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

The post Section 125: Rights of Indemnity Holder appeared first on The Fact Factor.