Indemnity contract | contract law | contract II | KSLU

Topics to be covered
Contract of indemnity – (Section 124,125)
 Definitions andessentials
 Rights of indemnity holder
 Time of commencement to indemnifier’s liability
Contract of guarantee - (Section126-147)
 The distinction between indemnity andguarantee
 Kinds of guarantee
 Nature and extent of surety’s liability
 Rights of surety
 Discharge of surety

Contract of bailment - (Section148-171)
Definitions andessentials
 Kinds
 Rights and duties of Bailor and Bailee
 Lien and its types
Contract of pledge - (Section 172-181)
 Difference withbailment
 Rights and duties of pawner and Pawnee
 Pledge by non-owners
Contracts of agency – (Section182-238)
 Principal agent relationship
 Creation of agency
 Extent of agents authority

 Delegation of authority: sub-agent and substitute agent
 Liability of principal
 Personal liability of agent towards the third party
Indian partnership Act
 Definition, Nature, and mode of determining the existence of partnership
 Rights and duties of a partner
 Relation of partners with third parties
 Types,Admission, retirement, and expulsion of partners
 Registration and dissolution of firms
Sale of GoodsAct
 The contract of sale and Agreement to sell
 Conditions and warranties
 Transfer of title and performance of contract
 Rights of unpaid seller
 Remedies for breach ofcontract

CONTRACT OFINDEMNITY
Contracts of Indemnity and Guarantee are special types of contracts.
The contract of indemnity means compensation to be paid to the person who is a victim of
loss or any compensation to save him from the loss caused by a different cause. A contract of
Indemnity is a contract by which a person promises to others that he will indemnify that
person from contingent loss.
Contract of indemnity meaning is a special kind of contract. The term ‘indemnity’ literally
means “security or protection against a loss” or compensation.

According to Section 124 of the Indian Contract Act, 1872, “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, is called a contract of indemnity.”
PARTIES IN CONTRACT OF INDEMNITY
Promisor/Indemnifier: The person who promises to indemnify theloss.
Promisee/Indemnified or Indemnity holder: The person whose loss is to be made good/
person who is saved from the loss.
To indemnify: to compensate and to make good theloss

According to the English Law a contract of indemnity is ' a promise to save another
harmless from loss caused as a result of a transaction entered into at the instance of the
promisor."
English Law in comparison to Indian law is wider in relation to the definition of theterm.

According to the Indian Contract Act: The loss must be caused either by the conduct
of the promisor or any other person and if the loss is caused by accident there would
not be a contract of indemnity.
But the According to English law seems wide than Indian law and also covers the loss
caused by accident or natural causes etc.

Illustration:
P contracts to indemnify Q against the consequences of any proceedings which R may take
against Q in respect of a certain sum ofmoney.
 P is the indemnifier or promisor as he promises to bear the loss of Q.
 Q is the promisee or the indemnified or indemnity-holder as his loss is covered by P.
The objective of entering into a contract of indemnity is to protect the promisee against
unanticipated losses.

ESSENTIALS OF CONTRACT OF INDEMNITY
1. The contract is made for protecting the promisee against unanticipated or
contingent loss.
2. The liability of the indemnifier started as soon as the loss occurs to the indemnity
holder (existence of loss is essential).
3. Indemnification is made for actual loss.
4. The event specified in the contract must be happening.
5.The promisee himself responsible for the loss if the loss is caused byhis own
misconduct.

6. It covers only the loss caused
• By the conduct of promisor himselfor’
• By the conduct of another person.
7. Contract may be implied or expressed.
8. It has to fulfill the essential of sec10 of ICA,1872
9. In a contract of Indemnity, there is only one contract that is between the
Indemnifier and the Indemnified/ IH.
10. Indemnity is a part of a general class of contingentcontracts.
11. Loss caused by the conduct of promise or an act of God is not covered.

A duty to indemnify may be annexed by operation of law to various particular kinds
of contract. For example:-
1. Fire insurance agreement
2. Share holders in a company
In Chandmull v. General Assurance Society Ltd.(1959)A.Cal
The Calcutta HC held that a contract of fire insurance is a contract of
indemnity and the insured has to prove the loss incurred, the sum mentioned
being the utmost limit of insurer’s liability.

RIGHTS OF THE PROMISEE/INDEMNIFIED/INDEMNITY HOLDER
SECTION 125
ALLDAMAGES
SEC 125(1)
ALLCOSTS
SEC 125(2)
ALLSUMS
SEC 125(3)
Section 125: Rights of indemnity-holder when sued
As per Section 125 of the Indian Contract Act, 1872 the following rights
are available to the promisee/ the indemnified/ indemnity holder against the
promisor/ indemnifier, provided he has acted within the scope of his
authority.

Section 125(1): All damages
An indemnity-holder has the right to recover from the indemnifier all damages which
he may be compelled to pay in any suit in respect of any matter to which the contract
of indemnity applies.
 If indemnifier has promised to indemnify in respect to any matter
 Indemnified has paid damages in respect to a suit in court
Section 125(2): All costs
An indemnity-holder has the right to recover from the indemnifier 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 thesuit.

If indemnified/IH has paid costs in any case whether he filed the case or someone else
has filed a case against him
He should not contradict the orders of the indemnifier.
Section 125(3): All sums
An indemnity-holder also has the right to recover from the indemnifier 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
If indemnified has paid money for settlement of a case
The compromise should not be contrary to the orders of the indemnifier

The indemnity holder is entitled to sue for specific performance if he has incurred absolute
liability and the contract covers such liability.
Bihal Chandra v Chattur Sen AIR 1967 All 506:
where seller promised to the purchaser to indemnify him against dues, if any, it was held
that such indemnity clause would include only then existing dues and not those
subsequently imposed thoughretrospectively.
Osman Jamal & Sons ltd v Gopal Purushottam 1928 ILR 56 Cal 262:
It was held that indemnity is not necessarily given by repayment after payment. Indemnity
requires that the party to be indemnified shall never be called upon to pay.

Duties of Indemnity-holder
• To act in accordance with the orders of the indemnifier;
• To act like a man of ordinaryprudence;
• To bring all the material facts to the knowledge of the indemnifier.

Duties of Indemnifier :
The Indian Contract Act has no provisions regarding the rights of the Indemnifier.
Generally, the Indemnifier has the duty to indemnify the indemnity holder in the
following situation:
a. There must be damage orloss
b. Loss or damage must have been caused by an incident as mentioned inthe
contract.
c.The indemnity holder has to act carefully, prudently and according to the
direction or with the authority of the indemnifier.

COMMENCEMENT OF LIABILITY OF PROMISOR/ INDEMNIFIER
Indian Contract Act, 1872 does not provide the time of the commencement of the
indemnifier’s liability under the contract of indemnity. But different High Courts in India have
held the following rules in this regard:
• Indemnifier is not liable until the indemnified has suffered the loss.
• Indemnified can compel the indemnifier to make good his loss although he has not
discharged his liability.
In the leading case of Gajanan Moreshwar vs. Moreshwar Madan(1942), an observation was
made by the judge that “ If the indemnified has incurred a liability and the liability is absolute,
he is entitled to call upon the indemnifier to save him from the liability and pay it off”.

CONTRACT OF GUARANTEE
Sec 126 to 147

CONTRACT OF GUARANTEE
SECTION 126 TO 147
The contract of guarantee may be an ordinary or some different type of guarantee, which is
different from a standard guarantee. The guarantee may be either oral or written. It means that
a contract to perform the promise or discharge the liability of a third person in case of his
default and such type of contracts are formed mainly to facilitate borrowing and lending
money which based on the following facts:-
i) Surety is the person by whom the guarantee isgiven.
ii) Principal debtor is the person from whom the assurance is given.
iii) Creditor is the person to whom the guarantee is given.

Section 126:
“A contract of guarantee is a contract to perform the promise or to discharge the
liabilities 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 Principal Debtor, and the person to whom the guarantee is given
is called the creditor. A guarantee may be either oral or written.”
Illustration: X and his friend Y enter a shop and X says to Z “Supply the goods
required by Y,and if he does not pay you, I will.” This is a contract of guarantee.

ESSENTIALS OF CONTRACT OFGUARANTEE
1. Contract of Guarantee: it is a species of a contract, the general principles governing
contracts are applicable here. There must be free consent, a legal objective to the
contract, etc. Though all the parties must be capable of entering into a contract, the
principal debtor may be a party incompetent to contract, i.e., a minor.
2.Consideration received by the principal debtor is sufficient for the surety. Anything done,
or any promise made for the benefit of the principal debtor can be taken as sufficient
consideration to the surety for giving the guarantee.
3. In the case of Swan vs Bank of Scotland 1836, it was held that a contract of guarantee is
a tripartite agreement between the creditor, the principal debtor, and the surety.

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A contract of guarantee is a tripartite agreement between the principal debtor, creditor and
surety. There are three contracts as under:
(i) Contract between creditor and the principal debtor out of which the guaranteed debt arises.
(ii) Contract between surety and the principal debtor by which the principal debtor undertakes
to indemnify the surety if the surety is required to pay.
(iii)The contract between surety and the creditor by which the surety guarantees to pay the
principal debtor's debt if the principal debtor fails to pay.

4.Surety need not be benefited. According to Section 127, "Anything done, or any
promise made, for the benefit of the principal debtor, may be a sufficient consideration to
the surety for giving the guarantee”.
5.The principal debtor need not be competent to contract. In case the principal debtor is
not competent to contract, the surety would be regarded as the principal debtor and would
be personally liable to pay.
6.A guarantee need not be in writing. According to Section 126, a guarantee may be
either oral or written.

7.There must be an existing liability or a promise whose performance is guaranteed.
Such liability or promise must be enforceable bylaw.
8.Guarantee not to be obtained by misrepresentation [section 142] Any guarantee which
has been obtained by means of misrepresentation made by the creditor, or with his
knowledge and assent, concerning a material part of the transaction, isinvalid.
9. Guarantee not to be obtained by concealment [section 143]
Any guarantee which the creditor has obtained by means of keeping silent as to material
circumstances is invalid. (London Omnibus Co v. Holloway).

Is a contract of guarantee A contract of uberrimae fidei?
A contract of guarantee is not a contract of uberrimae fidei (i.e., a contract of absolute
good faith). Hence, it is unnecessary for the principal debtor or the creditor to disclose
all the material facts to the surety before entering into a contract.
Example: In case of a guarantee given to a Bank, the bank need not inform the surety
of matters affecting the credit of the principal debtor.
However, the provisions of Sections 142 & 143 gave some protection to the surety by
making the following guarantee invalid.
 Guarantee obtained by misrepresentation
 Guarantee obtained by concealment of material facts.

• A contract of guarantee is to be enforced according to the terms of the contract.
• A guarantee is a contract of strictissima juris that means the liability of the surety is
limited by law; a surety is offered protection by law and is treated as a favored debtor
in the eyes of the law.
• A contract of guarantee is not a contract ‘uberrimae fidei’ (requiring of utmost good
faith)
• Still the suretyship relationship is one of trust and confidence and the validity of the
contract depends upon the good faith of the creditor. However, it is not a part of the
creditor’s duty to inform the surety about all his previous dealings with the principal
debtor.

Specific Guarantee:
A guarantee which extends to a single debt or specific transaction is called a specific
guarantee. The liability of the surety comes to an end when the guaranteed debt is duly
discharged or the promise is duly performed.
Illustration: X guarantees payment to Y of the price of the five bags of flour to be delivered
by Y to Z and to be paid for in a month. Y delivers five bags to Z, Z pays for them.
X intended to guarantee only for the payment of the price of the first five bags of flour to be
delivered at one time. [Kay v. Groves]

Continuing Guarantee [Section 129]:
A Guarantee which extends to a series of transactions is called a 'continuing guarantee'. A
surety's liability continues until the revocation of theguarantee.
Illustration: On A’srecommendation, C employed B for the collection of rent fromhis
tenants. A promised to make good any default made by B.
Illustration: A guarantees payment to B, a tea-dealer to the extent of Rs 100, for any tea he
may supply to C from time to time. B supplies C with tea to the above value of Rs 100, and
C pays B for it. Afterwards, B supplies C with tea to the value of Rs 200. C fails to pay. The
guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the
extent of Rs100.
A continuing guarantee may be given for a part of the entire debt or for the entire debt
subject to alimit

REVOCATION OF CONTINUING GUARANTEE
1. By Notice of revocation [Section 130]:
A continuing guarantee may at any time be revoked by the surety as to the future
transactions by notice to the creditor. However, the surety remains liable for the past
transactions which have already taken place.
Wingfield v. De St Cron it was held that a person who guaranteed the rent payment for his
servant but revoked it after the servant left his employment was not liable for the rents after
revocation.
Illustration: : A guarantees to B, to the extent of 100,000 rupees, that C shall pay all the bills
that B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of
revocation. C dishonors the bill at maturity.A is liable upon his guarantee.

2. By Death of surety [Section131]
In the absence of any contract to the contrary, the death of surety operates as a revocation of
a continuing guarantee as to the future transactionstaking place after the death of surety.
However, the surety's estate remains liable for the past transactions which have already
taken place before the death of surety.
In the case of Durga Priya v/s Durga Pada, it was held by the court that in each case the
contract of guarantee between the parties must be looked into to determine whether the
contract has been revoked due to the death of the surety or not. If there is a provision that
says that death does not cause the revocation then the contract of guarantee must be held to
continue even after the death of the surety.

3. By modes of discharging the surety: A continuing guarantee is also revoked in the same
manner in which the surety isdischarged.
a. Novation [Section 62]
b. Variance in terms of the contract [Section 133]
c. Release or discharge of principal debtor [Section 134]
d. When the creditors enter into an arrangement with the principal debtor [Section
135]
e. Creditor's act or omission impairing surety's eventual remedy [Section139]
f. Loss of security [Section 141]

Rights of a surety
A contract of the guarantee being a contract, all rights that are available to the parties of a
contract are available to a surety as well. The following are the rights specific to a contract of
guarantee that is available to the surety.
Rights of Surety can be classified into three groups, as follows;
1.Right against Principal debtor.
2.Right against Creditor.
3.Right against Co-Sureties.

RIGHT AGAINST PRINCIPAL DEBTOR
a. Right to Subrogation [Section140]
On payment of the guaranteed debt or performance of the guaranteed duty; the surety
acquires all the rights which the creditor had against the principal debtor. Thus, the
surety steps into the shoes of thecreditor.
In the case of Lampleigh Iron Ore Co Ltd, Re 1927, the court has laid down that the surety
will be entitled, to every remedy which the creditor has against the principal debtor; to
enforce every security and all means of payment; to stand in place of the creditor to have the
securities transferred in his name, though there was no stipulation for that; and to avail
himself of all those securities against the debtor. This right of surety stands not merely upon a
contract but also upon natural justice.

In the case of Mamata Ghose vs United Industrial Bank AIR 1987, Cal HC held that
under the right of subrogation, the surety may get certain rights even before payment. In
this case, the principal debtor was disposing off his personal properties one after another,
the surety, after paying the debt, seize them. The surety sought for temporary injunction,
which was granted.

b. Right to Indemnity [Section 145]
In every contract of guarantee there is an implied promise by the principal debtor to
indemnify the surety, and the surety is entitled to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee, but not those sums which he
had paid wrongfully.
In the case of Chekkara Ponnamma vs A S Thammayya AIR 1983. In this case, the principal
debtor died after hire-purchasing four motor vehicles. The surety was sued and he paid over.
The surety then sued the legal representatives of the principal debtor. The court required the
surety to show how much amount was realized by selling the vehicles, which he could not
show. Thus, it was held that the payment made by the surety was notproper.

Examples:
B is indebted to C, and A is surety for the debt. C demands payment from A, and on his
refusal sues him for the amount. A defends the suit, having reasonable grounds for doing
so, but he is compelled to pay the amount of the debt with costs. He can recover from B
the amount paid by him for costs, as well as the principal debt.
A guarantee to C, to the extent of Rs 2,000, payment for rice to be supplied by C to B. C
supplies to B rice of less amount than Rs 2,000 but obtains from A payment of the sum of
Rs 2,000 in respect of the rice supplied. A cannot recover from B more than the price of
the rice actually supplied.

RIGHTS AGAINST CREDITOR
a. Right to Securities [Section141]
A surety is entitled to the benefit of every security which the creditor has against
the principal debtor at the time when the contract of suretyship is entered into,
whether the surety knows of the existence of such security or not; and if the
creditor loses, or, without the consent of the surety, parts, with such security, the
surety is discharged to the extent of the value of the security.

Examples:
C advances to B his tenant, Rs 2,000 on the guarantee of A. C has also a further security
for Rs 2,000 by a mortgage of Bs 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.
A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B.
Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives
up the further security.A is not discharged

This section recognizes and incorporates the general rule of equity as expounded in the
case of Craythorne vs Swinburne 1807 that the surety is entitled to every remedy which
the creditor has against the principal debtor including enforcement of everysecurity.
The surety was then sued for the loss but he was not held liable. It is important to note
that the right to securities arises only after the creditor is paid in full. If the surety has
guaranteed only part of the debt, he cannot claim a proportional part of the securities after
paying part of the debt. This was held in the case of Goverdhan Das vs Bank of Bengal
1891.

b. Right to Claim Set-Off:
The surety has the right to claim set-off or counterclaim, if any, which the principal
debtor had against the creditors in case the creditors sue him for payment of liability of
the principal debtor.

Rights against co-sureties
When the same debt or duty is guaranteed by two or more persons, such persons are
called 'co-sureties’.
a. Co-sureties liable to contribute equally (Section146):
Equality of burden is the basis of Co-suretyship.
section 146 states that “whentwo or more persons are co-sureties for the same
debt, or duty, either jointly, or severally and whether under the same or different
contracts and whether with or without the knowledge of each other, the co-sureties
in the absence of any contract to the contrary, are liable, as between themselves, to
pay each an equal share of the whole debt, or of that part of it which remains
unpaid by the principaldebtor”.

Example :
A, B and C are sureties to D for the sum of 3,00,000 rupees lent to E, He makes default in
payment.A, B and C are liable, as between themselves, to pay 1,00,000 rupees each.

b. Liability of co-sureties bound in different sums (Section 147):
The principal of equal contribution is, however, subject to the maximum limit fixed
by a surety to his liability. Co-sureties who are bound in different sums are liable to
pay equally as far as the limits of their respective obligations permit.
Example :
A, B and C, as sureties for D, enter into three several bonds, each in a different liability,
namely, A in the liability of 1,00,000 rupees, B in that of 2,00,000 rupees, C in that of
4,00,000 rupees, conditioned for D’s duly accounting to E. D makes default to the extent
of 4,00,000 rupees; A is liable to pay 1,00,000 rupees, and B and C 1,50,000 rupees
each.

Right to ClaimContribution:
If a co-surety pays more than his proportionate share of liability, he has a right to claim
contribution from the other co-surety or co-sureties.
Right to Share theSecurity:
If a co-surety obtains any security of the principal debtor, the other co-surety (or co-sureties)
has (or has) a right to share such security.

Effect of Release of One Co-surety [Section 138]
Where there are co-sureties, a release by the creditor of one of them does not discharge
the others; neither does it free the surety so released from his responsibility to the other
sureties. However, under English law, the release of one co-surety shall release all the
other co-sureties since the liability of co-sureties under English law is only joint and not
joint and several.

The extent of Surety’s Liability Sec.128
In the absence of a contract to the contrary, the liability of the surety is coextensive
with that of the principal debtor. It means that the liability of the surety is equal to that
of the principal debtor unless otherwise agreed.
The liability of the surety is co-extensive with that of the principal debtor unless it is
otherwise provided by the contract:
• The term “co-extensive with that of principal debtor” means that the surety is
liable for what the principal debtor is liable.
• The liability of a surety arises only on default by the principal debtor. But as
soon as the principal debtor defaults, the liability of the surety co-extensive with
the liability of the principal debtor, in the sense that the surety will be liable for
all those sums for which the principal debtor is liable.

• Where a debtor cannot be held liable on account of any defect in the document,
the liability of the surety also ceases.
• Surety’s liability continues even if the principal debtor has not been sued or is
omitted from being sued. In other words, a creditor may choose to proceed
against a surety first, unless there is an agreement to thecontrary.
• Surety’s liability may be conditional. The surety may impose certain conditions
in the contract of guarantee. Until those conditions are met, the surety shall not
be liable.

In Bank of Bihar Ltd. v. Damodar Prasad, The Supreme Court held that the liability
of the surety is immediate and cannot be defended until the creditor has exhausted
all his remedies against the principal debtor
In Kellappan Nambiar v. Kanhi Raman in this case that if the principal debtor
happens to be a minor and the agreement made by him is void, the surety too cannot
be made liable in respect of the same because the liability of the surety is co-
extensive with that of principal debtor. It has been held that the guarantee of the loan
or an overdraft to an infant is void because the loan to the infant itself is void ab
initio.

In the case of Harigobind Aggarwal v. State Bank of India, it was held that the principal
debtor liability is reduced e.g., after the creditor has recovered a part of the sum due from
him out of his property the liability of the surety is also reducedaccordingly.
In Maharashtra Electricity Board Bombay v. Official Liquidator and Another, under a
letter of guarantee the bank undertook to pay any amount not exceeding Rs.50000/- to the
Electricity Board. It was held that the bank is bound to pay the amount due under the
letter of guarantee given by it to the Board
Example:
A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is
dishonored 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.

BY REVOCATION OF CONTRACT OF GUARANTEE
• BY NOTICE [SECTION 130]
A specific guarantee may be revoked by a surety by notice to the creditor if the
liability of the surety has not yet accrued. A continuing guarantee may at any time
be revoked by the surety as to future transactions by notice to the creditor.
However, the surety remains liable for the past transactions which have already
taken place.
• BY THE DEATH OF SURETY [SECTION131]
In the absence of any contract to the contrary, the death of a surety operates as a
revocation of a continuing guarantee as to future transactions taking place after the
death of surety. However, the deceased surety's estate remains liable for the past
transactions which have already taken place before the death of the surety but will
not be liable for the transactions taking place after the death of surety even if the
creditor has no notice of surety's death.

• BY NOVATION [SECTION 62]
A contract of guarantee is said to be discharged by novation when a fresh
contract is entered into either between the same parties or between other
parties, the consideration being the mutual discharge of the old contract. The
original contract of guarantee comes to an end and the surety under the original
contract is discharged.

BY CONDUCT OF CREDITOR:
• By Variance In Terms of Contract [Section 133]
Any variance, made without the surety's consent, in the terms of the contract between
the principal debtor and the creditor, discharges the surety as to transactions subsequent
to the variance. But variation which is not substantial or material or which is beneficial
to the surety will not discharge him of hisliability.
In M.S. Anirudhan v. Thomeo's Bank, the surety guaranteed overdraft provided by the bank
to the principal debtor only up to Rs 25,000. Subsequently since the bank was willing to
provide overdraft only up to Rs 20,000, the principal debtor reduced the amount in the
guarantee form to Rs 20,000. On default by the principal debtor the court held the surety
liable as the alteration was beneficial to him and it was not of a substantial nature.

BY RELEASE OR DISCHARGE OF PRINCIPAL DEBTOR [SECTION 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 omissions of the creditor, the legal
consequence of which is the discharge of the principal debtor.
Example :
A contract with B for a fixed price to build a house for A 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.

• By arrangement [SECTION 135]
A contract between the creditor and principal debtor, by which the creditor makes a
composition with, or promises to give time to, or not to sue the principal debtor, discharges the
surety unless the surety assents to such contract.
• By Creditor's Act or Omission Impairing Surety's Eventual Remedy [Section139]
If a creditor does any act which is inconsistent with the rights of the surety, or omits to do an
act which is 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 isdischarged.
• Loss of Security [Section 141]
If the creditor loses, or without the consent of the surety, parts with security given to him, the
surety is discharged from liability to the extent of the value of security

BY INVALIDATION OF CONTRACT
• Guarantee Obtained by Misrepresentation [Section 142]
Any guarantee which has been obtained by means of misrepresentation made by a
creditor or with his knowledge and assent, concerning a material part of the transaction,
is invalid.
• Guarantee Obtained by Concealment [Section 143]
Any guarantee which a creditor has obtained by means of keeping silence to material
circumstances is invalid.
• Failure of Co-surety to Join a Surety [Section144]
Where a person gives a guarantee upon a contract that a creditor shall not act upon it
until another person has joined in it as co-surety

DIFFERENCE BETWEEN INDEMNITY AND
GUARANTEE
CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE
In Indemnity there are two parties, one who is
Indemnity holder and the other Indemnifier
There are three parties in the contract of
Guarantee- surety, Principal debtor, Creditor
(Tripartite agreement)
It consists of only one contract under which
indemnifier promises to pay in the event of
certain loss.
There are three contracts between surety, principal
debtor and creditor.
The contract of indemnity is made to protect
the promisee against some likely loss.
The object of contract of guarantee is the security
to the creditor.
The liability of the indemnifier in a contract
of indemnity is a primaryone.
In guarantee the liability of surety is only a
secondary, when principal debtor default.
The liability arises only on the happening of a
contingency.
The liability arises only on the non-performance
of an existing promise or non-payment of an
existing debt.

Contract of indemnity Contract of guarantee
The indemnifier need not act at the request of
indemnity-holder.
The surety acts at the request of the principal
debtor
The indemnifier cannot sue a third party in his own
name because of absence of privity of contract
between him and a third party. He can sue the third
party in his own name if there in an assignment in
his favour.
A surety, on discharging the debt of principal
debtor, can sue the principal debtor in his
own.
Once the indemnifier fulfills his liability, he does
not get any right over any third party. He can only
sue the indemnity-holder in his ownname.
Once the guarantor fulfills his liability by
paying any debt to the creditor, he steps into
the shoes of the creditor and gets all the
rights that the creditor had over the principal
debtor.
The reason for a contract of indemnity is to make
good on a loss if there is any.
The reason for a contract of guarantee is to
enable a third person to get credit.

Indemnity contract | contract law | contract II | KSLU

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