Section 125 of the Indian Contract Act lays down the three important rights of indemnity holder

Section 125.   Rights of indemnity-holder when sued.

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.

As per Section 125 of the Indian Contract Act, 1872 the following rights are available to the promisee/ the indemnified/ indemnity-holder against the promisor/ indemnifier, provided he has acted within the scope of his authority.

Right to recover damages paid in a suit [Section 125(1)]:

When a third party lays down a claim against the indemnity holder, it is well established the duty to pay the latter arises for the indemnifier at the first place. The damages would definitely be the end result of the total liability that the indemnity holder had to carry.

The logical principle is that a person who had acted on the faith of another party should be indemnified.  An indemnity-holder has the right to recover from the indemnifier all damages which he may be compelled to pay in any suit in respect of any matter covered in the contract of indemnity.

In Parker v. Lewis, (1873) 8 Ch App 1035 case, the logical principle of providing the indemnity to a person who had acted on the faith of another party is upheld. The Court laid down that it would be obvious for the person indemnified, who has altered his position and faced action for that action, to be indemnified and be protected by the third party. Once a suit is decided against the indemnified and he, being the judgment debtor, pays the money to the judgment creditor, or, when in a compromise, he prudently settles the dispute by paying the damages; indemnifier becomes absolutely liable to indemnify him (i.e. the decree becomes conclusive for the purpose of invoking indemnity), notwithstanding that the suit could have been brought or could have been appealed against. Also, if the indemnifier trusts indemnified to further appeal against the judgment, he will still be liable to pay under the indemnity contract to the indemnified, if the latter had paid the decreed amount under the previous suit. It is only if indemnified finally wins the case, shall the judgment debtor will pay the decreed amount to the indemnifier.

In Alla Venkataramanna v. Palacherla Manqamma, AIR 1944 Mad 457 case, the Court held that the suit, in which the indemnified is roped in, has a binding effect on the indemnifier in terms of its final result, even though he was not a party to the contract. This is not an exception to the rule of res judicata rather; it is so because the claim against which the indemnification had been promised has been conclusively established.

In Gokuldas v. Gulab Rao, AIR 1926 Nag 108 case, the Court held that the indemnifier cannot plead that he was not a party to a dispute hence the result should be implemented upon him.

In Nallappa Reddi v. Vridhachala Reddi, (1914) 37 Mad 270 case, the Court held that the indemnifier cannot escape from the responsibility of providing the damages to the indemnified.

In Anwar Khan v. Gulam Kasam, AIR 1919 Nag 126 case, the Court held that the measure of damages would depend upon the extent to which the person has been indemnified, if more than the amount, the indemnifier may refuse as well.

Right to recover costs incurred in defending (Section 125(2)): 

When pursuing a suit, in which the purpose or the action of the indemnity is being involved, the indemnity holder is being provided with the statutory right to claim costs as well with the damages from the indemnifier provided they are reasonable.

An indemnity-holder has the right to recover from the indemnifier all incidental 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.

In Pepin v. Chunder Seekur Mookerjee, (1880) ILR 5 Cal 811 case, the Court held that the expenses do arise while reducing or ascertaining or resisting the claim. Hence, the cost of such a nature can be recovered.

In Gopal Singh v. Bhawani Prasad, (1888) ILR 10 All 531 case, the Court held that only those costs would be recoverable that are supposed to be incurred by a prudent man.

Right to recover sums paid under compromise )Section 125 (3)):

This is similar to previous right, but it arises in the case of compromise. An indemnity-holder also has the right to recover all amounts from the indemnifier 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.

In Alla Venkataramanna v. Palacherla Manqamma, AIR 1944 Mad 457 case, the court laid down the conditions for the claim by the promisee, to be valid. If the indemnity holder genuinely wants the amount to be recovered, certain conditions with respect to the compromise so effected would have to fulfill:

1. The compromise should have been put to effect in a bona fide manner.
2. It has been resolved without any sort of collusion
3. It has not been impeached as an immoral bargain

Right to sue for specific performance:

An indemnity-holder is entitled to sue for specific performance if he has incurred absolute liability and the contract covers such liability. The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor

Rights of Indemnifier:

The rights of the indemnifier have not been mentioned expressly anywhere in the Act. In Jaswant Singh v. Section of State, 14 BOM 299, it was decided that the rights of the indemnifier are similar to the rights of a surety under Section 141 where he becomes entitled to the benefit of all securities that the creditor has against the principal debtor whether he was aware of them or not. Where a person agrees to indemnify, he will, upon such indemnification, be entitled to succeed to all the ways and means by which the person originally indemnified might have protected himself against loss or set up his compensation for the loss.

Indian Legal System > Civil Laws > Indian Contract Act, 1872 > Section 125: Rights of Indemnity Holder

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The distinctive feature of Contract Law, as compared to other branches of law, is that in the former the parties make law for themselves within the broad framework of the Contract Law. The importance of the contract in regulating business and other social and economic relations is so great that Dot only private enterprise, but public enterprise units and the Government have resorted to contract as an instrument of participating in their country’s market economy. In this article, we shall study the meaning of indemnity, the contract of indemnity under the Indian Contract Law, 1872.

Indemnity Under English Law:

The word indemnity means security or protection against a financial liability i.e. it is a security or protection against loss. In a contract of indemnity one party – i.e. the indemnifier promise to compensate the other party i.e. the indemnified against the loss suffered by the other. It is one of the most important forms of commercial contracts. Several industries, such as the insurance industry, rely on these contracts. These contracts basically help businesses in indemnifying their losses and, therefore, reduce their risks. The objective of entering into a contract of indemnity is to protect the promisee against unanticipated losses. Contract of indemnity is really a kind of contingent contract.

The English law definition of a contract of indemnity is – “it is a promise to save a person harmless from the consequences of an act”. Thus it includes within its ambit losses caused not merely by human agency but also those caused by accident or fire or other natural calamities.

In Adamson v. Jarvis, (1827) 4 Bing 66, case, Adamson (the petitioner) was an auctioneer who was given cattle by Jarvis (the defendant) to be sold at an auction. Adamson followed the instructions and sold the cattle. But Jarvis was not the owner of the cattle. The real owner of the cattle sued Adams for conversion and was successful. Adamson had to pay damages and he then sued Jarvis to be indemnified for the loss that he suffered by way of damages to be paid to the real owner. The Court held that Adamson carried out Jarvis’s instructions and was entitled to presume that if anything went wrong as per instructions, he would be indemnified. Jarvis was ordered to pay damages to Adams.

In Betts v. Gibbins, (1834) 2 Ad. & E. 57, case the Court held that an undertaking or promise to indemnify may be implied.

In Toplis v. Grane, 5 Bing. N. C. 636 case, Tindal C.J. observed that when an act has been done by the plaintiff under the express directions of the defendant which occasions an injury to the rights of third persons, yet if Such an act is not apparently illegal in itself but is done honestly and bona fide in compliance with the defendant’s directions, he shall be bound to indemnify the plaintiff against the consequences thereof.

In Dugdale v Lovering, (1875) LR.10 CP196 case,  the plaintiffs were in possession of certain trucks, which were claimed by the defendant, and also by the proprietors of the K. P. Colliery. A correspondence took place between the plaintiffs and the defendant, in which the plaintiffs asked for an indemnity if they should deliver up the trucks to the defendant. The defendant, without giving any answer as to the indemnity, wrote requiring the plaintiffs to send the trucks back to him, which they thereupon did. The K. P. Colliery proprietors then brought an action against the plaintiffs for the conversion of the trucks, and their claim proving well-founded, the plaintiffs were obliged to pay a sum of money, in settlement of the action, which they sought to recover from the defendant upon a contract of indemnity. The Court held that the doctrine laid down in Betts v. Gibbins, (2 Ad. & E. 57) and Toplis v. Grane (5 Bing. N. C. 636), that there was, under the circumstances of the case, evidence of implied promise.  The Court also held that the principle upon which in such cases a contract of indemnity is implied is not confined to cases of principal and agent, or employer and employed

In Sheffield Corp. v. Barclay, 1905 AC 392 case, a corporation, having registered a transfer of stock on the request of the banker, was held entitled to recover indemnity from the banker when the transfers were discovered to be forged.

In Starkey v. Bank of England, (1903) AC 114 (HL) case, a stockbroker innocently acted upon the power of attorney on which one out of three signatures were forged. The court allowed the bank to recover indemnity from an agent who presented the document.

Indeminity Under the Indian Contract Act:

Section 124 of the Indian Contract Act defines a contract of immunity.

Section 124: “Contract of indemnity” defined

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”.

Illustration

A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

Section 124 starts with the word ‘contract’, hence the contract of immunity should have all the ingredients of a valid contract. There are generally two parties in indemnity contracts.   The person who gives the indemnity is called an ‘indemnifier’ and the person for protection it is given is called ‘indemnity holder’ or said to be ‘indemnified’.

For example, X promises to deliver certain goods to Y for Rs. 20,000 every month. Z comes in and promises to indemnify Y’s losses if X fails to so deliver the goods. This is how Y and Z will enter into contractual obligations of indemnity. In this case Z is indemnifier and Y is indemnity holder.

It is kind of contingent contract whereby one promises to save another harmless from the result of the conduct of the promisor or of any other person. Hence to invoke contract of indemnity, there must be a loss to promise.

Compare to English definition of ‘indemnity’, the Indian definition is narrower. The English definition of indemnity is wide enough to include a promise of indemnity against loss arising from any cause whatsoever, e.g., loss caused by fire or by some other accident. Thus as per this definition every contract of insurance, other than life insurance, is contract of indemnity. As per Section 124 of the Act the loss must have been caused either by the conduct of the promisor or any other person, it does not include loss caused by natural factors, not involving human factors.

Essential Elements of Contract of indemnity:

• It should be a valid contract. The principles of the general law of contract contained in Section 1 to 75 of the Indian Contract Act, 1872 are applicable to them. 
• There should be two parties to such a contract. There must be two parties, namely, promisor or indemnifier and the promisee or indemnified or indemnity-holder.
• It is a promise to compensate for or security against damage, loss or injury. The loss may be caused due to the conduct of the promisor or any other person.
• Every contract of insurance, other than life insurance, is a contract of indemnity.
• It is not a collateral but an independent contract.
• It is a tool for allocating risks contingent liability.
• To activate the contract of indemnity, the loss to promise is essential.
• The contract of indemnity may be express (i.e. made by words spoken or written) or implied (i.e. inferred from the conduct of the parties or circumstances of the particular case).
• Consideration and objects of such contract must be lawful.
• Indemnity clauses, amongst other things, in such contract must be clear, specific, where possible stipulate the circumstances under which the indemnity will arise

Enforcement of Contract of Indemnity:

• A contract of indemnity can be enforced according to its terms and measure of damages could be up to the extent to which the promisee has been indemnified
• Claim of Indemnity holder can include: damages, legal costs of adjudication, amount paid under the terms of compromise.
• Indemnifier should ideally be informed of the legal proceedings or should be joined as third party.
• There is no onus to show breach or actual loss.

In Gajanan Moreshwar Parelkar V. Moreshwar Madan Mantri, AIR 1942 Bom 302 case, the plaintiff transfers a plot of land to BMC and BMC agreed to keep the plot on lease for 999 years. Now the defendant wanted to construct a building on the piece of land and the owner allowed to do so. Now the plot was in the possession of the defendant but the owner was the plaintiff. Construction materials were supplied by a Keshavdas Mohandas. At one point of time, there was a due of Rs. 5000 but the defendant was unable to pay. So the defendant requested the plaintiff to a mortgage. So the property was mortgaged to Keshavdas Mohandas and as a result, now Rs5000 and 10% interest were payable. Again Rs. 5000 was demanded on supply by Keshavdas Mohandas. The defendant requested now on the same property charge was put to Keshavdas Mohandas. A date was set for the return of the principal amount. The defendant had agreed to pay the principal amount, the interest and to get the mortgage deed released before a certain date. Now the property was too transferred to the plaintiff, but the title deed was with Keshavdas Mohandas and he did not give. The owner now sued for indemnity as he wanted title deeds as consideration for land transfer. The Stance of the Defendant was that the plaintiff had suffered no loss and thus could not claim anything under Sections 124 and 125. The Court held that an indemnity holder has rights other than those mentioned in the Sections above. If the indemnity holder has incurred a liability and the liability is absolute, he can turn to the indemnifier to take care of the liability and pay it off. Thus, the plaintiff was entitled to be indemnified by the defendant against all liability under the mortgage and deed of charge.

In K.P Ram Kuppam Chettiar v. Sp. Ram swami Chettiar, AIR 1946 Mad 472 case, the Madras High Court laid down the principle that if an act done by A at the request of B which is not apparently tortuous to the knowledge of A but turns out to be injurious to right of C and A is held liable to pay C, A is entitled to be indemnified by B.

Indian Legal System > Civil Laws > Indian Contract Act, 1872 > Section 124: Contract of Indemnity

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