Rights of an Indemnity Holder :
Section 125 of the Contract Act deals with the rights of an indemnified or the indemnity holder.
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor:
– All damages which he may be compelled to pay in any suit in respect of any matter to which the promse to indemnity applies.
– 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 authorised him to compromise the suit.
– All sums which he may have paid under the terms of any promise 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 to compromise the suit.
It may be noted that that the right of indemnity holder are subject to:
– His acting within the scope of his authority.
– The condition that he does not contravene the specific directions of the promisor. In case the indemnity holder does not violate the above two conditions, he is then entitled to be indemnified by the indemnifier to the extent of:
– The damages paid by him.
– The costs incurred to file the suit
– Any amounts paid by him pursuant to a compromise in the suit provided that the compromise was not contrary to any of the order or directions of the indemnifies and the compromise was such that it was an act of prudence in the absence of contract of indemnity,
Costs: As regards the costs, costs paid to the solicitors, traveling expenses and also costs reasonably incurred in resisting or reducing or ascertaining the claim, may be recovered. The general principle in computing the costs is that it should be such as, would a reasonable man think if necessary to incur.
Sums paid on compromise: As per the section, if the indemnity holder acts within the scope of his authority, then he is entitled to recover from the indemnifier all the sums that he may have paid pursuant to a compromise in a suit, provided however that:
a) Such compromise was not contrary to the orders of the indemnifier or
b) Such compromise was prudent to be made by the indemnity holder in the absence of any contract of indemnity.
c) The indemnifier had authorized the indemnity holder to compromise the suit.
The Madras High Court in Venkataramana v. Magamma (AIR 1944 Mad. 457) has held that even in the absence of a notice to the indemnifier (promisor), the compromise would bind him, if not contrary to the orders of the promisor, and is entered bona fide and without any collusion and is not imprudent.
Time of commencement of the indemnifier’s liability:
Section 124 the Indian Contract Act does not state the time of the commencement of the indemnifier’s liability under the contract. Different High Court have been observing different rules in this connection. Some High Court have held that the indemnifier is not liable until the indemnified has incurred an actual loss. Others have held that the indemnified can compel the indemnifier to make good his loss even before he has actually discharged his liability. “Indemnity is not given by repayment after payment Indemnity requires that the party to be indemnified shall never be called upon to pay.”
The latter view, which is based on equitable principles, has now almost come to stay. The position in English law is also the some. It has been rightly observed in an English case that “to indemnify does not merely mean to reimburse in respect of moneys paid, but to save from loss in respect of liability against which the indemnity has been given… if it be held that payment is a condition precedent to recovery, the contract may be of little value to the person to be indemnified, who may be unable to meet the claim in the first instance,”
A similar observation was made by Chagle J, in the case of Gajanan vs. Moreshwar that “if the indemnified had incurred a liability and that liability is absolute, he is entailed to call upon the indemnifier to save him from that liability any pay it off.”
Damages
You may recall that contract of indemnity is a contract by which one party promises to save the other from loss caused to him. This loss can be either by the conduct of the promisor or by the conduct of any other person.
The indemnity holder (the promise or the person who is indemnified) has the following rights when sued (i.e. when a legal action is taken against the person who is indemnified)
The promise is entitled to recover from the promisor, in respect of the matter to which the promise to indemnify applies:
1. All damages which he may be compelled to pay in any suit.
2. All costs which he may be compelled to pay in any suit.
Let us take an illustration to bring home this point clearly:
A contracts with C that B will not sue C in respect of Rs. 100000/-, which C owes to B. If sues C, any consequences of such a suit will be borne by A according to the contract. Is such a contract valid?
The Contract Act specifically provides that such a contact can be entered into. These are known as contract of indemnity. Here A is said to indemnify C for a certain loss, which he may suffer.
All insurance contracts are examples of contracts of indemnity because all insurance contracts, which indemnify a person from certain losses, which he may suffer, e.g. under a fire insurance policy taken by a shop-keeper for his godown, the insurance company undertakes to pay a certain amount to the policy holder (i.e. the shop-keeper) in the event of fire in the godown and subject to the conditions of the policy and payment of premium by the shop keeper (policy holder).