CONTRACT OF INDEMNITY

CONTRACT OF
GUARANTEE
 Lecture outcome
• Apprehend the legalities of contract of
indemnity and guarantee
• Cognize the true position of surety
 CONTRACT OF INDEMNITY

• It is a contract by which one party

promises to save the other from loss
caused to him by the conduct of the
promisor himself or by the conduct of
any other person.
Example : A promises to B
that if you face any loss due
to him then he (A) will be
liable to pay that loss of B.
 CONTRACT OF INDEMNITY cont---

• There are only two parties involved i.e. the

person who promises to make good the loss
generally known as the indemnifier (promisor)
• The person whose loss is to be made good
called as the indemnified or Indemnity- holder
(promisee).
 Who is indemnity holder?
• A promises to B that if you face any loss
due to any proceedings which C may take
against B then he (A) will be liable to pay
that loss of B.
 Who is indemnifier??
• A and B go into a shop. B says to
shopkeeper “ Let A have the goods, I will
see you paid.”
 CONTRACT OF INDEMNITY cont---

• There is only one contract between the parties.

• There is an undertaking on the part of the

indemnifier to be answerable.
 CONTRACT OF INDEMNITY cont---

• The liability of the indemnifier to the indemnified

is primary and independent.

• This contract is for the reimbursement

(compensation) of loss.
 Essentials of contracts of
indemnity.
1. Essentials of a valid contract.
 Essentials of contracts of
indemnity.
2.Indemnifier promises to save indemnity
holder from some loss.
 Essentials of contracts of
indemnity.
3. The loss may be caused to him due to

– conduct of the promisor himself ,

– or by the conduct of any other person.

 Essentials of contracts of
indemnity.
4.Contract may be expressed or implied.
 Essentials of contracts of
indemnity.
5.Liability of indemnifier commences when
the indemnifier suffers some loss
according to the terms and conditions of
the contract.
(not in text book)
 Rights of Indemnity Holder
He can recover the following from
indemnifier-
1. All damages which indemnity holder was
compelled to pay
 Rights of Indemnity Holder
He can recover the following from
indemnifier
2. All costs which indemnity holder was compelled to
pay in bringing or defending the suit
 Rights of Indemnity Holder
He can recover the following from
indemnifier
3. All sums which indemnity holder paid in compromise
of any
 Rights of indemnifier
• No provision in Indian contract Act
• May have same rights as of surety
( next topic)
 MCQ
A contract in which one person promises to
compensate the other for loss suffered by
him due to conduct of the promisor or of
any other person, is known as:
a) Contract of indemnity
b) Contract of guarantee
c) Quasi contract
d) None of these
 MCQ
The party who gives the indemnity is known
as:
a) Indemnity holder
b) Indemnifier
c) Surety
d) Principal debtor
 MCQ
One of the following is not an essential of a
valid contract of indemnity, which states
that it must:
a) Have requisites of valid contract
b) Be to save a party from loss
c) Be in writing and signed
d) Be lawful in nature
 MCQ
On making the payment of loss suffered by
the indemnity holder the indemnifier’s right
are not provided in any section of Contract
act, thus he gets:
a) Right of surety
b) Moral right
c) Fundamental right
d) None of these
 MCQ
The liability of indemnifier to compensate the
indemnity holder commences when:
a) Indemnity holder has suffered actual loss
b) Liability of indemnity holder becomes
clear and certain
c) He is called upon to pay
d) He fixes that date for the same
CONTRACT OF
GUARANTEE
Contracts of guarantee
• Acc. To sec. 126 of Indian Contract Act-
A contract of guarantee is a contract to
perform the promise or discharge the liability
of a third person in case of default.
• PARTIES—surety, principal debtor,&
creditor.
Contracts of guarantee
• PARTIES-
–Surety
– principal debtor &
–creditor
CONTRACT OF GUARANTEE cont---

• The person who gives the guarantee is known

as the surety.
CONTRACT OF GUARANTEE cont---

• The person in respect of whose default the

guarantee is given known as the principal
debtor
CONTRACT OF GUARANTEE cont---

• The person to whom the guarantee is given

known as the creditor.
Contracts of guarantee
Kinds of Guarantee
1. Specific Guarantee
 A specific guarantee pertains to a single debt or a single
transaction.
 In a specific guarantee if a new transaction has to be made
between two parties a fresh guarantee will have to be taken
 Guarantee can be for an existing debt or for a prospective debt
or a future transaction.
Contracts of guarantee
Example
Purva guarantees the payment for 5 computers to Ali. The
computers are to be delivered to Khan in March. Ali
delivers the computers to Khan and payment is made to
him. Purva’s contract of guarantee ends on the payment.
He is not liable for any further contracts because it is a
specific contract pertaining to only five computers. If Khan
would not have paid for the computers then Purva would
have been liable to make the payment to Ali .
Contracts of guarantee
Kinds of Guarantee
2. Continuing Guarantee
According to Section 129 a continuing guarantee extends
to a series of transactions. The surety is liable for all the
transactions as his guarantee extends to all of them until
the guarantee is removed .
Contracts of guarantee
A, a fruit dealer agreed to supply some fruits to B on credit
at the request of C. C guaranteed to A for the payment of
the price of any fruits that he may supply to B from time to
time within one year A supplied foods worth 2 lakh and B
paid for it.
– What kind of guarantee it is?
– After one year A supplied fruits worth Rs
50,000 and B refused to pay is C Liable to
pay??
CONTRACT OF GUARANTEE cont---

Essentials
1. All the essentials of a valid contract
CONTRACT OF GUARANTEE cont---

Essentials
2. There must be a Consideration-no need for
separate consideration
CONTRACT OF GUARANTEE cont---

Essentials
3. Contractual capacity of parties- competent to
contract
CONTRACT OF GUARANTEE cont---

Essentials
4. There must be some one primarily liable-

 Existence of principal debt—enforceability by law

 Secondary liability of surety
CONTRACT OF GUARANTEE cont---

Essentials
5. Promise to pay must be conditional
CONTRACT OF GUARANTEE cont---

Essentials
6. No Misrepresentation-
CONTRACT OF GUARANTEE cont---

Essentials
7.No concealment of facts
CONTRACT OF GUARANTEE cont---

Essentials
8. Writing not necessary
– The contract of guarantee can be oral or written
 Tripartite contract

• There are three contracts

– first b/w creditor & principal debtor
– second b/w surety & creditor
– third b/w surety & principal debtor.

The primary liability is of principal debtor and the surety has a secondary liability.
Which means that the payment is to be made by the surety only if the debtor does
not pay.
Example : BIRKMYR vs. DARNELL

• S and P go into a shop. S says to the

shopkeeper “ Let P have the goods and if P fails
to pay the amount , I will”. This is the contract of
guarantee.

 If S says to the shopkeeper “ Let P have the goods and I

will pay ”
This is contract of guarantee or indemnity ????
 Summary
• Three parties.
• Three contracts.
• Secondary liability of surety.
• Existence of principal debt—enforceability by
law.
• Consideration-no need for separate
consideration.
• No misrepresentation or concealment.
• Contractual capacity of parties.
DIFFERENCE BETWEEN
CONTRACT OF
INDEMNITY AND
GUARANTEE
 Difference between Indemnity
Contract and Guarantee Contract

• Number of Parties: Indemnity contract includes

two parties namely, indemnifier and indemnity
holder. But guarantee contract includes three
parties namely creditor, Principal debtor and
surety.
• Number of Contracts: In case of
indemnity contract, as there are only two
parties, there is possibility for existence of
one contract only. But a contract of
guarantee includes three sub-contracts.
•Nature: As indemnity contract includes two
parties and one contract, it can be said that
indemnity contract is simple in nature. But
guarantee contract includes three parties
and three sub-contracts and hence be said
that guarantee contract is complex in
nature.
• Liability: In contract of guarantee there
will be two types of liabilities namely;
primary and secondary liabilities which will
be with principal debtor and surety
respectively. But in contract of indemnity
there is no classification and sharing of
liability where the absolute liability rests
with indemnifier.
• Recovery: In case of indemnity contract
the indemnifier, after compensating
indemnity holder`s loss, cannot recover
that amount from any person. But in
contract of guarantee, if surety makes
payment to creditor, he (surety) can
recover that amount from principal debtor.
RIGHTS OF SURETY
Rights of Surety

(i) Against creditors

(ii) Against principal debtor
(iii) Against Co-sureties
Rights against Creditors

1. Right to claim securities

Rights against Creditors

2.Right of set off

( can rely on any counter claim which debtor
has against creditor)
Rights against Creditors

3. Right to share reduction

Rights against principal debtor

1. Right of subrogation
Rights against principal debtor

2. Right to indemnity
 On Payment of debt surety is entitle to recover from
the principal debtor
Rights against principal debtor

3. Right to be relieved from Liability

 Before payment of debt , the surety can compel
principal debtor to relieve him from liability by paying
of debt
Rights against Co- sureties

1. Right to claim contribution

2. Right to share benefits of securities
DISCHARGE OF SURETY
 DISCHARGE OF SURETY

“A surety is said to be discharged when his

liability comes to an end”

BY BY THE
BY
REVOCATION CONDUCT OF
INVALIDATION
THE
OF CONTRACT
CREDITORS
 By Revocation

BY GIVING DEATH OF NOVATION

A NOTICE
(SEC.130) SURETY (SEC.62)
(SEC.131)
 BY REVOCATION
1. BY NOTICE(SEC.130)
 A specific guarantee cannot be revoked by the
surety if the liability has already accrued.
 A continuing guarantee may at any time be revoked
by the surety as to future transaction by the notice
to the creditor.
 But the surety remains liable for transaction already
entered into.
 BY REVOCATION

BY DEATH(SEC.131)

 The deceased surety’s estate will not be liable for

any transaction entered into between the creditor
and the principal debtor after the death of surety,
even if the creditor has no notice of death.
 BY REVOCATION

BY NOVATION(SEC.62)
Novation means
 substitution of a new contract of guarantee for an old one either
between the same parties or
 between one of the old parties and a new party,
 the consideration for the new contract being the mutual discharge of
the old contract.

The original contract of guarantee in such

a case comes to an end
 VARIANCE IN THE TERMS OF
CONTRACT(SEC.133)

DISCHARGE OF PRINCIPLE
DEBTORS(SEC.134)

BY THE
CONDUCT COMPOSITION WITH PRINCIPAL
OF THE DEBTORS(SEC.135)
CREDITORS

IMPAIRING SURETY’s
REMEDY(SEC.139)

LOSS OF SECURITY(SEC.141)
 By the conduct of the creditor
BY VARIANCE IN TERMS OF CONTRACT(SEC133)
 A surety is liable for what he has undertaken in the
contract.
 When the terms of the contract between the
principal debtor and the creditor are varied without
the surety’s consent , the surety is discharged as to
the transactions subsequent to the variance.
 Example
C contracts to lend P Rs.5000 on 1st March.
S guarantees repayment . C pays the
amount to P on1st January. S is discharged
from his liability, as the terms of the contract
have been varied.
 By the conduct of the creditor
BY RELEASE OR DISCHARGE OF
PRINCIPAL DEBTOR(SEC.134)
 The surety is discharged by any contract
between the creditor and the principal debtor,
by which the principal debtor is released,
 or by any act or omission of the creditor, the
legal consequences of which is discharged of
the principal debtor.
 Example
A contract with B for a fixed price to build a
house for B within a stipulated time, B
supplying the necessary timber. C
guarantees A’s performance of the contract .
B omits to supply the timber. C is discharged
from his surety ship.
 By the conduct of the creditor
BY CREDITOR COMPOUNDING WITH
THE PRINCIPAL DEBTOR(SEC135)
 A contract between the creditor and the principal
debtor, by which the creditor makes a composition
with, or promises to
 give time to, or
 promise not to sue the principal debtor
discharges the surety unless the surety assents to

such contract .
 Example
P purchased a motor car from C under hire-
purchase agreement on guarantee of S for
the due performance of the agreement . C
for the valuable consideration gives P further
time for payment of one of the instalments.
Held the giving of time to P discharged S
from any further liability under the guarantee
 By the conduct of the creditor
BY CREDITOR’S ACT OR OMISSION
IMPAIRING SURETY’S EVENTUAL
REMEDY(SEC139)
If the creditor does any act
 which is inconsistent with the rights of the surety,
 or omits to do any act which his duty to the surety requires him
to do,
 and the eventual remedy of the surety himself against the
principal debtor is thereby impaired,
the surety is discharged.
 Example
A puts M as apprentice to B and gives a
guarantee to B for M’s fidelity. B promises
on his part that he will, at least once a month
see M make up the cash. B omits to see this
done, as promised, and M embezzles. A is
not liable to B on his guarantee.
 By the conduct of the creditor
BY CREDITOR LOSING SECURITY
AGAINST THE PRINCIPAL
DEBTOR(SEC141)
If the creditor
 loses or,
 without the consent of the surety, parts with the security
he has against the principal debtor at the time when the contract of
suretyship is entered into ,
Surety is discharged to the extent of the value of the security .
 Example
C advances to B, his tenant Rs.2,000 on the
guarantee of A. C has also further security
for Rs.1,000 by a mortgage of B’s furniture.
C cancels the mortgage. B becomes
insolvent and C sues A on his guarantee. A
is discharged to the extent of the value of
the security.
 BY
MISREPRESENTATION(SEC.142
)

BY CONCEALMENT(SEC.143)
BY
INVALIDATION
OF CONTRACT
BY FAILURE OF A CO-SURETY TO
JOIN(SEC.144)

BY FAILURE OF
CONSIDERATION
 By Invalidation of Contract
BY MISREPRESENTATION(SEC.142)
• Where a creditor misrepresents to the surety
regarding the material facts,
The guarantee is invalid and therefore the surety is
discharged
 By Invalidation of Contract
BY CONCEALMENT(SEC.143)
When a creditor obtains guarantee
 by concealing or
 keeping silent over the materials facts,

The surety is discharged as the guarantee is invalid.

 Example
C engage P as a clerk to collect money for
him. P fails to account for some of his
receipts and C, in consequences, calls upon
him to furnish security for his duly
accounting. S gives his guarantee for P’s
duly accounting. C does not inform S with
P’s previous contract . P afterwards makes
default. The guarantee is invalid
 By Invalidation of Contract
BY FAILURE OF CO-SURETY TO
JOIN(SEC.144)
• Where a person gives a guarantee upon a contract
that a creditor shall not act upon it until another
person has joined in it s co-surety
• The guarantee is not valid if that person does not
join.
• S2 signed a guarantee given to a bank
which on the face of it was intended to be
joint guarantee of S1,S2,S3 and S4. S4
did not sign and afterwards died. The bank
did not agree with S1,S2 and S3 to
dispense with S4’s signatures. Held S2
was not liable.
 By Invalidation of Contract
BY FAILURE OF CONSIDERATION
 MCQ
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