This document discusses special contracts under the Indian Contract Act, 1872, focusing on contracts of indemnity and guarantee. It defines indemnity as a promise to compensate for loss and guarantee as a promise to fulfill a third party's obligations in case of default. The document outlines the essential elements, rights, and distinctions between the two types of contracts, emphasizing their roles in protecting against financial loss.

1. Bachelor of Commerce Part-2
Business Law(Special Contract)

2. Learning objective :-
After going through this lesson, you will be able to understand :-
1. The concept of contract of Indemnity.
2. The concept and kinds of contract of Guarantee.
3. The difference between contract of Indemnity and contract of Guarantee.

3. •Indemnity.
•Guarantee.
•Bailment.
•Pledge.
•Agency.
Special
contracts are
contained in
sections 124 to
238 of the
Indian Contract
Act,1872.
These special
contracts are: -

4. In this Lesson we are going to discuss about contract of
indemnity and guarantee.
The contract of indemnity and guarantee are the special
types of contract which help from protection against loss in the
form of a promise to pay for loss of money or goods. Section
124 to 147 of the Indian Contract Act, 1872 discuss about
contract of Indemnity and Guarantee.

5. Contract of Indemnity :-
The contract of indemnity is the compensation of security against loss of
money or goods.
Under Section 124 of the Indian Contract Act, 1872 define a
contract of indemnity as ‘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 conduct of any other person’.

6. Indemnity Meaning –
i. To make good the loss incurred by another person.
ii. To compensate the party who has suffered some loss.
iii. To protect a party from incurring a loss.
For Example :-
P contract to indemnify a sum of Rs 5000 to Q for the loss which may be
caused or any proceeding which may be carried on by R against Q. This
is a contract of indemnity.

7. Definition of Indemnifier And Indemnity-Holder:-
• Indemnifier :-
The Person who gives the indemnity is called the Indemnifier.
• Indemnity – Holder :-
The Person for whose protection it is given is called the
Indemnity- Holder or Indemnified.
In above example “P” is indemnifier whereas “Q” is indemnity-holder.

8. Essential elements of a contract of indemnity:-
 Contract :- All the essentials of a valid contract must also be present in
the contract of indemnity like offer, acceptance, free consent, valid
consideration, capacities of parties etc.
Example:- X asks Y to beat Z and promises to indemnify Y against the
consequences. Y beats Z and is fined Rs.1,000. Y cannot claim this amount from X
because the object of the agreement was unlawful.

9. Essential elements continued……..
Loss to one party :-A person can indemnify another person only if
such other person incurs some loss or it has become certain that he
will incur some loss.
Indemnity by the promisor :-The purpose of contract of indemnity is
to protect the indemnity holder from any loss that may be caused to
the indemnity holder.

10. Rights of the indemnity-holder(Sec. 125) :-
 Indemnity-holder is entitled to recover all damages which he might have
been compelled to pay in any suit in respect of a matter covered by the
contract.
 Indemnity holder is entitled to recover all costs incidental to the institution
or defending of the suit. But the party indemnified cannot recover costs
when he has not acted as a prudent man in defending the action against him
or has not been authorized by the indemnifier to defend the suit or where the
costs incurred have been unreasonable in amount.

11. Right Continued…………
 Indemnity holder is entitled to recover all sums paid under any
compromise of any such suit, provided the compromise was not
contrary to the directions of the promisor, and the indemnity holder
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 or her to
compromise the suit.

12. Contract of Guarantee :-
The term ‘contract of guarantee’ defines under Section 126 of the Indian
Contract Act, 1872 as –
“A contract of guarantee is a contract to perform the promise, or
discharge the liability, of a third person in case of his default.”
Example: P promise to pay Q Rs 2000 on behalf of R, if, R make default in
returning Rs 2000 to Q, P will pay. Here, Q is ‘creditor’ R is ‘principal debtor’
and P is ‘surety’.

13. Requisites of a valid guarantee :-
Essentials of a valid Contract:- The essentials of a valid contract
like offer, acceptance, free consent, capacities of parties etc. must be
present in the contract of guarantee.
There must be someone primarily liable:- There has to be a
primary liability of a person who is other than the surety to the
contract of guarantee. If there is no principal debtor, there cannot be a
contract of guarantee.

14. Requisites Continued……….
There should be no misrepresentation:- A guarantee should be
obtained after disclosing all the material facts that may affect the
degree of responsibility of the surety. Under Section 142 & 143 any
guarantee that is obtained by misrepresentation or concealment of
facts by the creditor is invalid.
Contract may be Oral or in Writing:- As given in section 126 of the
Contract Act a contract of guarantee may be either oral or written.

15. Kinds of guarantee :- Guarantee may be specific
guarantee or continuous guarantee.
Specific guarantee is a contract of guarantee where the surety
guarantees against the conduct of the principal debtor in respect of a
particular transaction.
Example: A guarantee to pay B Rs 15000 on behalf of C as repayment of loan,
if, C make default in returning the same to B. It is a specific guarantee where the
surety ‘A’ guarantees against the default in returning the loan by the principal
debtor ‘C’ in respect of the particular transaction to the creditor ‘B’.

16. Continuous guarantee:- The continuous guarantee may extend to a series
of transactions during a fixed period e.g. for two years.
Example: P guarantee (surety) to pay Q (creditor) the dealer of tea Rs
1000 for supply of tea from time to time within two year to R (principal
debtor). R (principal debtor) paid Rs 1000 for the tea supplies to Q (creditor)
within first year. In the second year Q (creditor) the dealer of tea supply tea
from time to time to R (principal debtor) in Rs 1000 but ,R default to
payment. Now, P (surety) has to pay Q (creditor) Rs 1000 on default of
payment by R in the second year. This is called continuous guarantee

17. Limit on surety’s liability by contract:-
The liability of surety is co-extensive with that of principal debtor,
unless it is otherwise provided by the contract i.e if the contract between
the parties so provides, the liability of the surety may be less as that of
the liability of the principal debtor if he make any default.
Example: P guarantee (surety) to pay Q (creditor) the dealer of
tea Rs 600 for supply of tea from time to time within a year to R
(principal debtor) where R is liable to pay Rs1500. Thus, P (surety) has
to pay Q (creditor) Rs 600 only on default of payment by R not Rs
1500.

18. The Rights of surety:-
The right of surety may be classified under following three heads:
1. Right against the principal debtor.
2. Right against the creditor.
3. Right against the co-sureties.

19. Right against the principal debtor :-
i. Rights of subrogation(sec.140):- When the surety makes payment
upon default of principal debtor against guaranteed debt, he gets all
the rights which the creditor has against the principal debtor.
ii. Right to indemnity(sec.145):- In every contract of guarantee, there
is an implied promise of the principal debtor to indemnify the surety
and the surety can recover from the principal debtor whatever sum
rightfully paid under the said guarantee. If he sustains any damage
beyond the amount paid, he can recover that damage also.

20. Right against the creditor :-
i. Right to claim security(sec.141): surety gets the right to the benefit
of every security, which the creditor has against the principal debtor
even if the surety has no knowledge of the existence of such
securities. If the creditor loses the security, the surety is discharged
of his responsibilities limited to the value of his security.
Example:- C advances to B, his tenant, Rs 2000 on the guarantee of A. C has
also further security for the Rs 2000 in a mortgage of B’s furniture. C cancels
the mortgage. B become insolent, and C sues A on his guarantee. A is discharged
from liability to the amount of the value of the furniture.

21. ii. Right of set –off :- Set-off implies a counter claim or deduction
from the amount of loan. If the creditor sues the surety, he can claim
set-off or counter claim, which the debtor had against the creditor.
Right Against Co-sureties:-
 Release of Co-surety (sec.138) :- In any contract of guarantee if
there is more than one co- surety, a release by the creditor of one of
them does not discharge the others. It also does not free the surety so
released from his or her responsibility to the other sureties

22. Right Against Co-sureties continued…….
• Right to Contribution(sec146-147):-wherever there are co-sureties for the
same amount, they are liable to share an equal amount of the debt which
remains unpaid by the principal debtor. If a surety pays more than his share
he has the right to ask the other sureties to participate in contributing an
equal amount towards the debt.
Example : A, B and C are sureties to D for a 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 and B are liable to pay Rs 250 and C Rs 500

23. Distinction Between Indemnity And Guarantee :-
The contract of indemnity is for the reimbursement of the loss
whereas, The contract of guarantee is for the security of the creditor.
In a contract of indemnity there is only one contract whereas, In the
contract of guarantee, there are three contracts; first between principal
debtors and creditor, second between creditor and surety, and third
between surety and principal debtor.

24. Distinction Continued…….
The liability of the indemnifier is primary and independent whereas,
The liability of the surety is secondary and conditional.
There are only two parties in the contract of indemnity; the
indemnifier and the indemnity holder whereas, in the contract of
guarantee there are three parties; the principal debtor, creditor and the
surety.