This document summarizes key aspects of contracts of indemnity and guarantee under Indian contract law. It defines a contract of indemnity as one where one party promises to save the other from loss caused by the conduct of the promisor or a third party. A contract of guarantee involves one party promising to perform or discharge the liability of a third party (principal debtor) in case of default. The document outlines the rights and obligations of indemnifiers, guarantors (sureties), principal debtors, and those indemnified or to whom a guarantee is given (creditors). It also discusses various ways in which sureties can be discharged from their obligations or liabilities.

1. Lecture 6
Contract of Indemnity and Guarantee
INDIAN CONTRACT ACT, 1872
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2. • The Contract by which one party promises to save the other from the
loss caused to him by the conduct of the promisor himself/ by the
conduct of any other person is called a ‘contract of
indemnity’;(Section 124)
• Thus, the person who promises to indemnify the other is the
Indemnifier (promisor) and the person whose loss is to be made is
the Indemnified/ Indemnity holder (Promisee);
• For example: A contracts to indemnify B against the consequences of
any proceedings which C may take against B in respect of a certain
sum of Rs. 200. This is a contract of indemnity;
• Also, where the insurance co. agrees to compensate for any damages
that the insured is protected by the insurer company;
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3. • The contract of indemnity is a contingent contracts;
• Right of an indemnity holder: (Section 125)
a) Right to recover damages
b) Right to recover costs
c) Right to recover sums paid in compromise
• A ‘Contract of guarantee’ is a contract to perform the promise/
discharge the liability of a third person in case of his default;
(Section 126)
• Thus, the person who gives the guarantee is called the ‘surety’, the
person in respect of whose default the guarantee is given is called the
‘principal debtor’ and the person to whom the guarantee is given is
the ‘creditor’;
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4. • A guarantee can be oral/ written or express/ implied and may even
be inferred from the course of conduct of the parties concerned;
• Anything done/ any promise made for the benefit of the principal
debtor, may be a sufficient consideration to the surety for giving the
guarantee;
• For example: B requests A to sell and deliver to him goods on credit.
A agrees to do so, provided C will guarantee the payment of the price
of the goods. C promises to guarantee the payment in consideration of
A’s promise to deliver the goods. This is sufficient consideration for
C’s promise;
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5. • Kinds of Guarantee:
1) Retrospective Guarantee (guarantee issued when the debt is already
outstanding)
2) Prospective Guarantee (Given in regard to a future debt)
3) Specific Guarantee (when dealing with a single transaction i.e. single debt)
4) Continuing Guarantee (series of transactions)
• For example: A, in consideration that B will employ C in collecting the
rents of B’s zamindari, promises B to be responsible, to the amount of Rs.
5000, for the due collection and payment by C of those rents. This is a
continuing guarantee;
• A guarantees payment to B, a tea dealer, to the amount of Rs. 1000, for any
tea he may from time to time supply to C. B supplies C with tea of value of
Rs. 1000 and C pays B for it. Afterwards, B supplies C with tea of the value
of Rs. 2000. C fails to pay. The guarantee of A was a continuing guarantee
and liable to B but to the extent of Rs. 1000.
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6. • Revocation of a Continuing Guarantee
a) By notice (Sec. 130)
b) By death of Surety (Sec. 131)
c) On discharge of Surety
• Surety’s Liability (Sec. 128)
a) Liability is secondary and Conditional
b) Liability is coextensive with liability of Principal Debtor
c) Surety’s liability may be limited
• For example: A guarantees to B the payment of a bill of exchange by
C, the acceptor. The bill is dishonoured by C. A is liable not only for
the amount of the bill but also for any interest and charges which may
have become due on it.
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7. • Rights of Surety:
a) Against the Principal Debtor (Sec. 140 and 145)
i. Right of subrogation (invested with same rights as creditor)
• Rights invested only ‘upon payment or performance of all that he is
liable for’ and to the extent ‘the principal debtor has defaulted’(CK
Aboobacker v Ayishu);
ii. Right to Indemnify (recover all amounts rightfully paid to PD)
b) Against the Creditor
i. Right to claim securities (all securities that debtor provided to
creditor)
ii. Right to set off (deductions from the loan amount)
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8. c) Against the Co-sureties (Sec. 146-147)
i. Right to contribution (one co-surety can recover from other co
surety if pays debt or discharges the entire obligation)
• For example: A, B and C are sureties to D for the sum of Rs. 1000 lent
to E, and there is a contract between A, B and C that A is to be
responsible to the extent of one quarter, B to the extent of one quarter,
and C to the extent of one half. E makes default in payment. As
between the sureties, A is liable to pay Rs. 250, B Rs. 250 and C Rs.
500;
ii. Right to share the benefit of securities (security received by one
co-surety will enable others to share the benefit equally);
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9. • Discharge of a Surety:
a) By notice of revocation (Sec. 130)
b) By death of surety (Sec.131)
c) By variance in terms of Contract (Sec. 133)
• A becomes surety to C for B’s conduct as manager in C’s Bank. Afterwards,
B and C contract, without A’s consent, that B’s salary shall be raised and
that he shall become liable for 1/4th of the losses on overdrafts. B allows a
customer to over draw and the bank loses a sum of money. A is discharged
from his suretyship by the variance made without his consent and is not
liable to make good this loss;
d) By release/ discharge of Principal Debtor (Sec. 134)
• A contracts 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 suretyship;
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10. e) When creditor compounds/gives time/ agrees not to sue the debtor
(Sec. 135)
• But when the creditor makes contract with third person to give time to
principal debtor instead of making contract with principal debtor, the surety
is not discharged; (Sec.136)
• For example: C, the holder of an overdue bill of exchange drawn by A as
surety for B, and accepted by B, contracts with M to give to B. A is not
discharged;
• Mere forbearance on the part of creditor to sue the principal debtor/ enforce
any other remedy against him does not, discharge the surety; (Sec. 137)
• For example: B owes to C a debt guaranteed by A. The debt becomes
payable. C does not sue B for a year after the debt has become payable. A is
not discharged from his suretyship;
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11. • Release of one co-surety does not discharge others (Sec. 138);
• For example: A, B and C gives surety to D for Rs. 3000 for E. C
becomes insolvent. Here, D may discharge C from liability as surety
but A and B will not be discharged;
f) By creditor’s act (Sec. 139)
• For 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.
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12. g) By release or loss of security by creditor (Sec. 141)
• For example: C, advances to B, his tenant, Rs. 2000 on the guarantee
of A. Also, C has further security for Rs. 2000 by a mortgage of B’s
furniture. C, cancels the mortgage. B becomes insolvent and C sues A
on his guarantee. A is discharged from liability to the amount of the
value of the furniture;
h) By invalidation of Contract of Guarantee (Sec. 143)
• For example: A guarantees to C payment for iron to be supplied by
him to B to the amount of Rs, 2000 tons. B and C have privately
agreed that B should pay Rs. 5 per ton beyond the market price, such
excess to be applied in liquidation of an old debt. This agreement is
concealed from A. A is not liable as a surety;
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