued: “The fact that Group will not be able to collect in its main asset, namely the inter-company debt, does not interfere with the [pari passu] principle”.

Looking at the issues more broadly the judge concluded: “while the [indemnity] is disadvantageous to Group in present circumstances, the disability which it imposes […] as regards the inter-company debt is, as it were, part of the price for the advantage secured […] through obtaining the assistance of AIG in getting the payment of duty deferred.


                                                         Conclusion


It is hereby submitted that the concept of fairness and equality of bargaining cannot be excluded when talking about double indemnity clauses in indemnity contracts. Some basic terms and conditions will always be there, whether they be outlawed by the provisions of rules or statutes. What is needed in the complex world of today is a valid legislation with regard to indemnity clauses and as such some provisions to protect the weaker sections in a bargaining transaction.

 It is now realised that economic equality often does not exist in any real sense and that individual interests have to be made to sub serve those of the community. Hence there have been fundamental changes both in our social outlook and in the policy of the Legislature towards contract and the law today interferes at numerous points with the freedom of the parties to make whatever contract they like. Obviously the draftsman of an indemnity clause needs to approach the matter in much the same way as he would an exemption clause: the wording must be as tight as possible, in other words watertight. Although there is a reasonably strong line of authority for the courts not to approach an indemnity clause in the same light as exemption clauses, the idea that is to be aimed at is tight wording coupled with an indication in the clause that its function is the apportionment of insurance risks or that it is otherwise reasonable.

Therefore acting within the limitations imposed on them by the contractual framework of these transactions, the courts nevertheless endeavored to alleviate the position of the recipient of the document by requiring certain standards of notice in respect of the onerous clauses, and by construing the document wherever possible in his favour. Hope this piece of research will add to the storehouse of knowledge for the future generations.


[1] Smith v. South Wales Switchgear Ltd. [1978] 1 All E.R 18 at 22
[2] Section 4 of the Unfair Contract Terms Act 1977 reads as:
Section 4
(1)     A person dealing as consumer cannot by reference to any contract term be made to indemnify another person (whether a party to the contract or not) in respect of liability that may be incurred by the other for negligence or breach of contract, except in so far as the contract term satisfies the requirement of reasonableness.
(2)     This Section applies whether the liability in question---
(a)     is directly that of the person to be indemnified or is incurred by him vicariously;
(b)     is to the person dealing as consumer or to someone else.
[3] John Adams and Roger Brownsword, Contractual Indemnity Clauses, J.B.L 200 (1982)
[4] AIR 1994 P.& H. 206
[5] Secretary of State v. The Bank of India Ltd. AIR 1938 P.C 191
[6] Gajanan Moreshwar v.  Moreshwar Madan AIR 1942 Bom 302
[7] Prafulla Kumar v. Gopee Ballabh Sen I.L.R (1944) 2 Cal 318
[8] Ramalinga v. Unnamolai AIR 1938 Mad 791
[9] Abdul Majeed v. Abdul Rashid, AIR 1936 All 598
[10] AIR 1942 Bom 302 at 304
[11]  John N. Adams and Roger Brownsword, Double Indemnity—Contractual Indemnity Clauses Revisited, J.B. L 146 (1988) at 153
[12] 53 Cal.App.4th 500 (1997) cited from http://www.constructionweblinks.com/Resources/Industry_Reports__Newsletters/August_21_2000/indemnity_clauses.htm <Last Visited on 24-08-06>
[13] 73 Cal.App.4th 1265 (1999) cited from http://www.constructionweblinks.com/Resources/Industry_Reports__Newsletters/August_21_2000/indemnity_clauses.htm <Last Visited on 24-08-06>
[14] 78 Cal.App.4th 992 (2000) cited from http://www.constructionweblinks.com/Resources/Industry_Reports__Newsletters/August_21_2000/indemnity_clauses.htm <Last Visited on 24-08-06>
[15] http://www.legalmart.com.au/topics/business/it_ecom/true_story_1.asp <Last visited on 6-09-06>
[16] http://www.nmmlaw.com/articles/contr_indem.html <last visited on 10-09-06>
[17] 292 U.S. 80 (1934) cited from http://caselaw.lp.findlaw.com/scripts/getcase.pl?court=us&vol=292&invol=80 <Last Visited on 03-09-06>
[18] Ibid at 80, 82
[19] Ibid at 83
[20] Id at 81
[21] Id at 85
[22] Id at 86
[23] [1994] QB 127
[24] http://www.elbornes.com/articles/piperalp.htm < Last Visited on 29-08-06>
[25] 1928 ILR 56 Cal 262
[26] Followed in Prafulla Kumar v. Gopi Ballabh AIR 1964 Cal 159
[27] [2004] EWHC Ch 1760 cited from http://lawzone.thelawyer.com/cgi-bin/item.cgi?id=111776&d=205&h=226&f=209 < Last visited on 28-08-06>

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