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) 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.
Rights of a person who is promised protection (Indemnity-holder)
If someone promises to protect you from loss (this is called indemnity), and you (indemnity-holder or promisee) act properly within your authority, then you can get back money from that person (promisor) if a case is filed against you.
You can recover from promisor:
1. Damages (losses): Any money you are forced to pay by the court in that case.
2. Legal costs: Any expenses for the case (like lawyer fees), if:
- You did not go against the instructions of the person who promised to protect you, and
- You acted carefully and reasonably, as a normal prudent person would act if there was no indemnity contract, or
- That person allowed you to file or defend the case.
3. Settlement amount: Any money you paid to settle the case (compromise), if:
- The settlement was not against the instructions of the promisor, and
- The settlement was one which a reasonable and prudent person would have made even if there was no indemnity contract, or
- The promisor agreed to the settlement.
Example
1) A asks B to sell goods on his behalf and promises to cover any loss (indemnity). A customer files a case against B for a problem with the goods.
Now Ravi:
- Pays ₹20,000 as court-ordered damages
- Spends ₹5,000 on lawyer fees
- Settles the case by paying ₹10,000 (with Mohan’s approval)
B can ask A to repay all ₹35,000 because A had promised to protect him from such losses.
2) A transport company agrees to deliver goods for a business owner. The owner promises to indemnify the transport company against any legal claims relating to the goods.
Later, a third party files a case against the transport company claiming the goods caused damage to their property. The court orders the transport company to pay ₹1,00,000 as damages.
Since the matter is covered by the indemnity agreement, the transport company (indemnity-holder) can recover the ₹1,00,000 damages from the business owner (promisor).
3) Suppose a distributor agrees to sell products for a manufacturer. The manufacturer promises to indemnify the distributor against any legal claims regarding the product.
A customer files a lawsuit against the distributor for a defect in the product. The distributor hires a lawyer and spends ₹50,000 defending the case.
If the distributor acted reasonably and did not go against the manufacturer’s instructions, he can recover the legal expenses from the manufacturer.
4) A contractor agrees to perform work for a company, and the company promises to indemnify the contractor for claims related to the project.
Later, a third party files a case against the contractor. Instead of continuing the case, the contractor settles the dispute by paying ₹75,000.
If the settlement was reasonable and not against the company’s instructions (or the company allowed it), the contractor can recover the ₹75,000 from the company.