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CMA Intermediate · Business Laws and Ethics · Special Contracts - Indemnity and Guarantee; Bailment and Pledge; Laws of Agency

Under Section 125 of the Indian Contract Act, 1872, an indemnity-holder sued by a third party in respect of a matter covered by the indemnity can recover from the promisor all costs he is compelled to pay in the suit if:

Costs are recoverable if the indemnity-holder did not contravene the promisor's orders and acted as would have been prudent without an indemnity, or if the promisor authorised the suit. Section 125(2) sets this test; success in the suit or prior notice alone is not required.

  1. AHe won the suit, regardless of the promisor's orders
  2. BHe did not contravene the promisor's orders and acted as would have been prudent without any indemnity, or the promisor authorised the suitCorrect
  3. CHe informed the promisor in writing before filing the suit, whatever the conduct of the suit
  4. DThe costs were below the amount of damages awarded

Explanation

Section 125(2) allows recovery of costs where, in bringing or defending the suit, the promisee did not contravene the promisor's orders and acted as it would have been prudent for him to act without an indemnity, or where the promisor authorised the suit. Winning or giving notice is not the stated test.

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