In an indemnity contract, what damages can the indemnifier be held liable for?
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The contract of indemnity is a particular contract in which one of the parties (the indemnifier) promises to protect the other (the indemnified) from loss caused by the promisor’s or any other person’s actions. Section 124 and 125 of the Indian Contract Act, 1872 applies to these contracts.
The promisee/ indemnified/ indemnity-holder has the following rights against the promisor/ indemnifier under Section 125 of the Indian Contract Act, 1872, provided that he acts within the boundaries of his authority.
Therefore, when sued, the indemnity-holder has the following rights:
a. The indemnifier will be liable for the damages claimed by the indemnity holder in a lawsuit.
b. Any costs he is legally obliged to pay in any such suit if, in initiating or defending it, he did not disobey the promisor’s commands and acted as he would have acted in the absence of the indemnification contract, or if the promisor permitted him to bring or defend the claim.
c. The indemnity holder has the power to force the indemnifier to pay the costs of the lawsuit.
d. If the parties agree to a legally binding settlement, the indemnifier is responsible for paying the settlement sum.
e. All payments paid under the terms of a compromise in any such dispute, if the compromise was not against the promisor’s instructions and was one that the promisee would have made if the indemnification contract had not been made, or if the promisor authorized him to make the compromise. Some of the crucial restrictions he should observe here are that the indemnification holder’s rights are neither absolute or unrestricted under this section. He must act within the scope of the promisor’s power and not go against the promisor’s commands. He must also operate with the same level of intelligence, caution, and care as he would if there were no indemnification contract in place.
f. If an indemnity bearer has acquired absolute liability and the contract covers that liability, he has the right to sue for particular performance.
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