Indemnity in times of COVID

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Introduction

In December 2019, there was an outbreak of a life-threatening virus in China. It was first identified in Wuhan, China and named as coronavirus. At the beginning of the next year, this virus spread across the entire world resulting in a pandemic that continues to exist till now. After killing many in its wake, the need for an effective vaccine was soon realized by medical experts and the efforts for the same were made by scientists all over the world. Today, many vaccines are available against coronavirus. The vaccine manufacturers are at risk of getting sued if the vaccine causes side effects. Therefore, they have asked the government to grant them indemnity against such risks. This article analyses the outcome of granting or not granting indemnity to the vaccine manufacturers.

The Indemnity under English Law

The contract of indemnity has been defined as “a duty to make good any loss damage or liability incurred by another”, or “the right of an injured party to claim reimbursement for its loss, damage or liability from a person who has such duty”[1].

The meaning and effect of a contract of indemnity is well explained through the English case of Adamson v Jarvis,[2] the facts of which are stated below-

The plaintiff, an auctioneer sold certain cattle on the instructions of the defendant. Subsequently, it was discovered that the cattle did not belong to the defendant but to the third person, who made the auctioneer liable and the auctioneer, in turn, sued the defendant for indemnity for the loss suffered by him due to working on the instructions of the defendant.

The court held that the plaintiff had acted on the request of the defendant had a right to assume that in case of any loss suffered by him, he would be indemnified.

The Indemnity under English Law is a promise to reimburse for losses and that promise can be either express or implied depending on the given situation. An instance of implied indemnity is in the case of Dugdale v Lovering[3]. In the case, the plaintiffs were in possession of some trucks which were claimed by the defendants and also one K.P. Co. The defendants demanded delivery upon which the plaintiffs asked for indemnity bond but obtained no response. Even so, they delivered the trucks to the defendants.

Subsequently, K.P. Co. sued the plaintiffs for conversion of their property and the plaintiffs were allowed to recover indemnity from the defendant on an implied indemnity.

When compared to the Indian law, the English law on indemnity is much wider as it includes a promise to indemnify against loss arising from accidents. These accidents include accidents caused by fire, perils of the sea, etc. All insurance contracts are indemnity contracts except the life insurance contracts.[4]

Indian Law on Indemnity

The concept of Indemnity as defined under section 124 of the Indian Contract Act, 1872 states “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, is called a “contract of indemnity”.

The parties involved in the said contract are called Indemnifier and Indemnity holder. The party which makes the promise is called the Indemnifier and the party which receives the said promise is made is called ‘Indemnity-holder’ or ‘indemnified’.

Thus, by way of Section 124, the scope of indemnity contract is restricted to the cases where there is a promise to indemnify against loss, caused –

  1. By the promisor himself
  2. By any other person

This definition does not include within its purview cases of loss arising from accidents like fire or perils of the sea.[5] Furthermore, a judicial pronouncement laid down that the loss in an indemnity should be caused by some human agency[6]. An indemnity secures the party involved from incurring any loss in the future due to a defect in goods or services. The indemnity is of two kinds-

  1. Express Indemnity –It refers to an agreement between the parties to indemnify against the loss caused to a party by the other party or a third person. This agreement can be either written or spoken.
  2. Implied Indemnity – It is when there exists no outright agreement between the parties but by way of the acts of the parties, it is inferred that there exists a promise to indemnify. Eg- A note with forged endorsement was given to a bank that received it for value and in good faith. The bank dispatched it to the Public Debt Office for renewal in their name. The actual owner of the note recovered compensation from the State and the state was allowed to recover it from the bank on an implied promise of indemnity.[7]

Almost all insurances except life and personal accident insurance are contracts of indemnity. The insurer’s promise to indemnify is an absolute one meaning thereby, a suit can be filed immediately upon failure of performance irrespective of actual loss.

Special Cases on Implied Indemnity

Implied indemnity has its essence in many other provisions of the Indian Contract Act, 1872. These include Section 69, section 145 and Section 222.

  • Section 69 – “A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other.”[8]
  • Section 145 – “In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but, no sums which he has paid wrongfully.”[9]
  • Section 222 – “The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him”[10]

Damages on Breach

The contract of Indemnity provides an assurance to the indemnity-holder against the loss suffered. There arises a claim for the damages upon breach of the contract. These damages which an indemnity holder has are well stated under section 125 of the Indian Contract Act, 1872 that states “The promise 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 promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.”[11]

Commencement of Liability

The original English rule, the liability of the indemnifier to pay or the right of the indemnity holder to recover indemnity commences when the indemnity-holder has actually suffered a loss following the law maxim: “you must be damnified before you can claim to be indemnified”. However, with time the law has changed.

According to the equity principle expressed by Kennedy L.J. in the case of Liverpool Mortgage Insurance Co.[12] stated, “to indemnify does not merely mean to reimburse in respect of moneys paid, but (in accordance with its derivation) to save from loss in respect of the liability against which the indemnity has been given…if it be held that payment is a condition precedent to recovery, the contract may be of little value to the person to be indemnified, who may be unable to meet the claim in the first instance”

Furthermore, the principle expounded by Buckley L.J., in Richardson, re[13], states, “Indemnity is not necessarily given by repayment after payment. Indemnity requires that the party to be indemnified should never be called upon to pay…”

Following the same principle, many courts have given judgments favoring the view. One such judgment is in Osmal Jamal & Sons Ltd v Gopal Purshttam[14]. The facts of the case state, 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 occupy. The company went on to 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. 

Vaccines in India

The vaccines that have been granted approval for emergency use in India are Covishield, Covaxin, Russia’s Sputnik V and Moderna’s, RNA by the Drugs Controller General of India. Out of these, Covishield, Covaxin and Sputnik V are currently available in the market without an indemnity contract with the government. The Serum Institute of India’s Covishield and Bharat Biotech’s Covaxin have not been granted indemnity as the Purchase order signed between the government of India and the Indian manufacturers. The said order states, “Company shall be liable for all adversities as per CDSCO/Drugs and Cosmetics Act/DCGI policy/approval”.[15] Although, US’ Moderna and Pfizer are still in talks with the government for an indemnity contract before entering the Indian market.[16]

While talking about the Indemnity clause on vaccines, it is important to understand why the vaccine makers are asking for it? It is simply because they want to waive off any liability that may arise in the future due to the vaccine’s possible side effects.  Once, the vaccine manufacturers have an indemnity they won’t be required to pay off for the damages in case they are sued. Hence, they will be secured against the losses.

Indemnity for Vaccines

The vaccination drive in India is a bit slower than expected. One of the reasons associated with the slow pace of vaccination is the shortage of vaccines in India. Due to this, the government is willing to buy vaccines from foreign manufacturers as well. The availability of Russia’s Sputnik V is an outcome of the government’s move. But aside from this vaccine the government is trying to procure contract with other manufacturers as well. The Indian government has recently decided to grant emergency use to vaccines which have already been approved by the US, the UK, Japan or the World Health Organization. These also include manufacturers are US based Pfizer and Moderna.

The US government has already granted indemnity to the COVID-19 vaccines manufacturers in USA, namely Pfizer and Moderna and they cannot be sued for compensation in case of any side effects.[17] Following this, the vaccine manufacturers therefore are asking for the same from the Government of India. There is no consensus yet regarding the indemnity clause.

Whether to grant indemnity or not

In order to ascertain whether the indemnity should be granted or not, it is better to first analyze the outcome of granting or not granting indemnity. If the indemnity is granted then surely the problem shortage of vaccines can easily be curbed. This will improve the situation, making the pace of the vaccination drive faster. This will definitely benefit the people of the country as there will be less chances for them to get contracted with coronavirus. This also does not disrupt the work flow in the country and the overall GDP of the country will not be required.

The market for vaccines is supply driven market. This simply means that the supply is limited in number but the demand is more. Therefore, if the vaccine manufacturers are asking for indemnity and if the government refuses, they can move on to another buyer. In order to get the supply, it would be better to agree to the demand of the vaccine manufacturers.

If the indemnity is not granted, then the people who encounter any health complications after taking the vaccine will be able to file suit for damages. Giving the pandemic situation, the vaccines have been given usage license on emergency basis. Therefore, there is always a risk of encountering side effects. As such, not granting indemnity provides a sense of security to the people.

Interesting, if the indemnity is not granted then also there is a way in which the vaccine manufacturer can sell vaccine to a private player and that player would bear the damages. In this set up the manufacturer would get the desired indemnity but it will increase the overall cost of the vaccine which may not be favorable for the public. The Indian government could purchase these vaccines from the vaccine manufacturer after granting them indemnity, and sell them on to these private entities. These entities could in turn be required to undertake all liability for injury or death caused by the vaccine.

Conclusion

The coronavirus pandemic has brought a lot of hardships in all walks of life. The need to force lock down in the country was felt and subsequently, the rules and regulations were imposed. Those who failed to comply with the rules were given punishment and penalties were imposed on repeated offenders. The government issued notification regulating nearly everything and laws were formed timely to facilitate the situation. The government has been working to acquire vaccines from foreign manufacturers. Currently, there are talks being held regarding the indemnity clause in the contract. Due to the negotiations on the clause there has been slight delay to come to a conclusion regarding the contract. Let’s see if the contract is formed between the Govt of India and Pfizer and Moderna in respect to the supply of vaccines in Indian market.


[1] Brian A. Garner(ed.),Black’s Law Dictionary (Thomson Reuters,11th edition)

[2]  (1827) 4 Bing 66: 29 RR 503

[3] (1875) LR 10 CP 196: 44 LJ CP 157:32 LT 155

[4] Avtar Singh, Contract & Specific Relief  592(EBC, 12TH edn., 2018)

[5] Avtar Singh, Contract & Specific Relief  593(EBC, 12TH edn., 2018)

[6]Gajanan MoreshwarParelkar v Moreshwar Madan Mantri, AIR 1942 Bom 302: (1943) 203 IC 261

[7] Secy of State for India v Bank of India Ltd., AIR 1938 PC 191

[8] The Indian Contrct Act, 1875, Section 69, available at https://www.indiacode.nic.in/show-data?actid=AC_CEN_3_20_00035_187209_1523268996428&sectionId=38673&sectionno=69&orderno=70 (Visited on July 18, 2021)

[9] The Indian Contrct Act, 1875, Section 145, available at https://www.indiacode.nic.in/show-data?actid=AC_CEN_3_20_00035_187209_1523268996428&sectionId=38701&sectionno=145&orderno=146 (Visited on July 18, 2021)

[10] The Indian Contrct Act, 1875, Section 222, available at https://www.indiacode.nic.in/show-data?actid=AC_CEN_3_20_00035_187209_1523268996428&sectionId=38779&sectionno=222&orderno=224 (Visited on July 18, 2021)

[11] The Indian Contrct Act, 1875, Section 125, available at https://www.indiacode.nic.in/show-data?actid=AC_CEN_3_20_00035_187209_1523268996428&sectionId=38681&sectionno=125&orderno=126 (Visited on July 18, 2021)

[12] (1914) 2 Ch 617,638

[13] (1911) 2 KB 705 (CA)

[14] ILR (1929) 56 Cal 262

[15] Pfizer, Moderna may want indemnity cover before launching vaccine in India, available at https://economictimes.indiatimes.com/industry/healthcare/biotech/pharmaceuticals/pfizer-moderna-may-want-indemnity-cover-before-launching-vax-in-india/articleshow/82091162.cms?from

[16] Talks with vaccine makers Moderna and Pfizer stuck on Indemnity clause, available at https://www.indiatoday.in/coronavirus-outbreak/story/pfizer-moderna-covid-corona-vaccine-india-indemnity-clause-1827657-2021-07-13 (Visited on July 19,2020)

[17] You can’t sue Pfizer or Moderna if you have severe Covid vaccine side effects. The government likely won’t compensate you for damages either, available athttps://www.cnbc.com/2020/12/16/covid-vaccine-side-effects-compensation-lawsuit.html (Visited on July 20, 2021)

Author: Aayushi Singh, Symbiosis Law School, NOIDA

Editor: Kanishka VaishSenior Editor, LexLife India.

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