Section 125 Indian Contract Act - Rights of Indemnity-Holder When Sued

Section 125 of the Indian Contract Act, 1872 states the principal statutory rights of a promisee under a contract of indemnity when the promisee acts within the scope of authority. It permits recovery from the promisor of specified damages, litigation costs and compromise payments.

Meaning and context of Section 125

A contract of indemnity is defined in Section 124 of the Indian Contract Act, 1872. In such a contract, one party promises to save the other from loss caused by the conduct of the promisor or another person. Section 125 then specifies what the indemnity-holder may recover when sued, provided the indemnity-holder acts within the scope of the authority conferred by the contract.

Section 125 - Rights of indemnity-holder when sued

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor:

  1. Damages: all damages which the promisee may be compelled to pay in a suit concerning a matter to which the promise to indemnify applies.
  2. Costs: all costs which the promisee may be compelled to pay in such a suit where, in bringing or defending it, the promisee did not contravene the promisor's orders and acted prudently as a person would have acted without a contract of indemnity, or where the promisor authorised the action.
  3. Compromise payments: all sums paid under a compromise of such a suit where the compromise was not contrary to the promisor's orders and was prudent in the absence of an indemnity contract, or where the promisor authorised the compromise.

What can an indemnity-holder recover?

1. Damages paid in a covered suit

The indemnity-holder may recover damages that he or she is compelled to pay where the subject matter of the suit falls within the indemnity promised by the promisor. The scope and wording of the indemnity therefore remain important.

2. Litigation costs

Section 125 protects reasonable litigation costs, but the statutory conditions matter. The indemnity-holder should not act contrary to the promisor's directions and should act prudently, unless the promisor has expressly authorised the bringing or defence of the proceedings.

3. Sums paid in compromise

A settlement or compromise may also be recoverable if it satisfies the statutory conditions. A compromise should not violate the promisor's orders and should be prudent in the circumstances, unless it was authorised by the promisor.

Practical effect of Section 125

Section 125 links the right of reimbursement to both the scope of the indemnity and the conduct of the indemnity-holder. A claim should therefore be examined with reference to the indemnity clause, the liability arising in the suit, instructions given by the promisor, litigation expenditure, and the terms and circumstances of any settlement.

Legal note: The exact rights in a particular dispute depend on the wording of the indemnity, the facts, applicable judicial decisions and the relief claimed. This page is a general explanation of the statutory provision.

Official text of the Indian Contract Act, 1872

For the current official statutory text, see the Indian Contract Act, 1872 on India Code. Section 125 appears in Chapter VIII, "Of Indemnity and Guarantee".