Special Contracts · Indemnity, Guarantee, Bailment and Agency

Rights and Duties in Indemnity

Apply Sections 124 and 125 to damages, legal costs, prudent compromises and the indemnifier's obligation when covered liability becomes absolute.

5 min readReviewed by Advocate Aditya Sharma
Sections 124 and 125

In one line

An indemnifier must protect the indemnity-holder against loss within the promise, including qualifying damages, costs and compromise payments.

After this note, you should be able to

  • Identify whether a loss falls within the indemnity.
  • Apply the three statutory heads in Section 125.
  • Explain when the holder can seek protection.

Rights of the indemnity-holder

Section 125 applies when the holder acts within the scope of authority.

Damages
Recover damages the holder is compelled to pay in a suit concerning the matter covered by indemnity.
Costs
Recover prudent litigation costs where the holder did not disobey the indemnifier and acted as a reasonable person would without indemnity.
Compromise sums
Recover amounts paid under a prudent compromise not contrary to the indemnifier's orders, or one authorized by the indemnifier.
Relief against absolute liability
Courts have recognized protection when covered liability becomes absolute, even before the holder has actually paid it in every case.

Duties and protections of the indemnifier

Liability extends only to the risk and conduct covered by the promise.

Make good covered loss
The indemnifier must satisfy liability falling within the indemnity according to its terms.
Receive cooperation
The holder should act prudently, follow lawful instructions and avoid unnecessarily increasing the indemnifier's exposure.
Benefit of recovered rights
After satisfying the loss, the indemnifier may rely on equitable subrogation to prevent double recovery by the holder.

Work through the facts

Illustration

Facts

A promises to indemnify B against a third-party ownership claim. B reasonably defends the suit and enters a court-approved settlement after informing A.

Likely result

B may recover the covered settlement and prudent defence costs if the settlement was authorized or reasonable and not contrary to A's instructions.

What to learn

Test scope, prudence, authority and causation for each amount claimed.

Cases with a purpose

Landmark judgments

Learn the rule and where to use it. A case name without its legal function adds little to an answer.

Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri

Further reading

AIR 1942 Bom 302

Principle: An indemnity-holder need not always wait to suffer actual out-of-pocket loss once the covered liability has become absolute.

Use in an answer: Use it where the holder seeks an order compelling the indemnifier to meet a crystallized liability.

Osman Jamal & Sons Ltd. v. Gopal Purshottam

Further reading

AIR 1929 Cal 208

Principle: Indemnity is intended to save the protected party from covered liability and can support relief before ruinous personal payment.

Use in an answer: Use it with Gajanan Moreshwar for the equitable operation of indemnity.

For a 10-mark answer

Answer structure

  1. Identify the exact risk covered by the indemnity.
  2. Classify the claim as damages, costs or compromise payment.
  3. Test authority, prudence and instructions under Section 125.
  4. Decide whether liability is contingent or has become absolute.

Common mistakes

  • Assuming every commercial loss falls within the indemnity.
  • Allowing unreasonable litigation costs automatically.
  • Requiring payment first even after liability has become absolute.

Before you close the tab

Quick revision

  • Scope of the promise controls the indemnifier's duty.
  • Section 125 covers damages, costs and compromise sums.
  • The holder must act prudently and within authority.
  • Absolute liability can trigger equitable protection.

Test yourself

  1. Which three heads appear in Section 125?
  2. When are litigation costs recoverable?
  3. Must the holder always pay first?

Short answers

Frequently asked questions

Does indemnity cover every loss suffered by the holder?

No. The loss must fall within the language and purpose of the indemnity and satisfy the statutory conditions.

Can the holder claim before paying the third party?

Courts have recognized relief where the covered liability has become absolute, even if the holder has not first paid from personal funds.

Primary sources

This is an educational study note. Read the bare provision and full judgment before relying on a proposition in research or practice.