Chapter VIII - Of Indemnity and Guarantee
Section 125
Section 125: Indemnity-holder rights when sued
An indemnity-holder sued over a covered matter may recover specified damages, costs and compromise payments, subject to the statutory conditions.
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Need advice on Section 125?
This article is for general information. Refer to the Indian Contract Act, 1872 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
The promisee 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.
Rule and business relevance
The holder must act within authority. Damages must concern a covered matter; litigation costs and compromise payments have additional prudence, instructions or authorisation conditions.
Limits and related provisions
An invoice for litigation or a settlement does not establish recovery by itself. Check the separate requirements for each category and any instructions of the indemnifier.
Hypothetical business example
Hypothetical example: A distributor reasonably defends a covered claim without disobeying the indemnifier’s instructions. The litigation costs require review under clause (2), separately from damages awarded.
Practical decision flow
Confirm the suit concerns a matter covered by the indemnity.
Separate damages, litigation costs and settlement payments.
Retain authority, instructions, advice and evidence supporting the prudence or authorisation of each item.
Check the applicable legal framework
This guide explains the central provision. Applicable State amendments, the agreement, transaction date and other governing laws can affect its application. Check the current legal framework before relying on it for a commercial decision.
Practical checklist
Do
- Confirm the suit concerns a matter covered by the indemnity.
- Separate damages, litigation costs and settlement payments.
- Retain authority, instructions, advice and evidence supporting the prudence or authorisation of each item.
Avoid
- An invoice for litigation or a settlement does not establish recovery by itself. Check the separate requirements for each category and any instructions of the indemnifier.
Glossary
- Compromise
- A settlement of the claim rather than a judgment deciding it.
- Authority
- The scope within which the indemnity-holder may act.
Frequently asked questions
Are all legal costs automatically recoverable?
No. Clause (2) imposes its own conditions concerning instructions, prudence or authorisation.
Can a settlement payment be covered?
Yes, where the conditions in clause (3) are satisfied.
Does the holder need to stay within authority?
Yes. The opening words make this a condition of the statutory rights.
Need help applying this provision to your situation?
Contact BizeneedLast updated 10 October 2026