Rights of Indemnity Holder and Extent of Liability

Introduction

The Indian Contract Act, 1872 provides protection to the indemnity holder when loss occurs. Section 125 lays down the rights available to the indemnity holder against the indemnifier.

These rights ensure that the indemnity holder is fully compensated for losses suffered while acting within authority.

Meaning / Definition

Section 125 of the Indian Contract Act, 1872 provides that an indemnity holder, acting within the scope of his authority, is entitled to recover certain amounts from the indemnifier.

The indemnifier’s liability extends to all losses covered under the contract, provided the indemnity holder has acted in good faith (honestly) and within authority.

Modes or Types

Right to Recover Damages

The indemnity holder can recover all damages which he is compelled to pay in any suit related to the matter covered by the indemnity.

Right to Recover Costs

The indemnity holder can recover all costs of bringing or defending a suit, provided:

• He has acted prudently (carefully and reasonably), or
• He has followed the instructions of the indemnifier

Right to Recover Sums Paid Under Compromise

The indemnity holder can recover amounts paid under a compromise (settlement), if:

• The compromise is not against the instructions of the indemnifier
• The act was reasonable and done in good faith

Right to Specific Performance

The indemnity holder can compel performance (force the indemnifier to perform the promise) when liability becomes absolute (certain and fixed).

Important Case Law

• Mohit Kumar Saha v. New India Assurance Co.
  The indemnifier must compensate the full loss. Any arbitrary reduction in compensation is not valid.

• Secretary of State v. Bank of India
  A person acting on another’s request is entitled to indemnity if loss occurs.

Practical Example

A asks B to defend a case on his behalf and promises indemnity. B incurs legal expenses and pays damages. B can recover all such costs and damages from A, provided he acted honestly and within authority.

Summary

• Section 125 defines rights of indemnity holder
• Indemnity holder must act within authority and in good faith (honestly)
• Rights include recovery of damages, costs, and sums paid in compromise
• Indemnifier’s liability covers all such lawful losses
• No right if there is dishonesty or disobedience of instructions
• Ensures full compensation for losses suffered