Indemnity Bond contradicts the Contract Act

Section 124 of the Indian Contract Act deals with Indemnity Bonds. And Sections 2,15,16 & 65 of the Act deals with Contract, Coercion, Undue Influence and redressal against victimization of a party against the other who acted contravening the provisions of this act. And Indian Contracts Act 1872 is the Law Governing the Contractual Obligations between various parties in the territory of Union of India. This is a Central Government Act enacted in 1872 by Government of India. And Section 124 defines Indemnity Bond.

(We all know that recently Engineer Valuers lost their case on the issue of Indemnity Bond in Bombay High Court. But that the Court’s verdict is not enforceable in other States based on Jurisdictional principles. One High Court Judgment is not binding on other High Courts. But SBI may try to file the Bombay High Court Judgment in other courts to influence the future judgments in the High Courts where Stay orders are in force. And try to vacate the Stay orders. So we will have the opportunity to contest the Bombay High Court order in other courts indirectly.

And let us know that in the Bombay high court the petitioners have stressed more on 70 years age issue rather than indemnity Bond. And also it is unfortunate that while contesting Indemnity Bond necessary Indian Contract Act provisions are not Invoked. So obviously the case was bound to fail. To win a case we have to present our case with the support of relevant clauses of the Acts available to us. But the counsel at Bombay did not advise petitioners well. Let it be. Now let us know what is what of the Indian contract act vis a vis Indemnity Bond)

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Here in this page we are going to learn about relevant clauses of Indian Contracts Act and how they are useful for us to get out of the mess of Indemnity Bond. An agreement reached by and between two or more parties for legal purposed is called a Contract. But every agreement need not be enforceable under law.

Contracts can be Void and Voidable. And burden of proof that the so and so Contract is Valid lies with the Promisee not the Promisor. Let us know about these legal intricacies fully.

Some strange things exist in the society. All deals made between two or more people cannot be enforced unless it carries a monetary benefit to one or more of the parties. For example, if a person gives a hand loan to his friend who promised him that he would return the money in one or two months. But, let us say that he did not return the money even after 6 months. He cannot sue his friend for return of his money in a court of law. Because of two reasons, one there is no formal agreement on paper. In another case a promissory note was executed but without noting interest. Then also the P note is not enforceable in a court of law. Because there is no monetary consideration to the lender.

Actually the person who took the money must return the money in time as per social obligation. But Courts cannot enforce that social obligation because it doesn’t fulfill the legal condition of monetary consideration.

Read related issues by clicking on the following links:

By this way Indemnity Bond or any conditions imposed on Engineer Valuers cannot be enforced if they are not in conformity with the Rules of the Land, especially the Contracts Act and the provisions of Constitution of India. In this article we will deal with the Contract Act provisions only.


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Constitutional aspects are discussed in another article which can be viewed by clicking on the following link pl:

General perception regarding the authorities is that they would act in “Good Faith”, based on the principle that “Kind Does No Wrong”. But now Kings have gone. Now the Country is run by common people. Normal human being will have his own prejudices and self interests, Jalousies. He should not be allowed to act on his whims and fancies. And also he will be subjected to external influences prompting him to act against his personal conscience also. So rules devised and promulgated by the authorities need not be in good faith and need not be flawless. That is why our forefathers have devised certain safeguards like Contracts Act, Fundamental rights in Constitution of India etc. and Courts are placed to check the arbitrary actions if any by the powers that be. We have to remember that Telangana High Court termed Indemnity Bond as Draconian.

And as a matter of fact let us know that “all agreements are not contracts but all contracts are agreements”. So all agreement are not contracts unless they fulfill certain conditions laid down in the Indian contracts act in addition to the provisions of the Constitution of India. So let us verify if the Indemnity Bond stands against the scrutiny of the provisions of the Contracts Act or not.

And Section 124 of the Contract Act defines Indemnity Bond. Accordingly there must be three parties for Indemnity Bond to be Valid. AS per the recitals of the Indemnity Bond of SBI prescribed to be signed by the Engineer valuers there are only two parties. So the Letter cannot be enforced as Indemnity bond legally. And also the indemnity bond is very vague. It does not mention Market value in it. Valuation report contains Market value of the Property. But Market value issue is not mentioned in IB. May be because there are court Judgments stating that engineer cannot be prosecuted if there are small variation in the Market value. Because Market values fluctuate with time and market forces are beyond the control of any one. And,

Section 2 of The Indian Contract Act, 1872

(PL know that the following clauses are edited for better understanding without confusion. Interested my read the Act in relevant books or google it in the Internet.)

2. In this Act the following words and expressions are used in the following senses, unless a contrary intention appears from the context:—”

(a)   proposal by the promisee,

(b)  acceptance of the proposal by the promisor,

(c) The person making the proposal is called the “promisor”, and the person accepting the proposal is called the “promisee”,

(d) Performance of the contract for a consideration

(e) Every promise and every set of promises, forming the consideration for each other, is an agreement,

(f) Promises which form the consideration or part of the consideration for each other, are called reciprocal promises,

( BUT )

(g) An agreement which is not enforceable by law is said to be void,

(h) An agreement enforceable by law is a contract,

(i) An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract,

(j) A contract which ceases to be enforceable by law becomes void when it ceases to be enforceable.

Section 2(h) of the Indian Contract Act

Section 2(h) of the Indian Contract Act defines contract as “an agreement enforceable by law.” There is a saying that “all agreements are not contracts but all contracts are agreements.” Section 10 validates the statement.

Section 10 of the Indian Contract Act

Section 10 reads like this, “All agreements are contracts if they are made by free consent of parties who are competent to contract for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.” Hence, the following  essential conditions are required for an agreement to qualify as a contract,

a. Free consent of the parties

b. Parties must be competent to contract

c. Lawful consideration

d. Lawful object

e. Not hereby expressly declared to be void.

In our case Engineer Valuers are not competent to stand Guarantee for a loan disbursed by a Bank. Because a valuer issued a Valuation Certificate for a fee of about Rs. 2000/- to 5000/- in general. And loans may be to the extent of Rs. 10.00 Lakh to One Crore. Can a person who works for the Bank for a fee of Rs. 2000/- indemnify the Bank for Rs. One Crore? So an engineer valuer is not competent to stand as indemnifier to the Bank and pay the amounts which would have fallen due by a loanee.  

And consent is said to be ‘free” when it is not caused by coercion, undue influence, fraud, misrepresentation and mistake.  

And absence of condition (a) i.e. free consent makes the contract voidable. Free consent is absent in the case of Engineer Valuers signing Indemnity Bond. Because it is imposed at the time of renewal of their licenses. There is inherent threat in the process as the engineer valuer would lose his profession if not signing the Indemnity Bond. This act and process falls under the category of obtaining the signatures with undue influence and coercion.


Coercion, Section 15 of the Indian Contract Act

 “Coercion is the committing, or threatening to commit, any fact forbidden by the Indian Penal Code, or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.”

Coercion is said to be caused when consent is obtained by pressure exerted by either of the following ways:-

1. Committing or threatening to commit any act forbidden by the Indian Penal Code; or,

2. unlawful detaining or threatening to detain any property.

Here in the case of Engineer Valuers the threat of discontinuance of the Empanelment hanging over the heads of the Engineer Valuers is nothing but coercion which attracts the provisions of Section 15 of the Contract Act to make it invalid and void. 

Unlawful detaining of property –

Section 15 also states that coercion can also be caused be unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.  

The section also states that the act causing coercion should not necessarily be against the party to the contract. If the act is to the prejudice of any person whatever, and with the intention of causing any person to enter into an agreement, it is enough to cause coercion.

For example, in Ranganayakamma v. Alwar Setti case, a widow was forced to adopt a child by the relatives. If she didn’t do so the relatives would not allow the dead body of the widow’s husband to be taken out of home until the adoption was made. This amounted to coercion.

Here in the case of Engineer Valuers the threat of discontinuance of the Empanelment as Valuers acts as Coercive force driving the Valuers to agree for signing the Indemnity Bond. It is apparent that the IB is enforced by threatening to dis-empanel the Valuers in case they desist from Signing the Indemnity Bond. 

Undue Influence, Section 16 of the Indian Contracts act.

 (1) A contract is said to be induced by “undue influence” where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other.

(2) In particular and without prejudice to the generality of the foregoing principle, a person is deemed to be in a position to dominate the will of another-

(a) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other; or

(b) where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness, or mental or bodily distress.

(3) Where a person who is in a position to dominate the will of another, enters into a contract with him, and the transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving that such contract was not induced by undue influence shall lie upon the person in a position to dominate the will of the other.

From the aforementioned definition, the following are the necessary ingredients of undue influence –

  • The relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other;
  • Such a person uses his dominant position to obtain an unfair advantage over the other

In the following cases a person is deemed to be in a position to dominate will of the other party –

1.Where he holds a real or apparent authority over the other –

2. Where he is in a fiduciary relation to the other party-

Examples of fiduciary relationships:

  • Doctor and patient
  • Parent and child / Guardian and ward/ Husband and wife
  • Master and servant
  • Creditor and debtor

Here in our case Bank and Engineer valuer are having Master and Servant relationship. Engineer Valuer is dependent on the Bank for work and livelihood and also he is dependent on continuity of his profession on which he is dependent for his livelihood.

In Merci Celine D’Souza v. Renie Fernandez, an infirm person, totally dependent on the defendants for his existence, gifted his property to them. It was discovered by the court that the defendants tried to obtain an undue advantage and the gift deed was not attested by the two witnesses as the law requires it to be.

Further, sub-section (3) of Section 16 states that in case of a fiduciary relationship, if a person in a dominant position gains an undue advantage in a transaction, in that case the burden of proof will lie on him and not on the aggrieved. He has to prove that the transaction was carried out without undue influence. The rule regarding burden of proof is mentioned under Section 111 of the Indian Evidence Act, which reads as under:

“Where there is a question as to the good faith of a transaction between parties, one of whom stands to the other in a position of active confidence, the burden of proving the good faith of the transaction is on the party who is in a position of active confidence.” And,

Section 65 of The Indian Contract Act, 1872

reads like this, Obligation of person who has received advantage under void agreement, or contract that becomes void.—When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.

So SBI is obtaining our signatures on Indemnity Bond by threatening us of dis-empanelment in case not doing so which invites the provisions of Coercion clause 15 of IC Act. Hence the IB is illegal at the outset.

And we are Engineer Valuers who have been serving the Bank by furnishing Valuation Reports on the Properties mortgaged with the Bank since several years ranging from 5 to 25 years for a prescribed fee. We are service people and do not draw any salary except the prescribed fee for our service. And we have been making a living by doing this job and dependent on this profession. Hence, there is a fiduciary relationship between Valuers and the Bank and it is similar to Master and Servant relation between a Valuer and the Bank.

In the Indemnity Bond Bank has typed at the end of the letter and above the signature line where the engineer is supposed to make his signature it is written “YOURS FAITHFULLY”. This itself is evident that Engineer Valuer is dependent on the faithfulness of the Banks. This establishes the fact that the relation between Engineer and Bank is fiduciary. And SBI is taking undue advantage of this fiduciary relationship and exerting undue influence on Valuers to execute the Indemnity Bond.

Based on both the counts the IB is illegal and should be dispensed with by the Bank. And it is evident that the Bank continues to insist upon the IB to be signed by Valuers it becomes responsible for restoration of status quo ante for the Valuers and also liable to pay compensations for the losses inflicted upon Valuers if any under Section 65 of IC act.  

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