Contract Law

Lala Shanti Swarup v. Munshi Singh

AIR 1967 SC 1315

Facts

The respondents had mortgaged agricultural property for ₹12,000.
They later sold half of the mortgaged property to the appellants for ₹16,000.
Of that price, ₹13,500 was retained by the purchasers specifically to discharge the mortgage.
The purchasers took possession but failed to pay the mortgagees.
The mortgagees obtained a decree against the original owners.
Ultimately, part of the owners’ remaining property had to be used to satisfy the mortgage liability.
The owners sued the purchasers for compensation.
The purchasers argued that:
there was no express contract of indemnity; and
the suit was barred because the breach occurred when they first failed to pay.

A contract of indemnity may be express or implied from the circumstances.
Where a purchaser retains part of the price to discharge an encumbrance for which the seller remains liable, an implied promise to indemnify may arise.
In a claim for indemnity, limitation ordinarily begins when the indemnity-holder is actually damnified or suffers the relevant loss, not merely when the indemnifier first fails to perform.

The purchasers retained ₹13,500 for one specific purpose: paying the outstanding mortgage.
The sellers accepted a smaller immediate payment because they relied on that arrangement.
The purchasers’ failure left the sellers exposed to the mortgage debt.
This commercial arrangement necessarily implied that the purchasers would protect the sellers against the consequences of non-payment.
The indemnity did not need to use the word “indemnify.”
Its existence followed from the purpose for which the money was retained.
The cause of action did not finally arise merely when the purchasers failed to make payment.
The sellers were actually damnified when their property was taken or burdened to satisfy the mortgage liability.
The claim was therefore brought within the applicable period from the actual loss. The uploaded materials likewise identify the retention of ₹13,500 and later loss of the owners’ property as the basis of the implied indemnity.

The Supreme Court held that an implied contract of indemnity existed.
The suit was not barred because limitation ran from actual damnification.
Use this case for: an implied indemnity arises where a buyer retains purchase money to discharge the seller’s mortgage liability.