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LAW OF CONTRACT - II
Faculty – Shradha Baranwal
Assistant Professor, COLS
CONTRACT OF INDEMNITY AND
Section 124 –promise to save the other from loss
• By the conduct of the promisor himself,
• By the conduct of any other person, is called a
‘contract of indemnity’.
English Law – covers loss caused
• By any act done at the request of Promisor
• By any accident, event not dependent on the
conduct of any person
INDEMNIFIER AND INDEMNIFIED
Promise of indemnity could be in three ways –
Express or implied contract of indemnity
Relation of the parties
EXAMPLES OF INDEMNITY
A, a joint Promisor pays off the whole debt and sues B for
half the due amount.
Liability of directors of the company to compensate for
the loss suffered by a person whose name appears as
director without his consent or the consent has been
Liability towards partner of a firm in respect of
payments made by him on behalf of the firm in
the ordinary course of business.
COMMENCEMENT AND EXTENT OF LIABILITY
Earlier position in English Law –
no indemnity till the actual losses
have been suffered
Difficulty with the earlier position
Law commission of India observed that indemnity
is a claim and not mere reimbursement. (See
Osman Jamal And Sons Ltd. vs Gopal Purshottam
AIR 1929 Cal 208
Gajanan Moreshwar Parelkar vs Moreshwar
Madan Mantri (1942) 44 BOMLR 703
LIMITATION ON CONTRACT OF INDEMNITY
Indemnifier cannot sue the debtor in his own
name for want of Privity of contract
Creditor also cannot sue the promisor of the
contract of indemnity
RIGHT OF INDEMNITY HOLDER WHEN SUED
Section 125 reads,
The promisee in a contract of indemnity, acting within the scope
of his authority is entitled to recover from the promisor –
• All damages (judgment is conclusive for indemnification)
• All costs (to be reasonable)
• All sums (notice may be given)
Limitation Act – 3 years time limit for recovery
Conditions are –
• Orders of the promisor should not have been contravened
• Action of a prudent man in absence of contract of indemnity
Rights of the indemnifier
Based on the natural equity
Where one person has agreed to indemnify
another, he will, on making good the
indemnity, be entitled to succeed to all the
ways and means by which the person
indemnified might have protected himself
against, or reimbursed himself for the loss.
CONTRACT OF GUARANTEE
Sec. 126 defines contract of guarantee
Performance of a promise – corresponds to a duty
Discharge of a liability – corresponds to a debt –
Either oral or written
Operative only in case of default
Essentials of contract of guarantee
• Three necessary parties – debtor, surety,
• Default by principal debtor
• Liability voluntarily taken by another person
Contract of Guarantee by Company
• By writing under its common seal
• By any person on behalf of a company viz.,
129. Continuing guarantee
A guarantee which extends to a series of
transaction, is called, a "continuing guarantee".
– The nature of Guarantee is a question of the intention
inferred by language, surrounding circumstances and relative
position of the parties.
Guarantee and indemnity (similarity)
Broadly both insures against losses
Differences – Guarantee and Indemnity
1. Parties and formation
2. Difference in liability
3. Existing debt or duty
4. Formalities –
– Contract of Guarantee with the knowledge of the principle
debtor (can avail 140, 141 and 145)
– Without the knowledge of principal debtor (can not avail
Nature of contract of Guarantee
• Collateral or conditional contract
• Something auxiliary to an antecedent obligation.
• There are two classes of guarantee – a promise
which becomes effective if the debtor fails to
perform his obligation and a promise that the
debtor will perform his obligation. Guarantee in
the latter case are effectively unconditional.
• A contract of Guarantee is not one uberrimae
fidei, but a contract of strictissima juris.
• An arrangement under which the promisor
undertakes an obligation which replaces and/or
extinguishes the principal-debtor’s liability, whether
by novation or otherwise, is not a guarantee.
• The principal-debtor may be a party to the contract
• Surety against minor’s contract is treated as
• Liability should be legally enforceable
• Surety’s liability equivalent to that of a principal.
• Liability subject to condition if provided – Hence can
• For filing the suit for enforcing entitlement it is
not necessary for the creditor to exhaust suit
against principal debtor.
• Liability to be proved in the same manner as PD
• Contract of guarantee without consideration –
Criteria to determine whether contract of
Guarantee or Indemnity
• Use and frequency of use of words
• Nature of liability
Section 127 Consideration for guarantee
Anything done, or any promise made, for the
benefit of the principal debtor, may be a
sufficient consideration to the surety for giving
Legal detriment incurred by the Promisee at the
promisor’s request-irrespective of benefit to the
LIABILITY UNDER CONTRACT OF GUARANTEE
Section 128 Surety's liability
The liability of the surety is co-extensive with
that of the principal debtor, unless it is
otherwise provided by the contract.
Liability of two persons primarily liable, not
affected by arrangement between them that
one shall be surety on other’s default.
Section 144. Guarantee on contract that
creditor shall not act on it until co-surety
Section 146. Co-sureties liable to contribute
Section 147. Liability of co-sureties bound in
different sums –
• Liability for void or voidable contract (surety
against minor’s debt)
• Discharge of principal debtor by operation of law
does not discharge the surety e.g. insolvency.
• Statutory reduction or extinguishment of liability
• Filing a suit and execution of a decree
• Effect of acknowledgement by a principal debtor
does not bind the surety unless specifically
• Document of release in favour of PD without
reserving right against surety.
REVOCATION OF CONTRACT
130. Revocation of continuing guarantee
A continuing guarantee may at any time be revoked by the
surety, as to future transactions, by notice to the creditor.
• By giving notice guarantor can avoid future liability.
• Where a continuing relationship is constituted on the
faith of guarantee, it cannot be revoked during the
continuance of that relationship. However a material
change in the guaranteed situation may justify revocation
viz., proved misconduct of servant.
• Prescribed mode of revocation
• Change in the status of creditor would terminate the
guarantee unless agreed otherwise.
131. Revocation of continuing guarantee by
surety' death The death of the surety operates, in the absence
of any contract to the contrary, as a revocation
of the continuing guarantee, so far as regards
• In the absence of any contract in contrary
• Joint and several liability
DISCHARGE OF SURETY (SEC 133-135 &139)
Also consider General ways for discharge of contract
• Discharge of surety by variance in terms of contract
(variance without the consent of surety) Rule of strict
• Variance should be substantial
• Cases of ambiguity – rule of contra proferentem
Discharge of surety by release or discharge of principal
• A surety is discharged if the creditor without his consent,
unconditionally release the principal debtor.
• Release of the principal debtor by a complete
novation or otherwise – terminates the
• Acceptance of second surety by the creditor
• Consent decree/ Compromise
Sec. 135 Contract between principal debtor and
the creditor to give time to, agreement not to
sue…etc would discharge the surety.
Section 139. discharge of surety by creditor’s act or
omission impairing surety’s eventual remedy –
Section 139 includes –
-does an act inconsistent with the rights of the surety;
- Omits to do any act which his duty to the surety
requires him to do, and as a result the surety’s
eventual remedy against the principal debtor is
Section 139 is residuary in nature which ensures that
no contrary arrangement is made
Cases which can be covered under section 139 –
• Where the creditor consented to the release of
attachment over the properties;
• Where creditor failed to convey property in purchase, the
price of which was guaranteed by the guarantor ;
• Sale of mortgaged property in favour of creditor without
there being any occasion for the same;
• Loss of pledged goods;
• Failure of creditor to bring on record the LRs of the dead
principal debtor resulting into abatement of proceedings
• Security not returned in the same condition as given to
THE ONUS LIES ON SURETY
• Guarantee for several and distinct contracts.
• Waiver of right.
• Liability to remain when change is inoperative.
• Only substantial variance need not to be the
actual case of prejudice.
• Effect of novation.
• Surety is the best judge of his interest.
SURETY WHEN NOT DISCHARGED
Section 136. Surety not discharged when
agreement made with third person to give time
Section 137. Creditor’s forbearance to sue does
not discharge surety –
Section 138. Release of one co-surety does not
discharge others –
RIGHTS OF THE SURETY
Section 140. Rights of surety on payment or performance
….Surety becomes invested with all the rights which the
creditor had against the principal debtor.
• Entitlement for part payment
• Based on the principal of equity
• In counter guarantee for reimbursement the rights are
transferred to the counter guarantor.
• Priority in cases of liquidation and winding up.
• Rights before demand of payment once the liability
• Injunction even before the payment
Section 141. Surety’s right to benefit of creditor’s
securitySurety is entitled to all the securities creditor had
at the time of entering into contract of surety
irrespective of the knowledge of the same – any
impairment in the same would discharge the
Section 145. Implied promise to indemnify
Based on equity
• Rightfully paid
Includes property, assignment of rights
• Entitlement runs till full indemnification is
done including payment towards interest.
• Recovery of cost
Includes cases where surety has defended the
debtor under his authority, for his benefit, or
under circumstances which were unavoidable
GUARANTEE OBTAINED BY
Section 142. Guarantee
misrepresentation, invalid –
Section 143. Guarantee
concealment, invalid –
Circumstances in which necessary disclosure is
made to the surety –
• Where the surety has asked specific question to
• Where the bank misleads the surety by
volunteering only part of the truth;
• Where the surety makes a statement in the
creditor’s presence that demonstrates that the he
entirely misunderstood the principal debtor’s
• Where there is anything that might not naturally
be expected to take place between the principal
debtor and the creditor
CASE LAWS ON GUARANTEE
• Gas Authority of India Ltd., New Delhi v Official
Liquidator, Mumbai AIR 2004 Bom 220
• Syndicate Bank v Pamidi Somaiah (Died) AIR 2002 AP 12
• M. S. Anirudhan vs The Thomco'S Bank Ltd on 1963 AIR
• Ram Narain vs Lt. Col. Hari Singh And Anr. AIR 1964 Raj
• State Bank Of India & Anr vs Mula Sahakari Sakhar
Karkhana Ltd on 6 July, 2006
• Syndicate Bank vs Channaveerappa Beleri & Ors on 10
• United Bank Of India vs Satyawati Tondon & Ors. on 26
1. A, introduced B to C for certain business leading
to execution of a contract between B and C.
Later C breached the contract – Decide the
liability of A
Whether A is liable for indemnify or stands as
Guarantee (Refer Chanana Steel Tubes Pvt. Ltd. v.
Messrs Jaitu Steel Tubes Pvt. Ltd. AIR 2000 HP 48)
2. X invited Y for celebrating his marriage. Y
promised to gift X a watch. Z a common friend
to X and Y guaranteed the same in case Y
defaults. Y defaulted in his promise. Decide the
liability of Z.
3. X agreed to sell 500 pieces of shoes to Y for a
consideration of 30,000 Rs. Y received the goods
but failed in payment of the amount. Z a friend to
Y entered into a contract with X for the payment
of the due amount in consideration of discharging
the liability of Y. Decide the status of Z whether he
stands as surety to the contract between X and Y?
4. A agreed with B to pay off all the losses B would
suffer due to payment against sale B concluded
with C. The agreement between A and B was
worded as follows:
This Agreement of Guarantee is been concluded between A and
B whereby A guarantees to make payment in case of loss
suffered by B on account of payment against sale concluded
between B and C.
Decide the nature of contract between A and B
5. X borrowed Rs. 50,000 from Y. Z deposited his
property papers to secure the payment without
there being any express agreement. Decide the
liability of Z in case of non payment by X.
6. In a writing by X to Y in the presence of Z:
“Please lend Rs. 1200 to Z; there will be no
trouble in the payment of your money. Be
assured, if there by any trouble, I undertake to
indemnify you and would stand as equally
liable”. Decide whether contract of Guarantee