The document discusses the concepts of indemnity and guarantee under Indian contract law, particularly Sections 124 to 126 of the Indian Contract Act, 1872. It outlines the definitions, rights, and liabilities of indemnifiers, indemnified, sureties, and creditors, as well as the distinctions between indemnity and guarantee. Additionally, it describes the rights of sureties against principal debtors, creditors, and co-sureties, as well as the conditions under which a surety can be discharged from liability.

1. CONTRACT LAW-II
PART -1
By,
MahendarSunkepaka,
M.Pharm,LLB.

2. Index
 Indemnity
 Contract of Indemnity
 Rights & liability of Indemnifier
 Guarantee
 Guarantor/ Surety
 Contract of Guarantee
 Kinds of Guarantee
 Difference B/W Indemnity and Guarantee
 Surety
 Rights and Liabilities of Surety
 Discharge of Surety

3. Indemnity = నష్టపరిహారం
 Section 124 of Indian Contract act 1872 explains about the definition of
Indemnity.
 Indemnity means making compensation payments to one party by
the other for the loss occurred.
OR
 A contract by which one party promises to save the other from loss
caused to him by the contract of the promisor himself, or by the conduct of
any other person, is called a “contract of indemnity”.
Illustration :
A contracts to indemnify B against the consequences of any proceedings which
C may take against B in respect of a certain sum of 200 rupees. This is a contract
of indemnity.
Indemnifier: The person who gives the indemnity.
Indemnity Holder/Indemnified: The person for whose protection is given.

4. Rightsof IndemnityHolder/Liabilityof Indemnifier
1. Section 125 of Indian Contract Act,1872 Deals with the Rightsof
Indemnity Holder.
2. The promisee in a contract of indemnity, acting within the scope of
his authority, is entitled to recover from the promisor.
3. All damages which he may be compelled to pay in any suit in
respect of any matter to which the promise to indemnify applies.
4. 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.

5. 5. 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.
6. Indemnity Holder may recover
a. He can recover all damages which he may be compelled to pay in any suit in
respect of any matter covered by Contract.
b. Costs incidental to the institution or defending of any such suit.
c. Sums paid under any compromise of any such suit, provided the compromise
was a prudent one to make, had there been no contract of Indemnity.
COMPELLED = ఒత్తిడి
PRUDENT = వివేకం
CONTRAVENE = అత్తకరమంచు

6. Case:
GAJAN MORESHWAR vs. MORESHWAR MADA- 1942 BOM 302,
FACTS: G Moreshwar got a plot in Bombay for a long lease period. He
transferred the lease to M Madan for a limited period. M Madan started
construction over the said plot and got his supplies from a K D Mohan Das.
When Mohandas asked for payment, the defendant could not pay up. Upon
request of M Madan, G Moreshwar executed a mortgagee deed in favor of K D
Mohan Das. Mohandas, the supplier. Interest rate was decided and G
Moreshwar put a charge over his properties. A date was set for the return of the
principal amount. M Madan had agreed to pay the principal amount, the interest
and to get the mortgage deed released before a certain date. M Madan did not
pay anything to K D Mohan Das; it was G Moreshwar who paid some interest.
When despite repeated request, M Madan did not pay the principal amount,
interest or get the mortgage deed released, G Moreshwar sued him for
indemnity.

7. HELD: The Privy Council did not accept M Madan’s stance that G Moreshwar
had suffered no loss and thus could not claim anything under
Sections 124 and 125. The Council held that an indemnity holder has rights other
than those mentioned in the Sections above. If the indemnity holder has incurred a
liability and the liability is absolute, he can turn to the indemnifier to take care of
the liability and pay it off. Thus, G Moreshwar was entitled to be indemnified by
M Madan against all liability under the mortgage and deed of charge.
Judge: Justice Chagla
Court: BombayHighCourt

8. Guarantee= హామీ
 Section 126 of the Indian Contract Act,1872 defines Contract of
Guarntee.
 A “contract of guarantee” is a contract to perform the promise, or
discharge the liability, of a third person in case of his default.
 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 called the “creditor”.
 A guarantee may be either oral or written.
The person who stands as guarantor on behalf of Principal Debtor, to make
payment in the event of default on the part of the principal debtor is Called as
GUARANTOR / SURETY

9. Principal Debtor is a person who actually barrows loan from Lender/Creditor.
Illustrations:
A borrowed loan from B, C under took personal liability on behalf of A(Principal
Debtor),by merely depositing his property documents as surety. It implied Contract
of Guarantee.
Essential Characteristics of Contarct of Guranee:
1. It may be oral or Written with satisfi the conditions under Sec 10 of the Indian
Contarct Act,1872.
2. There must be 3 Parties
i. Principal Debtor.
ii. Surety.
iii. Creditor.

10. Sec 10 of the Indian Contract Act,1872 :All agreements are
contracts if they are made by the free consent of parties competent to
contract, for a lawful consideration and with a lawful object, and are
not hereby expressly declared to be void.
Nothing herein contained shall affect any law in force in [India] and
not hereby expressly repealed by which any contract is required to be
made in writing or in the presence of witnesses, or any law relating to
the registration of documents.

11. Kinds Of Guarantee
Contracts of guarantee may be
1. Specific or Deed Guarantee
2. Continuing Guarantee.
1. Specific guarantee: Specific guarantee means a guarantee given for one
specific transaction. In this case the liability of the surely extends only to a
single transaction.
Example:
A guarantee payment to B of the price of 5
sacks of flour to be delivered by B to C and to be paid in a month. B delivers
sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C
does not pay. The guarantee given by A was only a specific guarantee and
accordingly he is not liable for the price of the four sacks.

12. 2. Continuing guarantee (Sec. 129): A continuing guarantee is that which
extends to a series of transactions (Sec. 129). It is not confined to a single
transaction. Surety can fix up a limit on this liability as to time or amount of
guarantee, when the guarantee is a continuing one. The fact that the guarantee
is continuing can also be ascertained from the intentions of the parties and the
surrounding circumstances.
Example:
i. 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 5,000 rupees, for
the due collection any payment by C of those rents. This is continuing
guarantee.
ii. A gurantees payment to B, a tea/dealer to the amount of £ 100, for tea he may
from time to time supply to C.B supplies C with tea to the extent of the
agreed value i.e., £ 100 and C pays B for it. Afterwards B supplies C with tea
to the value of £ 200. C fails to pay. The guarantee given by A was a
continuing guarantee, and he is accordingly liable to B to he extent of £ 100.

13. Difference b/w Indemnityand Guarantee
INDEMNITY GUARANTEE
a. Section 126 of Indian Contract Act,
1872
b. A contract in which a party
promises to another party that he
will perform the contract or
compensate the loss, in case of the
default of a their person, it is the
contract of guarantee.
c. Three Parties, i.e. creditor, principal
debtor and surety,
d. Number of Contracts Three.
e. Degree of liability of the promisor
Secondary.
f. Purpose to give assurance to the
promisee.
g. Maturity of Liability already exists.
a. Section 124 of Indian Contract
Act, 1872
b. A contract in which one party
promises to another that he will
compensate him for any loss
suffered by him by the act of the
promisor or the third party.
c. Two Parties, i.e. indemnifier and
indemnified.
d. Number of Contracts One.
e. Degree of liability of the promisor
Primary.
f. PurposeTo compensate for the loss
g. Maturity of Liability When the
contingency occurs.

14. Rights of Surety
Rights of Surety can be classified into three groups, as follows;
1) Rights against Principal debtor.
2) Rights against Creditor.
3) Rights against Co-Sureties.

15. Rights against Principal Debtor (Sec 140)
1. Right to give Notice: When ever creditor comes to surety, for the
purpose of seeking payment, surety can give a notice to principal
debtor to settle the debt.
2. Rights of Sub-rogation: Sub rogation is a process where rights will
get shifted from one person to the other. If surety makes payment to
creditor, surety gets all rights of creditor by sub-rogation and from
then onwards surety can behave like a creditor.
3. Right of Indemnity: Principal of indemnity operates between
principal debtor and surety where principal debtor becomes implied
indemnifier and surety becomes implied indemnity holder. Therefore,
surety can make principal debtor answerable for all sufferings.
4. Right to get Securities: In case where surety makes payment to
creditor, surety has right to get the securities given by principal debtor
to creditor.
5. Right to ask for Relief: From the date of guarantee, besides creditor,
surety also can bring pressure on principal debtor in connection with
settlement of debt.

16. Rights against Creditor ( Sec141)
1. Right to get Securities: If Surety makes payment to creditor, surety can
get all securities into his possession from creditor.
2. Right to ask for Set-off: Surety can give advice to creditor to sell away
the security and to utilize the amount thus realized for set off.
3. Rights of Sub-rogation: When ever surety makes payment to creditor,
creditor foregoes or looses all of his rights in his capacity as creditor and
those rights will be attained by surety.
4. Right to advice to Sue Principal Debtor: Surety has right to give advice
to creditor to proceed legally against principal debtor for the purpose of
recovering the amount.
5. Right to insist on Termination of Services: In case where guarantee is
with regard to conduct of an employee, surety can insist on termination of
services of employee. Here employees status is equal to that of creditor
and employee’s status is equal to that of principal debtor.

17. Rights against Co-Sureties (Sec145)
1. Right to ask for Contribution: Surety can ask his co-sureties to contribute
the amount when principal debtor comes across default. If they have given
guarantee for equal amounts, they have to contribute equally. In case where
guarantee is given for in equal amounts, the mode of contribution differs
from England law to Indian law. As per England law contribution is to be
made in the ratio of guarantee amounts. But as per Indian law the deficit
amount is to be distributed to all sureties equally and every surety will
contribute share of deficit or guarantee amount which ever is less.
1. Right to claim Share in Securities: When co-Sureties make payment to
creditor, they get securities from creditors procession. Then every surety
can claim his share in those securities.

18. Liabilityof Guarantor / Surety
1. The surety’s liability is co extensive with that of the principal debtor, unless it is
provided by the contract, If the principal debtor’s liability is extinguished the
surety’s liability is also extinguished because two are co extensive.
1. The liability of the surety can never be part of the Principal debtor’s Liability.

19. Discharge of Surety
 Section 130-139 of the Indian Contract Act,1872 lay down the provisions
relating to Discharge of Surety.
 Discharge of Surety means termination of Surety.
 Surety said to be discharged, when liability comes to end.
 FollowingareDifferentmodesofDischarge.
1. Revocation of liability = Sec 130
2. By Death = Sec 131
3. By Novation = Sec 62
4. By variance in terms of contract = Sec 133
5. Discharge or release of Principal debtor = Sec 134
6. When Creditor compounds with, gives time to , or agrees not to sue, the
principal debtor = Sec 135
7. By Creditors act or omission impairing surety’s eventual remedy = Sec 139
8. By the loss of the security by the creditor = Sec141
9. By the in validation of contract = Sec142