Indian Contract Act, as defined in section 124 states that “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 section states that when a person enters into a contract with another party where he
promises to save the first party form any losses that would arise from the contract of the
promisor or from any other party.

This type of contract includes 3 parties; first is the promisor, second is the promisee and
the last one is indemnifier. Now, indemnifier would choose to indemnify the promisor from
any losses which he incurs in the transaction with the promisee or from any other person.

 Need for indemnity in commercial contracts

The indemnity clause is one of the most common clauses used in contractual agreements. The
basic idea of importing the concept of indemnity in the contractual relationships is to limit the
loss incurred by one of the party and shift it to another party with the consent of both the
parties. The main aim is to protect the indemnity holder form the lawsuit filed against him by
the third party and thus resolving him from any legal claims that can be raised against him.

One of the important aspects of interpreting the indemnity clause is that the scope of the
indemnity agreement has to be considered within the context of the agreement as a whole.
The interpretation of the meaning and language of the clause should be done taken into
account contextualism of the agreement in its entirety.

Usually, the indemnity contracts are drafted in a wide manner so that it could include the
third party liabilities because if whose conduct, negligence loss has been incurred by the
indemnity holder there are a multitude of the reason for incorporating indemnity clause in the
contracts which include the following:-

1. Risk management
2. Unforeseeable loss
3. Causation
4. Extent of loss
 Right of indemnity holder
Right to indemnity holder has been stated in section 125 which states that “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 promisee to make in the absence of any contract of indemnity, or if
the promisor authorized him to compromise the suit.”

This section states that what type of losses shall, the indemnifier shall be bound to indemnify
to the indemnity-holder. It states that he is bound to indemnify all the damages indemnity
holder has been compelled to pay by the court, all the costs incurred by him in defending or
bringing the suits in the court and all the sums which he has to pay under the terms of
compromise of such suit.

 Commencement of liability
Now the important question arises when is the liability of indemnifier commences, i.e. when
shall the indemnifier liable to pay, when the indemnity holder has actually suffered the loss
and he had paid off the claim, then indemnifier would satisfy his liability or when indemnity
holder has suffered the loss then the indemnifier pay of his liability?

So in English law, it’s the notion that “you must be damnified before you claim to be
indemnified” which essentially means is that one must suffer injury, (injury in sense, by
paying the all the damages, cost & sums) then one can claim indemnity from the indemnifier.

But the notion has been changed in the of Gajanan Moreshwar v Moreshwar Madan[5],
where it was held that it indemnity would not be of much use if the indemnity holder couldn’t
enforce his indemnity until and unless he has actually paid the loss amount.
It may happen that indemnity holder doesn’t have the required amount or in a position to pay
and if the indemnity couldn’t be enforced at that point of time then the whole point of having
indemnity contract gets vitiated.

III. Insurance contract

All the insurances contracts are indemnity contract except for the life insurance and personal
accident insurance. The insurer’s promise to indemnify is an absolute one and suit can be file
if the insurer failed to indemnify irrespective of the fact whether an actual loss has been
incurred or not.[6]
The basic premise is that insurance contract is undertaken so that if any untoward incident
happens then policyholder doesn’t have to pay as his losses are covered by the insurer. Like
in case of fire insurance, before policyholder had to pay for his loses; the insurer has the duty
to pay all the claims after duly assessing the damage of the property.

The main aim of the insurance contract is to put the policyholder back to place before such an
incident took place. Now before insurer indemnifies the policyholder, certain conditions have
to be proved, which are as follows:-

a. Compensation amount
It’s the settled principle and contract is drafted in such a way to ensure that amount of
compensation that can be claimed in the event of such loss takes place shall be equal to the
amount of the insurance taken by the policyholder.
For example, if the policyholder takes the insurance of 10 Lakh and the damage is of 20 lakhs
he shall have the claim from the insurer only up to 10 lakhs only and he has to bear for the
rest of the amount.

b. Excess amount
This one is in direct relation with the previous one, as per which of the policyholder receives
the amount in excess of the damage then the insurer has the right to claim the rest of the
amount. Like if A has suffered the loss of 5 Lakh and he gets the claim of 10 Lakhs then the
insurer has the right to reclaim the rest of the amount.

The idea behind this principle is that policyholder can’t have an income out of the insurance
contract. This was held in the case of Castellain v Preston[7], where Brett LJ held that
“Every contract of Marine or Fire insurance is a contract of indemnity, and of indemnity
only, the meaning at which is that the assured in case of a loss is to receive of full indemnity
but is never to receive more.
Every rule of insurance law is adopted in order to carry out this fundamental rule, and if any
proposition is bought forward, the effect of which is opposed to this fundamental rule, it will
fond to be wrong.”

c. Exclusionary principle
As already discussed this principle of indemnity doesn’t apply to the insurance and personal
accident claims as the idea behind it is that section 124 of the Act basically states that
indemnifier is bound to indemnify the indemnity holder if he suffers any losses due to the
promisor or due to any act of the third person.

It doesn’t cover the promise to indemnify the loss not arising out of the human agency. So
fire or life insurance contract doesn’t come under the ambit of section 124, though they are
valid and shall come under the contingent contract. But the motor or marine insurance
contracts are considered valid indemnity contract under section 124 of the Act provided the
loss arise out of the act of human agency.

In the case of United India Insurance Co v Aman Singh[8], certain goods where to be
transported from one to another and because of which the goods were stored in the godown.
When the goods wherein the godown, it caught fire and the entire stock was destroyed. So the
plaintiff asked the insurer to indemnify the loss incurred by him.
It was held that since the destroying of the goods happened not because of any human agency
but because of natural event remedy was not available under section 124 of the Act, but the
plaintiff can claim compensation through other statues.

Law Commission of India has also stated about the discrepancy between the indemnity
principle and insurance contract in its 13th Report[9] and stated that, its high time that the
understanding of the indemnity must be expanded so that insurance contract can also be
included in its aspect as both deals with the same issue, indemnifying the indemnity-holder. It
was suggested to include those cases of insurance which occurred not because of the human
agency but because of the natural event.
An exclusion clause is a term that is inserted in a contract or other document with the purpose
of excluding or limiting liability which would arise unless the exclusion clause was:
(i) valid – as will be discussed below, there are a number of factors the court takes into
account when called on to consider the validity of an exclusion clause, and
(ii) applicable – the party intending to rely on the exclusion clause may also have to prove
that the particular exclusion clause in question is applicable to the nature of liability the party
is seeking to avoid. For example, the party relying on the clause may allege that the clause
exempts the party from liability in breach of contract and negligence whereas the court may
decide that the clause only affects one of those two liabilities.
P.S. Atiyah1 observed that:
An exemption clause may take many forms, but all such clauses have one thing in common in
that they exempt a
party from liability which he would have borne had it not been for the clause.
G.H.L. Fridman2 notes:
Such a clause excludes or modifies contractual obligations. It affects the nature and scope of
a party's
performance.
It has been stated in Halsbury's Laws of England3 that:
It is common, particularly in standard form contracts, for one or more parties to seek to
exclude or limit liability
for breach of contract or misrepresentation which would otherwise be imposed upon him.

An exemption clause is a contractual term by which one party attempts to cut down either the
scope of his contractual duties or regulate the other parties right to damages or other possible
remedies for breach of contract. It means that the exemption clause is a phrase in an
agreement that give a limitation towards contracting parties. The exemption clause generally
is called as exclusion clauses as well.
1
P. S. Atiyah, An Introduction to the Law of Contract, 5th edn, Clarendon Press (Oxford), 1995, at p. 196
2
G.H.L. Fridman, The Law of Contract in Canada, 3rd edn, Carswell Thomson Professional Publishing, 1994, at
p. 571
3
Lord Mackay of Clashfern, Halsbury's Law of England, 4th edn Reissue, vol. 9(1), Butterworths (London),
1998, at p. 552, para. 797.
There are three types of exemption clauses which are incorporation by signature,
incorporation by notice and incorporation by previous course of dealings. In incorporation by
signature, it includes a clause written on a document that all the parties have signed. Besides
that, in incorporation by notice, it includes an exclusion clause if the person relying on a
contract took a rational measure to draw notice in order to attract other parties’ attention. In
incorporation by previous course of dealings, it is practically use words. It means that, this
incorporation involve a course of dealings between the parties were depends on the facts
incorporated by a contract.
The interpretation of exemption clause also includes a Contra Preferendum Rule (CPR),
which means if the exemption clause is not clearly worded, the courts will appeal to CPR to
the party relying on the exemption clause to explain on the not clearly worded exemption
clause failing which the party relying must accept the entire responsibility.
Based on the case of study, the situation of exemption clause can be seen in a notice board
that stated ‘The management shall not be liable for any damage to the car parked in the car
park’. John who own a car in the parking lots was very disbelief that his car being knocked
by some unknown vehicle which had costs his car damaged during the time he left his car at
the time of appointment. John has approach the car park attendant for explanation but the car
park attendant told John to read the car park ticket as well as the notice boards. John argued
that the exclusion clause is not clearly worded which applied the Contra Preferendum Rule
(CPR). He want to sue the car park due to the exclusion clause is not clearly worded.

EFFECT OF EXEMPTION CLAUSES IN ATTEMPTING TO EXCLUDE

CONTRACTUAL LIABILITY
Exemption clause excludes liability
Sometimes, a party to a contract will include exemption clause to exclude or limit his liability
in the event of a breach of contract. For example, the management of a company may include
exemption clause such as “ The management shall not be liable for any death or personal
injuries caused by any act, negligence, careless, reckless of omission by the employee,
servants, agents whomsoever” in a contract.
Exemption clause doesn’t give a freedom of contract
This is because there is a term or condition attached to the contract which restricts the rights
of the parties to the contract. Exemption clause allow the benefit to the buyer to be limited or
even completely excluded, by agreement between the parties. In practice, this allow an
economically stronger seller to get an economically weaker buyer to agree to a term or terms
implied for the benefit of the buyer.
Exemption clause doesn’t give inequality of bargain
This might be a problem if one party is, for example, a big company, and the other is an
ordinary customer. The parties have unequal bargaining power, so the stronger party might be
able to take advantage of the weaker party.
Exemption clause only protects the defendants
Sometimes it is unfair as defendants companies only rely on exemption clauses to limit its
liability in the event of something going wrong. For example when a party to a contract
wishes to limit their liability in the event that they breach the contract they will usually
include an exclusion clause, limiting the amount that the other side can claimed to a specified
total. They operate for the benefit of one party to an agreement, usually the defendant even
though the incident happened due to the negligence of the defendant.
Exemption clause evades liability on contract and tort (civil wrong)
CASE LAW
Thornton v Shoe Lane Parking (1971)4
This case (Thornton v Shoe Lane Parking) demonstrates that for an Exclusion clause to be
incorporated into a contract, other than by explicit agreement, the affected party must be
given adequate warning. Mr Thornton parked his car in a commercial car park. The car park
did display a sign to the effect that cars were parked at the owner’s risk. As it happens it was
Mr Thornton that was injured, not the car. The car park’s terms of business were printed on
the back of the ticket issued from the ticket dispenser but, it was ruled, this did not form part
of the contract as the contract was concluded before the ticket was issued. The notice on the
building was deemed insufficiently precise to allow a disclaimer of liability for injury. This
case was one of many in which Lord Justice ` I-hate-exclusion-clauses’ Denning used the
rules of incorporation to defeat exclusion clauses that mitigated against consumers. These
days such technical manoeuvres would be unncessary, as a contract term disclaiming liability
for personal injury would be deemed void under the UnfairContractTermsAct1977.
Olley v Marlborough Court (1949)5
This case (Olley v Marlborough Court) demonstrates how an Exclusion clause that is not
explicitly written into a contract cannot be upheld unless the party it acts against had
adequate notice.
Mrs Olley had her fur coat stolen from a locked root in the Marlborough Court Hotel. The
Hotel tried to defend the ensuing claim for damages on the basis that there were notices in the
bedrooms disclaiming liability for thefts. The court ruled that the contract was formed at the
reception desk, and Mrs Olley could not have know the Hotel’s policy. Therefore the
4
[1971] 1 All ER 686
5
[1949] 1KB 532
exclusion clause wass struck out. Of course, if it could have been shown that Mrs Olley had
visited the hotel regularly, and that she was aware of the terms under which it did business,
the clause may have been allowed to stand.
Curtis v Chemical Cleaning and Dyeing Co Ltd (1951)6
This case demonstrates that although ignorance of an Exclusion clause will not normally
prevent an injured party being bound by its terms, misrepresentation might. Ms Curtis took a
dress to be cleaned, and was asked to sign a contract. When asked what the contract bound
her to, the company’s employee said it was to disclaim liability for damage done to `beads
and sequins’ on the dress. The dress came back stained. In fact, the exclusion clause was for
all damage of any kind, but the court ruled that the company could not rely on it because it
had been misrepresented in the shop.
Parker v South Eastern Railway (1877)
This case (Parker v South Eastern Railway (1877) 2 CPD 416) demonstrates that while a
person cannot escape the effect of an Exclusion clause by failing to read the contract terms, it
may be a defence to show that the profounder of the clause had not taken sufficient trouble to
bring it to notice. The case concerns a railway ticket, and an exclusion for liability printed on
its back. Mr Parker claimed that he thought the ticket was merely a receipt, not a contractual
document. The jury in the original trial found for Mr Parker, on the basis that his reasoning
was sound. However, the CPD ordered a re-trial because this wasn’t the case in point; the
relevant issue was whether SER had taken reasonable steps to indicate that contractual nature
of the ticket.
L’estrange v Graucob (1934)7
This case (L’Estrange v Graucob Ltd) demonstrates that one cannot evade being bound by the
terms of a Contract, even an Exclusion clause on the basis that one did not read or understand
the terms. Mrs L’Estrange owned a cafe. She ordered a cigarette machine from the
manufacturers which, it turned out, never worked properly. Although an implied contract
term in the sale of goods is that the goods will be suitable for the purpose intended, the
contract — which Mrs L’Estrange had signed — did state that the manufacturers disclaimed
all liability regarding the malfunction of the machine. It was held that Mrs L’Estrange could
not claim damages on the grounds that she “did not see” the clause in the contract. There was
no evidence of fraud or misrepresentation that might have mitigated this judgement.
Seapower Resources Cold Storage & Warehousing Ltd. v. Assure Company Ltd.
In this case the claimants, cool store and warehouse operators, claimed unpaid storage
charges in respect of consignments of garlic entrusted to their care by the defendants, acting
as agents for the owners of the garlic. The defendants denied liability for the storage charges
on the grounds that the plaintiffs had repudiated the contract by storing the garlic at the
incorrect temperature, causing it to sprout and to lose thereby part of its value. The

6
[1951] 1 HB 805, 1 All ER 631
7
[1934] 2 KB 394
defendants counterclaimed for the damage to the garlic. The plaintiffs’ claim failed, the court
holding that they had failed to store the garlic at the temperature requested by the defendants,
and the counterclaim succeeded for its full value. The court held that the plaintiffs could not
limit their liability in reliance on the terms of their Godown Warrant, as they had failed to
bring to the attention of the defendants the existence of these terms before the storage
contract had been concluded.
Leonard v. Gt. Northern Ry. Co
In Leonard v. Gt. Northern Ry. Co. the plaintiff sent a consignment by rail. On arrival, four
were missing. Under the terms of the contract set out on the forwarding note the plaintiff was
required to notify the carriers of 10ss within three days. The plaintiff failed to do this. The
plaintext’s claim was dismissed because of failure to comply with the notice provision. If the
clause negatives a right to performance it is said to have substantive effect; if the clause
regulates entitlement to damages it is procedural; only failure to satisfy the procedural steps
laid down results in loss of the right to damages.
British Leyland Exports Ltd. v. Brittain Group Sales Ltd
It can sometimes prove difficult to decide whether the exemption clause has substantive or
procedural effect. In British Leyland Exports Ltd. v. Brittain Group Sales Ltd.3 a contract for
the supply of motor vehicles to the defendants in kit form included a clause which provided
that while the sellers would endeavour to meet orders placed they “shall no be liable for any
failure, delay or error in delivery, or any consequential loss there from, however caused.”
O’Hanlon J. held that while this clause did not exclude the sellers’ primary obligation to
deliver complete and satisfactory kits, the clause did limit the sellers’ remedy by excluding
the general secondary obligation to pay damages when defective kits were provided.
With respect, this analysis seems to this writer to ignore the fact that the clause was in fact
designed to limit the obligations on the seller to meeting orders where possible and
effectively ensure that complete kits were provided. On this analysis there could be no room
for a finding that the implied obligation excluded the claim for damages; the exclusion clause
excluded the implied obligation and ipso facto, there was no contractual right which could
bring the secondary obligation to pay damages into play.
Kenyon Son and Craven Ltd. v. Baxter Hoare & Co. Ltd.
There are several English cases in which the courts have suggested that th effect of an
exemption clause is to qualify or limit the scope of the contractual duties one party is to
perform. In Kenyon Son and Craven Ltd. v. Baxter Hoare & Co. Ltd. the defendants operated
a warehouse and undertook to store peanuts owned by the plaintiff. This contract of bailment
was concluded on the foot of the defendant’s standard conditions of business. One of the
clauses provided that the defendant was not to be liable for loss or damage to goods unless
such loss or damage was due to wilful neglect or default. The peanuts were damaged by rats
and although the defendant had been negligent they had not acted with wilful neglect or
default. Donaldson J. held that the clause was effective. It provided the defendant with a
complete answer to the action because the clause made it clear that the defendant was not
undertaking to excuse reasonable care and skill. The clause also excluded the ordinary duty
of a bailed for reward. This approach to the interpretation of the exemption clause is based on
the assumption that the court should read the contract in its entirety and that a limitation of
liability clause cannot merely limit liability but can also limit the duty undertaken by the
person relying on the clause.
Karsales (Harrow) Ltd. v. Wallis
It must, however, be conceded that there are other views of the role of an exemption clause.
Some judges hold that the clause merely operates as a defence to liability and that the
approach to be adopted in the interpretation of an exemption clause is to leave the clause to
one side and then interpret the contract so as to see what the parties have undertaken. The
clause is then examined to see if it provides a defence to the plaintiff’s action. The best
example of such a process is the judgment of L.J. in Karsales (Harrow) Ltd. v. Wallis. This
theoretical debate does some important practical consequences, as well shall see. The
exemption clause possessing substantive effect is designed cite risk between contracting
parties–should goods stored with a under a bailment contract be destroyed while in his
possession the may have anticipated this possibility and by contract transferred risk the
owner. In principle there is no reason why this should not be ted where the bailed has not
acted fraudulently or deliberately the goods. Difficulties arise when the party invoking the
exemption is in a stronger bargaining position and has exploited this by draconian provision
which, on its face, protects him. The courts and the legislature have dealt with such instances
of abuse freedom of contract in different ways.
Hughes v. J.J. Power Ltd and Colliers Ltd
While most exemption clauses are written statements which are found either in the contract
document itself, or in standard conditions of c0n-: tract, there are instances where one party
may verbally limit the scope of his contractual duty. In Hughes v. J.J. Power Ltd and Colliers
Ltd.6 the plaintiff took a tractor engine to the second defendant, a motor engineer, in order to
have the engine serviced. The work to be done was somewhat difficult due to certain defects
in the engine and the second defendant indicated that he would do the work but that the work
would be done at the owner’s risk. Blayney J. held that this statement was that the second
defendant would not be liable for any physical damage caused during the necessary work and
that a term to this effect was imported into the .contract-. This case provides a neat
illustration of the fact that clauses which exclude a particular duty are essentially concerned
with risk transfer or risk allocation.
Spurling (J) Ltd v Bradshaw (1956)
Eight orange juice casks belonging to Bradshaw (defendant) were stored with Spurling
(plaintiff), who had a no-liability clause inserted into the contract for warehousing which
included that all risks were assumed by Bradshaw. When the goods were handed back to
Bradshaw’s agent by Spurling, it was discovered that contents of three of the casks were
damaged.
Held: The defendant refused to pay for the outstanding balance and counterclaimed the
plaintiff for negligence. The plaintiffs were held to be entitled to rely on this exemption
condition – it was considered “reasonable” – there was no need for exceptional notice.
Richardson Spence & Co v. Rowntree
In the case of Richardson Spence & Co v. Rowntree3 the House of Lords applied the
approach outlined earlier in Parker. The plaintiff was a passenger on a steamer travelling
from Liverpool to Philadelphia. The plai ntiff was given a folded ticket, no writing being
visible in this form. The ticket, when opened had a great many conditions, one of which
limited liability for personal injury or loss of baggage to $100. The plaintiff never read the
ticket. The plaintiff was injured whilst on the vessel. At first instance Bruce J left three
questions to the jury:
1. Did the plaintiff know that there was writing on the ticket? This question was answered in
the affirmative.
2. Did the plaintiff know the writing contained conditions relative to the contract of carriage?
This was answered in the negative.
3. Did the defendants do what was reasonably sufficient to give the plaintiff notice of these
conditions? This question was answered the negative.
The High Court, Court of Appeal and House of Lords held that in the light of these findings
the limitation clause was not available to the defendant.
Ryan v. Great Southern & West Ry. in 1898
In Ryan v. Great Southern & West Ry. in 1898, the plaintiffs baggage had been lost by the
defendant. Terms of the plaintiffs ticket referred to standard conditions which were available
for inspection. Upon finding that the plaintiff was unaware that the ticket contained limiting
conditions of contract it was further held that insufficient notice had been given of the term.
Taggant v. Northern Counties Ry. in 1898
This case illustrates the fact that if the plaintiff is found to know that the ticket or contract
document contains contractual conditions; the plaintiff will be bound even if he is unaware of
the precise terms of contract. The Irish courts have not laid down exacting standards which a
proference must meet before the limiting term will be incorporated.
Early v. Gt. Southern Ry
In this case, the plaintiff was given an excursion ticket which on its face referred the
passenger to the company’s special conditions containing the limiting provisions. The
plaintiff was injured. Notwithstanding the fact that the conditions were not available for
inspection at this particular booking office the defendants were held entitled to rely on this
clause.
Shea v. Great Southern Ry.
In Shea v. Great Southern Ry. the plaintiff took a bicycle onto a crowded bus. The bus ticket
referred to a notice excluding liability for theft. The plaintiff was held bound by the notice.
Judge Davitt said that the plaintiff was “at liberty to get off the bus or remove his bicycle.” If
the proferens wants to be sure that the clause will be incorporated into the contract he should
obtain the signature of the other party to a contract document setting at the term.
Sproule v. Triumph Cycle Co
In Sproule v. Triumph Cycle Co. the plaintiff approached an agent of the defendants with a
view to buying a motor cycle. He did not read a catalogue which attempted to limit the
defendant’s obligations to replacement of defective parts for three months after purchase.
This “guarantee” was also set out on a card attached to the bike although this was not handed
to the plaintiff and read by him until after the sale had been concluded. The plaintiff was held
entitled to rely on section 14(1) of the 1893 Act. Moore C.J. held the guarantee ineffective
because it was not read until after the contract had been concluded. It should be noted that
when the case does not involve a railway ticket case the onus on the proferens is gather when
he alleges incorporation has occurred.
Brady v. Aer Rianta
In this case, the printed conditions were set out on the ticket and the terms were actually
displayed on a notice board outside the entrance to the car parking area at Dublin Airport.
Butler J. held that in these circumstances the contract was concluded before the plaintiff
entered parking area and the defendant had given reasonable notice of a clause prior to the
contract being formed. This reasoning has been followed in Beirne v. Aer Rianta.
Slattery v. C.I.E.
In Slattery v. C.I.E the plaintiff signed a consignment note which stated that delivery would
place at the owner’s risk. This note was not signed until after the ‘ ” the horse had occurred
and after the journey had been completed: this an oversight on the defendant’s part. The
defendants were held to entitled to rely on the document as setting out the terms of the
agreement. It should be noted that in this case, as in Knox, the plaintiffs envisaged that the
contract document had still to be completed; as Holmes J. said in Knox: “It is neither illegal,
unreasonable nor unusual, for the terms of a contract to be reduced to writing after the
performance of the services contracted for has been begun.” If this was a case of the
proferens attempting to add an exempting clause when a written or oral contract had already
been completed

Case name: New India Assurance Company Limited v. Rajeshwar Sharma and Others

In the case, the Insured claimed that his business of sanitary wares suffered damages on
ccount of illegal demolition by the Municipality in the premises. The Insured’s claim for
insurance was repudiated by the Insurance company on the ground that the Policy of
Insurance provided for exclusion of loss on account of “destruction by order of the
Government or any lawfully constituted authority”.  The State Commission however allowed
the claim holding that the order of demolition passed by Municipal Corporation had not been
brought on record and in its absence the exclusion would not operate.The High Court in
appeal upheld the State Commission’s order and held that the insurer was liable to indemnify
the loss sustained by the insured.

Bench’s Verdict

In view of the fact of the case, the Apex Court decided on the issue whether the exclusion
clause under the Policy of Insurance was attracted?

While making reference to Supreme Court’s verdict in National Insurance Co. Ltd. v. Ishar
Das Madan Lal, the Court noted that where there is an exclusionary clause in an Insurance
Policy, burden lies on the insurer to establish that the exclusion is attracted.

Interpretation of Exclusionary Clauses- While elucidating on this point, the Court made

reference to Court of Appeal’s decision in Cornish v. Accident Insurance Co. Ltd., wherein
it was opined that in a case of real doubt, the Policy ought to be construed most strongly
against the insurers; they frame the Policy and insert the exceptions.

That like any other provision in a Contract, words of exception or exemption must be read in
context of the Contract as a whole and with due regard for purpose.

Principles for Construing Insurance Exclusions- That the Court must adopt approach to the
interpretation of insurance exclusions which is sensitive to their purpose and place in the
insurance contract. The Court should not adopt principles of construction which are
appropriate to exemption clauses i.e. provisions which are designed to relieve a party
otherwise liable for breach of contract or in tort of that liability- to the interpretation of
insurance exclusions.

The Supreme Court was of the view that the impugned exclusionary clause in the present
case had no ambiguity and the exclusion was clear in exempting the insurer from liability for
a loss arising from the destruction of property caused “by order of Government or any lawful
authority.

4.4 CONCLUSION
In exemption clauses, it is generally having a few limitations. Firstly, exemption clause
should be clearly worded for example not absurd and must not be ridiculous. Secondly,
exemption clause must come before the formation of a contract or agreement. Besides that,
the exemption clause also needs to be legible. Next, exemption clause must be placed in
places which can be seen easily by people. After that, exemption clause also cannot be
applied for children as well as unfortunate for example handicap. In the limitations of
exemption clause, the courts will look into the policy consideration, the types of contract and
also floodgate of litigation before deciding on application of exemption clause. In addition,
exemption clause is ineffective when situation is attempt to exempt liability for death or
personal injuries, situation of attempt to exempt liability in respect of seller’s implied
undertaking as to title and also situation of attempt to exempt liability in respect of seller’s
obligations in respect of quality. So, exemption clause operates as to exclude or restrict the
rights of a party in a contract.