by Under Section 124 of the Indian Contract Act, 1872, a contract of indemnity involves a promise by one party (indemnifier) to compensate the other (indemnified) for loss. The indemnifier assumes responsibility in case of certain events that cause damage or loss to the indemnified.
Rights of the Indemnifier:
- Right to Control the Defence
When the indemnified faces a legal suit or proceedings, the indemnifier has the right to control the defence. This includes appointing lawyers, making strategic decisions, or choosing whether to settle the dispute. This right ensures that the indemnifier, who is ultimately liable to pay, can avoid unnecessary or inflated claims and control litigation expenses to protect their financial interest.
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Right to Access Legal Proceedings
The indemnifier is entitled to receive full information about legal proceedings, facts, and circumstances involving the indemnified. This includes the right to inspect legal documents, monitor case status, and be informed of actions taken. This access allows the indemnifier to assess liability, ensure transparency, and possibly intervene in a timely manner to limit loss or offer reasonable settlements to mitigate financial damage.
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Right to Subrogation
Once the indemnifier pays for the loss or damages on behalf of the indemnified, he attains the right of subrogation. This means the indemnifier steps into the shoes of the indemnified and can recover the amount from third parties responsible for the loss. Subrogation helps the indemnifier claim legal redress, damages, or refunds and prevents unjust enrichment of the indemnified.
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Right to Proof of Loss
The indemnifier has the right to demand credible proof or evidence of the loss before compensating the indemnified. This ensures that the indemnifier is not held liable for false, exaggerated, or fraudulent claims. The indemnified must demonstrate that the loss falls within the agreed terms of indemnity. This right is a protective measure to prevent misuse of indemnity arrangements.
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Right to Be Informed of Settlements
If the indemnified chooses to settle a claim or dispute without court intervention, the indemnifier has the right to be informed beforehand. Since the indemnifier may be responsible for the settlement amount, prior knowledge and consent help them evaluate the fairness of the settlement. This prevents the indemnified from entering unfavorable or excessive settlements without the indemnifier’s approval.
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Right to Reimbursement on Misuse
If the indemnifier pays for a loss based on false information or fraud by the indemnified, he retains the right to recover that amount. This right protects the indemnifier from being financially liable for dishonest conduct by the other party. Courts uphold this right to ensure indemnity is used only in good faith and within the legal scope of the original contract.
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Right to Define Scope of Indemnity
The indemnifier has the right to specify the extent, conditions, and limitations of indemnity at the time of entering the contract. This means the indemnifier can include clauses to exclude certain types of losses (like indirect damages, penalties, or third-party actions) or set a financial cap. Clearly defining scope protects the indemnifier from open-ended or unlimited liability in the future.
Duties of the Indemnifier
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Duty to Compensate for Actual Loss
The primary duty of the indemnifier is to compensate the indemnified for any actual loss or damage suffered due to the acts covered under the contract. This includes financial loss, legal costs, or damages awarded by the court. The indemnifier is legally bound to fulfill this duty once the indemnified proves that the loss falls under the indemnity clause.
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Duty to Act in Good Faith
The indemnifier must act honestly and in good faith while discharging obligations under the contract. This includes cooperating with the indemnified, not withholding critical information, and not taking unfair advantage of the indemnity arrangement. Good faith is fundamental to all contracts, and its breach may result in loss of trust or legal consequences.
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Duty to Honour Terms of Contract
The indemnifier has a legal obligation to perform according to the specific terms agreed in the contract of indemnity. This includes honoring the agreed limit of liability, covering specified events, and respecting timelines. Failure to perform as per the contract may amount to breach, making the indemnifier liable for damages or penalties.
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Duty to Pay Reasonable Legal Costs
When indemnity covers legal actions, the indemnifier must bear reasonable costs of litigation, including lawyer’s fees and court charges, if these are incurred in good faith. The indemnified should not suffer additional legal burden when acting within the terms of the contract. Courts may enforce this duty even if the indemnity amount does not explicitly mention legal costs.
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Duty Not to Interfere Unreasonably
Although the indemnifier may have the right to control proceedings, they must not interfere unreasonably or act in a way that harms the indemnified’s legal interests. For example, pressuring the indemnified to accept an unfair settlement may be considered a breach of duty. The indemnifier must balance control with the indemnified’s rights and interests.
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Duty to Indemnify Promptly
It is the indemnifier’s duty to compensate the indemnified within a reasonable time after the loss has occurred and been substantiated. Unnecessary delay in payment can lead to financial hardship for the indemnified and may invite legal action or interest on delayed compensation. Prompt action is seen as a sign of good faith and professionalism.
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Duty to Uphold Confidentiality
In situations where indemnity is linked to sensitive information, such as in professional services or commercial contracts, the indemnifier must maintain confidentiality. Sharing or misusing such information may not only breach the contract but also legal provisions under privacy or trade secret laws. Upholding confidentiality protects the integrity of the business or relationship.
