Indemnity Clause Creates Immediate Liability, Not Contingent On Final Appeal Outcome: Supreme Court

The Supreme Court has observed that an indemnity clause in a contract creates an immediate and absolute obligation to make good the loss and is not dependent on final confirmation of liability by the higher court.

A bench of Justice S.V.N. Bhatti and Justice Prasanna B. Varale set aside the Delhi High Court's decision, which had deferred the enforcement of a Singapore International Arbitration Centre (SIAC) consent award merely because it was subject to approval from the Singapore Court of Appeal.

Holding the High Court's reasoning to be flawed, the Court observed that an indemnity clause forming part of a consent award creates an immediate obligation and does not depend on a decision of the Highest Court of Appeal. The Court said that an indemnity clause creates an instant liability of the indemnifier to indemnify the loss on behalf of the indemnified.

“…the High Court used a “purposeful interpretation” to conclude that the Promoters owed no financial duty until the Highest Court of Appeal confirmed the EY liability. By doing so, the High Court ignored the immediate obligation mandated by the Compromise Deed, namely, that the Promoters must “ensure that no liability... is recovered from VPS/Medeor (indemnified) by the Forum.”, the Court observed.

“…it is not a case of indemnity that matures only upon the confirmation by the Highest Court of Appeal.”, the court added.

The dispute arose after Appellant-VPS Healthcare acquired Rockland Hospitals (later renamed Medeor Hospitals) in 2016. Before the acquisition, Rockland had agreed with Ernst & Young (EY), which subsequently led to an arbitration claim of about ₹10 crore along with interest.

To resolve disputes between VPS/Medeor and the original promoters, Prabhat Kumar Srivastava and Rishi Srivastava, the parties executed a compromise deed in 2019, which was later recorded as a consent award. A crucial clause in this agreement provided that the promoters would ensure that no liability is recovered from VPS/Medeor in relation to the EY dispute, and that they would pay the amount within 30 days if such liability was ultimately confirmed by the highest court.

In 2021, the arbitral tribunal ruled in favour of EY. When VPS/Medeor challenged the award before the Delhi High Court, the Court granted a stay subject to deposit of the entire awarded amount. Accordingly, VPS/Medeor deposited ₹15.86 crore under protest and thereafter sought enforcement of the consent award against the promoters, contending that the very act of deposit triggered the indemnity clause.

Aggrieved by the Delhi High Court's refusal to enforce the indemnity obligation, VPS approached the Supreme Court, arguing that once the High Court directed deposit of the amount, the promoters' obligation to indemnify, arising from the assurance that no liability would be recovered, stood immediately triggered.

Allowing the appeal, the judgment authored by Justice Bhatti observed that the High Court erred in giving different interpretation to the words “ensure that no liability is recovered”, which according to the Court create an absolute obligation, which applies as soon as any court or authority forces payment.

“…by the use of the word “ensure”, the obligation of the Promoters is to insulate VPS/Medeor from any liability arising from pending disputes.”, the court added.

Accordingly, the appeal was allowed, granting the Respondents a 30-day period to deposit Rs. 15,86,17,808/- for the benefit of the Appellant.

“The Enforcement Petition is allowed, and the Promoters are granted 30 days to pay or deposit Rs. 15,86,17,808/- for the benefit of VPS/Medeor. The amount deposited by the Promoters is subject to the outcome of the pending proceedings between EY and the Promoters. In case VPS/Medeor is successful in setting aside the Award dated 17.08.2021, the Promoters are entitled to encash the bank guarantee provided by EY in the proceedings before the High Court of Delhi.”, the court said.

Headnote

Arbitration and Conciliation Act, 1996 – Section 36 – Enforcement of Consent Award – Interpretation of Indemnity Clauses – Dispute regarding the timing of an indemnifier's obligation to discharge liability - The Supreme Court held that where a Consent Award contains an absolute obligation to "ensure" that no liability is recovered from the award-holder by a "Forum," such obligation is triggered as soon as a liability is crystallised and recovery is sought, regardless of whether a further appeal is pending .

Contractual Interpretation – Literal vs. Purposive Construction – Rule of Every Part – Supreme Court emphasized that every limb of a contract must be given meaning to avoid rendering any part otiose - A performance timeline for an "extreme scenario" (confirmation by the Highest Court of Appeal) cannot be used to negate an unconditional obligation to protect a party from recovery at earlier stages of litigation - Purposive construction is unavailable when a plain, literal reading of all limbs together ensures an immediate enforceable obligation.

Contract of Indemnity – Absolute Obligation – Distinguished between a contingent indemnity and an absolute obligation. Where a promisor incurs an absolute obligation (indicated by terms like "ensure"), it can be enforced without awaiting actual loss or the exhaustion of all appellate remedies - The impugned judgment of the High Court was set aside, and the Promoters were granted 30 days to deposit ₹15,86,17,808/- for the benefit of the Appellants. [Relied on Khetarpal Amarnath v. Madhukar Pictures, 1955 SCC OnLine Bom 73; Paras 16-28]

Cause Title: VPS HEALTHCARE PRIVATE LIMITED AND ANOTHER VERSUS PRABHAT KUMAR SRIVASTAVA AND ANOTHER

Citation : 2026 LiveLaw (SC) 393

Click here to download judgment

Appearance:

For Petitioner(s) Mr. Dhruv Mehta, Sr. Adv. Mr. Haris Beeran, Adv. Mr. Azhar Assees, Adv. Mr. Anand B. Menon, Adv. Mr. Prateek Singh Chaudhary, Adv. Ms. Shreya Sethi, Adv. Mr. Anirudh Bhatia, Adv. Ms. Rizwana R. Raj, Adv. Mr. Shaswat Jena, Adv. Mr. Radha Shyam Jena, AOR

For Respondent(s) Ms. Diya Kapur, Sr. Adv. Mr. Rohit Vats, Adv. Mr. Himanshu Bhandari, Adv. Ms. Aanchal Basur, Adv. Mr. Daya Krishan Sharma, AOR