Section 125 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 125 says what the promisee in a contract of indemnity may recover from the promisor when he is sued over a matter the indemnity covers. It lists three heads: damages he is compelled to pay, costs he is compelled to pay (subject to conditions), and sums paid under a compromise (subject to conditions). The promisee must be "acting within the scope of his authority". If you hold or have given an indemnity and a claim has been made, our legal consultation service can help you read the position.
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor: (1) all damages he may be compelled to pay in any suit on a matter the indemnity covers; (2) all costs he may be compelled to pay in that suit, if in bringing or defending it he did not contravene the promisor's orders and acted prudently (or the promisor authorised the suit); and (3) all sums paid under a compromise, if it was not contrary to the promisor's orders and was prudent (or the promisor authorised it). The section has no illustration in the source.
The opening words
"The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor—"
Three points. The section applies to "the promisee in a contract of indemnity", defined in section 124; see section 124. The promisee must be "acting within the scope of his authority"; the text does not define that phrase here. And the section lists what he is "entitled to recover from the promisor" under three numbered heads.
Head (1): damages
"all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;"
Elements: damages; compelled to pay; in a suit; in respect of a matter to which the promise to indemnify applies. The last element ties the right back to the scope of the indemnity as the parties wrote it. No condition about prudence or the promisor's orders is attached to head (1).
Head (2): costs
"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;"
Here there are two routes to recover costs:
- Route A: the promisee did not contravene the promisor's orders and acted as it would have been prudent for him to act in the absence of any contract of indemnity; or
- Route B: the promisor authorised him to bring or defend the suit.
Head (3): compromise sums
"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."
Same structure: either (A) the compromise was not contrary to the promisor's orders and was prudent in the absence of an indemnity, or (B) the promisor authorized the compromise.
The three heads at a glance
| Head | What may be recovered | Condition in the text |
|---|---|---|
| (1) | All damages he may be compelled to pay in any suit on a covered matter | None stated beyond "acting within the scope of his authority" |
| (2) | All costs he may be compelled to pay in the suit | Did not contravene the promisor's orders and acted prudently as if there were no indemnity; or the promisor authorised bringing or defending |
| (3) | All sums paid under a compromise of the suit | Not contrary to the promisor's orders and prudent as if there were no indemnity; or the promisor authorised the compromise |
The test "as it would have been prudent for him to act in the absence of any contract of indemnity" asks the promisee to act as he would if he were bearing the loss himself. The section does not define prudence further.
A modern example (ours)
Rahul's firm buys a software licence from Sunita on the strength of her written promise to indemnify him against any claim by the original vendor about the licence. The vendor sues Rahul. (1) Rahul is compelled to pay Rs. 4 lakh in damages: this is within head (1) if it is a matter to which the indemnity applies. (2) He spent Rs. 1 lakh in costs defending the suit. Sunita had told him in writing to defend it. That is within head (2), route B. (3) Alternatively, suppose Sunita had instructed him not to settle and he nonetheless settled for Rs. 2 lakh on the eve of trial. Under head (3), recovery of that sum depends on the compromise not being contrary to her orders and being prudent, or on her authorising it; here her orders were contrary, so the section's conditions would not be met on those facts.
What the section does not say
- It has no illustration in the source.
- It does not mention notice to the promisor; a prudent promisee would still give notice, and a contract may require it.
- It does not say that the promisee must wait to be sued before he can claim; it deals with "when sued".
- It does not mention interest, caps or exclusions. Those come from the contract.
What can the parties change?
Section 125 does not contain "unless a contrary intention appears". It lists what the promisee is entitled to recover where the section's conditions are met, and the contract may add to or limit what is covered. Common drafting includes conduct-of-defence clauses (who controls the defence), consent to settlement, and caps. The text of section 125 does not say whether such clauses displace it; it depends on the contract.
Practical points
- Give written notice to the promisor as soon as a claim is made, and ask for instructions.
- Get written authority to defend or compromise: head (2) and head (3) both mention authorisation by the promisor.
- Do not contravene the promisor's orders if you want costs and compromise sums; the section turns on this.
- Act prudently as if no indemnity existed: instruct sensible counsel, keep costs reasonable and record why a compromise was prudent.
- Keep records of damages paid, costs and settlement terms.
- Where the arrangement is really a guarantee, a different set of rules applies; see section 126.
Need help with an indemnity claim?
Whether you are the person claiming under an indemnity or the one who gave it, the steps you take after the first notice of a suit matter: who instructs counsel, who approves a settlement and what you record. Our legal consultation team can review the indemnity wording and your next steps. Bring the indemnity clause and the suit papers.
Key takeaways
- The promisee in a contract of indemnity, acting within the scope of his authority, may recover damages, costs and compromise sums as set out in section 125.
- Damages: all he is compelled to pay in a suit on a covered matter.
- Costs and compromise sums: subject to not contravening the promisor's orders and acting prudently, or to the promisor's authorisation.
- The section carries no illustration.
- Written authority and prudent conduct protect the claim.
Read next
- Section 124: contract of indemnity defined
- Section 126: contract of guarantee, surety, principal debtor and creditor
- Stamp duty on indemnity bond
Disclaimer: Based on the text of the Indian Contract Act, 1872 as consulted on 1 October 2026. Many questions under this Act turn on case law and on the wording of the particular contract, which this article does not cover. It is general information, not legal advice; check the official text and take advice before acting.