This document discusses contracts of indemnity and guarantee. It defines a contract of indemnity as one where one party promises to compensate another for losses caused by the promisor or a third party. It notes the indemnifier promises to pay losses and the indemnified is the party whose losses are covered. For contracts of guarantee, it explains that a surety guarantees to perform or pay a third party's debt in case of default. The document compares key elements of indemnity and guarantee contracts and provides examples. It also outlines rights and discharge of a surety.

1. Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

2. Contract of indemnity
 A contract by which one party promises to save the other
from loss caused to him by the conduct of promisor
himself, or by the conduct of any other person is called a
‘contract of indemnity’.(sec.124)
 The person who promises to make good the loss is called
indemnifier (promisor).
 The person whose loss is to make good is called the
indemnified (promisee) or indemnity holder.
 A contract of indemnity is a kind of the general contract.
 It can be expressed or implied.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

3. Contd..
 Rights of indemnity –holder (sec.125)-acting within the
scope of his authority ,is entitled to recover damages,
costs, all sums paid under the terms of compromise, suit
for specific performance.
 In gajanan moreshwar v. moreshwar madan(AIR 1942
born,302) it was held that the indemnity holder need not
wait to claim the amount from the indemnifier till he
suffers actual loss by paying off claim.
 Right of indemnifier are analogous to the right of surety
under section 141.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

4. Contract of guarantee(sec.126)
 It is a contract to perform the promise, or discharge the
liability ,of a third person in the case of his fault.
 The person who gives guarantee is called surety.
 The person in respect of whose default the guarantee is
given is ‘principal debtor’.
 The person whom the guarantee is given is called the
creditor.
 The guarantee may be oral or written.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

5. Contd..
 The contract of guarantee must have all the essentials
elements of valid contract.
 Exceptionally the principal debtor may be person
suffering from incapacity to contract.
 It is not necessary that the contract must necessarily
result in some benefit to the surety himself.
 If the guarantee is in the nature of an insurance, as in a
fidelity guarantee, all material facts must be
diclosed,otherwise the party can avoid the contract.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

6. Kinds of guarantee
 A guarantee may be given:
1. For the payment of debt
2. For the payment of the price of the goods sold on credit.
3. For the good conduct or honesty of a person employed
in a particular office(fidelity guarantee).
4. Specific or simple guarantee – which extends to a single
transaction.
5. Continuing guarantee which extends to a series of
transactions.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

7. Contd..
 The liability of the surety is coextensive with that of the
principal debtor, unless it is provided by the
contract.(sec.128)
 Limitation of surety's liability.
 Liability under the continuing guarantee.(sec.129)
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

8. Comparison
Contract of indemnity Contract of guarantee
 There are two parties to the
contract i.e. the indemnifier
and the indemnified.
 The liability of the
indemnifier to the
indemnified is primary and
independent.
 There is only one
contract.(indemnifier and
indemnified)
 There are three parties to the
contract, the creditor, the
principal debtor, and the
surety.
 The liability of the surety to
the creditor is secondary.
 There are three contracts:
1. Principal debtor & creditor
2. Creditor & surety.
3. Surety and principal debtor.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

9. Contd..
contract of indemnity Contract of guarantee
 It is not necessary for the
indemnifier to act at the
request of the indemnified.
 The liability of the
indemnifier arises only on
the happening of a
contingency.
 an indemnifier cannot sue a
third party for loss in his own
name as no contract between
them.
 It is necessary that the surety
should give the guarantee at
the request of debtor.
 There is usually an existing
debt or duty, the performance
of which is guaranteed by the
surety.
 A surety ,on discharging the
debt due by the principal
debtor can proceed against
the principal debtor in his
own right.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

10. illustration
 A and B claim certain goods from a railway company as rival
owners. A takes delivery of the goods agreeing to compensate
the railway company against loss in case B turns gut to be the
true owner. There is a contract of indemnity between A and the
railway company.
 P owes C Rs. 8,000 on a continuing guarantee given by S .S
may have given this guarantee in either of the following two
forms:
1. ‘I guarantee the payment of the debt of Rs. 5000 by P to C.
2. I guarantee the payment of any amount lent by C to P subject
to a limit of Rs. 5000
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

11. Rights of surety
 A surety has rights against-
1. The creditor-
*Before payment of principal debt ,surety can file suit
for declaration that principal debtor is liable to pay.
*On payment of principal debt ,the surety steps into
the shoes of the creditor.
2. The principal debtor- entitled to get all rights of
creditor and can recover the sum rightfully paid
under the guarantee
3. The co-sureties-liable to contribute equally.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

12. Discharge of surety
 By revocation-
1. Surety By giving notice
2. Death of surety
3. Novation
• By conduct of creditor-
1. Variance in terms of contract
2. Release or discharge of principal debtor(surety is not released
from operation by law)
3. Compounding by creditor with the principal debtor.
4. Creditor’s act omission
5. Loss of security
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU

13. Contd..
 By invalidation of contract
1. It includes guarantee obtained by misrepresentation
and concealment
2. Given on the condition that creditor will not act
upon it until co-surety joins the surety. if co-surety
does not join surety is discharged.
Prepared by Dr. Seema H. Kadam,Associate
Prof.,TMES-MBA,GTU