1.

INTRODUCTION
Contract of Indemnity and Guarantee are the special types of contracts given under sections
124 to 147 of the Indian Contract Act, 1872. Both the contracts are modes of compensation
based on certain similar principles. However, both differs from each other on several issues.
In this unit, the law relating to indemnity and guarantee are discussed.
2. CONTRACT OF INDEMNITY
“Contract of Indemnity” defined (Section 124) : 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.” There are two parties in this
form of contract. The party who promises to indemnify/ save the other party from loss is
known as ‘indemnifier’, where as the party who is promised to be saved against the loss is
known as ‘indemnified’ or indemnity
holder.

Example 1 : A may contract to indemnify B against the consequences of any proceedings

which C may take against B in respect of a sum of `` 5000/- advanced by C to B. In
consequence, when B who is called upon to pay the sum of money to C fails to do so, C
would be able to recover the amount from A as provided in Section 124.
Example 2 : X, a shareholder of a company lost his share certificate. He applied for the
duplicate. The company agreed to issue the same on the term that X will compensate the
company against the loss where any holder produces the original certificate. Here
there is contract of indemnity between X and the company.
Analysis
To indemnify means to compensate or make good the loss. Thus, under a contract of
indemnity the “existence of loss” is essential. Unless the promisee has suffered a loss, he
cannot hold the promisor liable on the contract of indemnity.
However, the above definition of indemnity restricts the scope of contracts of indemnity
in as much as it covers only the loss caused :
(i) By the conduct of the promisor himself, or
(ii) By the conduct of any other person.
Thus, loss occasioned by the conduct of the promise, or accident, or an act of God is not
covered.
A contract of indemnity like any other contract may be express or implied.
A contract of indemnity is like any other contract and must fulfill all the essentials of a valid
contract like consideration, free consent, competency of contract, lawful object etc.
Example : A asks B to beat C promising to indemnify him against the consequences. The
promise of A cannot be enforced. Suppose, B beats C and is fined Rs. 1000, B cannot claim
this amount from A because the object of the agreement is unlawful.
A contract of Fire Insurance or Marine Insurance is always a contract of indemnity. But there
is no contract of indemnity in case of contract of Life Insurance.
Rights of Indemnity—holder when sued (Section 125) : The promisee in a contract of
indemnity, acting within the scope of his authority, is entitled to recover from the
promisor/indemnifier—
(1) all damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies;
(2) 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
authorised him to bring or defend the suit;
(3) 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 authorised him to compromise the suit.
Analysis :In a contract of indemnity, the promisee i.e., indemnity- holder acting within the
scope of his authority is entitled to recover from the promisor i.e., indemnifier the following
rights :(a) all damages which he may be compelled to pay in any suit
(b) all costs which he may have been compelled to pay in bringing/ defending the suit
and(c) all sums which he may have paid under the terms of any compromise of suit.
It may be understood that the rights contemplated under section 125 are not exhaustive. The
indemnity holder/ indemnified has other rights besides those mentioned above. If he has
incurred a liability and that liability is absolute, he is entitled to call upon his indemnifier to
save him from the liability and to pay it off.
Please note that the Indian Contract Act is silent about the rights which the Indemnifier has
on carrying out his promise to indemnify. But they are similar to the rights of a surety under
section 141 of the Indian Contract Act.
3. CONTRACT OF GUARANTEE
Contract of guarantee”, “surety”, “principal debtor” and “creditor” [Section 126]
Contract of guarantee : A contract of guarantee is a contract to perform the promise made or
discharge the liability, of a third person in case of his default.

Three parties are involved

in a contract of guarantee

Surety- person who gives the guarantee,

Principal debtor- person in respect of whose default the guarantee is given,
Creditor-person to whom the guarantee is giver

Example 1 : When A requests B to lend ` 10,000 to C and guarantees that C will repay the
amount within the agreed time and that on C falling to do so, he will himself pay to B, there
is a contract of guarantee.
Here, B is the creditor, C the principal debtor and A the surety.
Example 2 : Where ‘A’ obtains housing loan from LIC Housing and if ‘B’ promises to pay
LIC Housing in the event of ‘A’ failing to repay, it is a contract of guarantee.
Example 3 : X and Y go into a car showroom where X says to the dealer to supply latest
model of Wagon R to Y. In case of Y’s failure to pay, X will be paying for it. This is a
contract of guarantee because X promises to discharge the liability of Y in case of his
defaults.
Analysis
Guarantee is a promise to pay a debt owed by a third person in case the latter does not pay.
Any guarantee given may be oral or written.
From the above definition, it is clear that in a contract of guarantee there are, in effect
three contracts
(i) A principal contract between the principal debtor and the creditor
(ii) A secondary contract between the creditor ad the surety.
(iii) A implied contract between the surety and the principal debtor whereby principal
debtor is under an obligation to indemnify the surety; if the surety is made to pay or perform.
The right of surety is not affected by the fact that the creditor has refused to sue the principal
debtor or that he has not demanded the sum due from him.
Consideration for guarantee [Section 127] : What constitutes consideration in a case of
guarantee is an important issue and is laid down in Section 127 of the Act. As per Section
127 of the Act, “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.”
Example 1 : 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 a sufficient
consideration for C’s promise.
Example 2 : A sell and delivers goods to B. C afterwards requests A to forbear to sue B for
the debt for a year, and promises that if he does so, C will pay for them in default of payment
by B. A agrees to forbear as requested. This is a sufficient consideration for C’s promise.

3 : A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for
them in default of B. The agreement is void.
Essentials of a valid Guarantee
1. Existence of a principal debt.
2. Benefit to principal debtor is sufficient consideration, but past consideration is
no consideration for a contract of guarantee.
3. Consent of surety should not be obtained by misrepresentation or concealment of a
material fact.
4. Can be oral or written.
5. Surety can proceeded against without proceeding against the principal debtor
first.
6. If the co-surety does not join, the contract of guarantee is not valid.

4. DISTINCTION BETWEEN A CONTRACT OF INDEMNITY AND

A CONTRACT OF GUARANTEE
CORPORATE AND OTHER LAWS
 5. NATURE OF SURETY’S LIABILITY [SECTION 128]
The liability of the surety is co-extensive with that of the principal debtor unless it is
otherwise provided by the contract.
Analysis :
(i) The term “co-extensive with that of principal debtor” means that the surety is liable
for what the principal debtor is liable.
(ii) 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 begins and runs 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.
(iii) Where a debtor cannot be held liable on account of any defect in the document, the
liability of the surety also ceases.
(iv) 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 the contrary.
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.
Nature of Surety’s liability can be summed up as (a) Liability of surety is of secondary nature
as he is liable only on default of principal debtor. (b) his liability arises immediately on the
default by the principal debtor (c) The Creditor has a right to sue the surety directly without
first proceeding against principal debtor.
6. CONTINUING GUARANTEE
Continuing guarantee (Section 129): A guarantee which extends to a series of transactions is
called a “continuing guarantee”. The essence of continuing guarantee is that it applies not to
a specific number of transactions but to any number of transactions and makes the surety
liable for the unpaid balance at the end of the guarantee.
Example 1 : 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. 5,000 rupees, for due collection and
payment by C of those rents. This is a continuing guarantee.

Example 2 : A guarantees payment to B, a tea-dealer, to the amount of $ 100, for any tea he
may from time to time supply to C. B supplies C with tea to above the value of $ 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 the
extent of $100.
Example 3 : A guarantees payment to B of the price of five sacks of flour to be delivered by
B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards
B delivers four sacks to C, which C does not pay for. The guarantee given by A was not a
continuing guarantee, and accordingly he is not liable for the price of the four sacks.
In the continuing guarantee, the liability of surety continues till the performance or the
discharge of all the transactions entered into or the guarantee is withdrawn.
7. LIABILITY OF TWO PERSONS, PRIMARILY LIABLE, NOT AFFECTED BY
ARRANGEMENT BETWEEN THEM THAT ONE SHALL BE SURETY ON OTHER’S
DEFAULT.
Where two persons contract with a third person to undertake a certain liability, and also
contract with each other that one of them shall be liable only on the default of the other, the
third person not being a party to such contract, the liability of each of such two persons to the
third person under the first contract is not affected by the existence of the second contract,
although such third person may have been aware of its existence. (Section 132)
Example : A and B make a joint and several promissory note to C. A makes it, in fact, as
surety for B, and C knows this at the time when the note is made. The fact that A, to the
knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon the
note.
8. DISCHARGE OF A SURETY
A surety is discharged from liability on a guarantee under the following circumstances :
(i) By revocation of the contract of guarantee
(ii) By the conduct of the creditor, or
(iii) By the invalidation of the contract of guarantee.

By revocation of the Contract of Guarantee

(a) Revocation of continuing guarantee (Section 130) : The continuing guarantee may at
any time be revoked by the surety as to future transactions by notice to the creditors.
Example 1 : A, in consideration of B’s discounting, at A’s request, bills of exchange for C,
guarantees to B, for twelve months, the due payment of all such bills to the extent of 50,000
rupees. B discounts bills for C to the extent of 20,000 rupees. Afterwards, at the end of three
months, A revokes the guarantee. This revocation discharges A from all liability to B for any
subsequent discount. But A is liable to B for the 20,000 rupees, on default of C.
Example 2 : 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 dishonours the bill at maturity. A is liable upon his guarantee.
(b) Revocation of continuing guarantee by surety’s death (Section 131) : The death of the
surety operates, in the absence of any contract to the contrary, as a revocation of a continuing
guarantee, so far as regards future transactions.
The estate of deceased surety is, however, liable for those transactions which had already
taken place during the lifetime of the deceased. Surety’s estate will not be liable for the
transactions taking place after the death of surety even if the creditor had no knowledge of
surety’s death.

By conduct of the creditor

(a) By variance in terms of contract (Section 133) : Where there is any variance in the
terms of contract between the principal debtor and creditor without surety’s consent, it would
discharge the surety in respect of all transactions taking place subsequent to such variance.
Example 1 : A becomes surety to C for B’s conduct as a 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 one-fourth of the losses on overdrafts. B allows a customer to overdraw, 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.
Example 2 : A guarantees C against the misconduct of B in an office to which B is appointed
by C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act,
the nature of the office is materially altered. Afterwards, B misconducts himself. A is
discharged by the change from future liability under his guarantee, though the misconduct of
B is in respect of a duty not affected by the later Act.
Example 3 : C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s
becoming surety to C for B’s duly accounting for moneys received by him as such clerk.
Afterwards, without A’s knowledge or consent, C and B agree that B should be paid by a
commission on the goods sold by him and not by a fixed salary. A is not liable for
subsequent misconduct of B.
Example 4 : A gives to C a continuing guarantee to the extent of 3,00,000 rupees for any oil
supplied by C to B on credit. Afterwards B becomes embarrassed, and, without the
knowledge of A, B and C contract that C shall continue to supply B with oil for ready money,
and that the payments shall be applied to the then existing debts between B and C. A is not
liable on his guarantee for any goods supplied after this new arrangement.
Example 5 : C contracts to lend B 5,00,000 rupees on the 1st March. A guarantees
repayment. C pays the 5,00,000 rupees to B on the 1st January. A is discharged from his
liability, as the contract has been varied, in as much as C might sue B for the money before
the 1st March.
(b) 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 omission of the creditor, the legal consequence of which is the
discharge of the principal debtor.

Example : 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.
(c) Discharge of surety when creditor compounds with, gives time to, or agrees not to
sue, principal debtor [Sector 135] : A contract between the creditor and the 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.
(d) Surety not discharged when agreement made with third person to give time to
principal debtor [Section 136] : Where a contract to give time to the principal debtor is made
by the creditor with a third person, and not with the principal debtor, the surety is not
discharged.
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 time to B. A is not discharged.
(e) Creditor’s forbearance to sue does not discharge surety [Section 137] : Mere
forbearance on the part of the creditor to sue the principal debtor or to enforce any other
remedy against him does not in the absence of any provision in the guarantee to the contrary,
discharge the surety.
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.
(f) Discharge of surety by creditor’s act or omission impairing surety’s eventual remedy
[Section 139] : If the creditor does any act which is inconsistent with the rights of the surety,
or omits to do any act which 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 is
discharged.
Example 1 : B contracts to build a ship for C for a given sum, to be paid by instalments as the
work reaches certain stages. A becomes surety to C for B’s due performance of the contract.
C, without the knowledge of A, prepays to B the last two instalments. A is discharged by this
prepayment.
Example 2 : 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 that 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.
By the invalidation of the contract of guarantee
(a) Guarantee obtained by misrepresentation invalid [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, is invalid.

(b) Guarantee obtained by concealment invalid [Section 143] : Any guarantee which the
creditor has obtained by means of keeping silence as to material circumstances is invalid.
Example 1 : A engages B as a clerk to collect money for him, B fails to account for some of
his receipts, and A in consequence calls upon him to furnish security for his duly accounting.
C gives his guarantee for B’s duly accounting. A does not acquaint C with B’s previous
conduct. B afterwards makes default. The guarantee is invalid.
Example 2 : A guarantees to C payment for iron to be supplied by him to B for the amount of
` 2,00,000 tons. B and C have privately agreed that B should pay five rupees 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.
(c) Guarantee on contract that creditor shall not act on it until co- surety joins (Section
144): Where a person gives a guarantee upon a contract that the creditor shall not act upon it
until another person has joined in it as co-surety, the guarantee is not valid if that other
person does not join.
9. RIGHTS OF A SURETY
Rights of a surety may be classified as under :
(a) Rights against the creditor,
(b) Rights against the principal debtor,
(c) Rights against co-sureties.

Right against the principal debtor

(a) Rights of subrogation [Section 140] : Where, a guaranteed debt has become due, or
default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon
payment or performance of all that he is liable for, is invested with all the rights which the
creditor had against the principal debtor.
This right is known as right of subrogation. It means that on payment of the guaranteed debt,
or performance of the guaranteed duty, the surety steps into the shoes of the creditor.
(b) Implied promise to indemnify surety [Section 145] : In every contract of guarantee
there is an implied promise by the principal debtor to indemnify the surety. The surety is
entitled to recover from the principal debtor whatever sum he has rightfully paid under the
guarantee, but no sums which he has paid wrongfully.
Example 1: 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 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.
Example 2 : C lends B a sum of money, and A, at the request of B, accepts a bill of exchange
drawn by B upon A to secure the amount. C, the holder of the bill, demands payment of it
from A, and, on A’s refusal to pay, sues him upon the bill. A, not having reasonable grounds
for so doing, defends the suit, and has to pay the amount of the bill and costs. He can recover
from B the amount of the bill, but not the sum paid for costs, as there was no real ground for
defending the action.
Example 3 : A guarantees to C, to the extent of 2,00,000 rupees, payment for rice to be
supplied by C to B. C supplies to B rice to a less amount than 2,00,000 rupees, but obtains
from A payment of the sum of 2,00,000 rupees in respect of the rice supplied. A cannot
recover from B more than the price of the rice actually supplied.
Right against the Creditor
Surety’s right to benefit of creditor’s securities [Section 141]: 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.
Example 1 : C advances to B, his tenant, 2,00,000 rupees on the guarantee of A. C has also a
further security for the 2,00,000 rupees 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.
Example 2 : C, a creditor, whose advance to B is secured by a decree, receives also a
guarantee for that advance from A. C afterwards takes B’s goods in execution under the
decree, and then, without the knowledge of A, withdraws the execution. A is discharged.
Example 3 : 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
the up the further security, A is not discharged.
Rights against co-sureties
(a) Co-sureties liable to contribute equally (Section 146) : Equality of burden is the
basis of Co-suretyship. This is contained in section 146 which states that “when two 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 principal debtor”.
Example 1 : A, B and C are sureties to D for the sum of 3,00,000 rupees lent to E. E makes
default in payment. A, B and C are liable, as between themselves, to pay 1,00,000 rupees
each.
Example 2 : A, B and C are sureties to D for the sum of 1,00,000 rupees 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 25,000 rupees, B 25,000 rupees, and C 50,000 rupees.
(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 1 : A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty 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 3,00,000 rupees. A, B and C are each liable to pay 1,00,000 rupees.
Example 2 : A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty 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.
Example 3 : A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty 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 7,00,000 rupees. A, B and C have to pay each the full penalty of his bond.the interest to
six per cent per annum and does not sue N for one year after the loan becomes due. N
becomes insolvent. Can M sue P?
Answer
M cannot sue P, because a surety is discharged from liability when, without his consent, the
creditor makes any change in the terms of his contract with the principal debtor, no matter
whether the variation is beneficial to the surety or does not materially affect the position of
the surety (Section 133, Indian Contract Act, 1872).
Question 2-What are the rights of the indemnity-holder when sued?
Answer-Rights of Indemnity- holder when sued (Section 125):The promisee in a contract of
indemnity, acting within the scope of his authority, is entitled to recover from the promisor—
(1) all damages which he may be compelled to pay in any suit in respect of any matter to
which the promise to indemnify applies;
(2) 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
authorised him to bring or defend the suit;
(3) 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 authorised him to compromise the suit.
It may be understood that the rights contemplated under section 125 are not exhaustive. The
indemnity holder/ indemnified has other rights besides those mentioned above. If he has
incurred a liability and that liability is absolute, he is entitled to call upon his indemnifier to
save him from the liability and to pay it off.
Question 3-Define contract of indemnity and contract of guarantee and state the conditions
when guarantee is considered invalid ?-Answer-Section 124 of the Indian Contract Act,1872
says that “A contract by which one party promises to save the other from loss caused to him
by the conduct of the promisor himself, or the conduct of any person”, is called a “contract of
indemnity”.
 Section 126 of the Indian ContractAct says that “A contract to perform the promise made or
discharge liability incurred by a third person in case of his default.” is called as “contract of
guarantee”.
The conditions under which the guarantee is invalid or void are stated in section 142,143 and
144 of the Indian Contract Act are :
(i) Guarantee obtained by means of misrepresentation.
(ii) creditor obtained any guarantee by means of keeping silence as to material
circumstances.
(iii) When contract of guarantee is entered into on the condition that the creditor shall not
act upon it until another person has joined in it as co-surety and that other party fails to join
as such.
Question 4
Mr. X, is employed as a cashier on a monthly salary of ` 2,000 by ABC bank for a period of
three years. Y gave surety for X’s good conduct. After nine months, the financial position of
the bank deteriorates. Then X agrees to accept a lower salary of ` 1,500/- per month from
Bank. Two months later, it was found that X has misappropriated cash since the time of his
appointment. What is the liability of Y ?
Answer
If the creditor makes any variance (i.e. change in terms) without the consent of the surety,
then surety is discharged as to the transactions subsequent to the change. In the instant case Y
is liable as a surety for the loss suffered by the bank due to misappropriation of cash by X
during the first nine months but not for misappropriations committed after the reduction in
salary. [Section 133, Indian Contract Act, 1872].
Question 5
A contracts with B for a fixed price to construct a house for B within a stipulated time. B
would supply the necessary material to be used in the construction. C guarantees A’s
performance of the contract. B does not supply the material as per the agreement. Is C
discharged from his liability.
Answer
According to Section 134 of the Indian Contract Act, 1872, 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 omission for the creditor, the legal consequence of which is the
discharge of the principal debtor. In the given case the B omits to supply the timber. Hence C
is discharged from his liability.
Differences between guarantee and indemnity-In a case study between, Punjab National
Bank Ltd. v. Bikram Cotton Mills and Anr and Gajan Moreshwar vs. Moreshwar Madan, the
difference between guarantee and indemnity is clearly visible. There are three parties here, in
the Punjab National Bank case where as only two parties in Gajan Moreshwar. Here
Moreshwar Madan was the indemnifier and hence he was the only one liable to make good of
the money, whereas in the Punjab National Bank case, the debtor, which is the first
respondent company, is the primary liability holder and the secondary liability belongs to the
surety which is the respondent. The Privy Council in Gajan Moreshwar case held that the
indemnity holder has rights other than those mentioned in the sections mentioned. If the
indemnity holder has incurred any liability, he can ask the indemnifier to do well of the
liability and Moreshwar Madan was directed by the Privy Council to do well of the
indemnity holder, Gajan Moreshwar’s, liability. In Punjab National Bank case, there was no
risk involved, but there is an existing duty to pay off debts as mentioned in the sections
governing guarantee. Hence irrespective of the presence of risk, the principal debtor and
surety has to do well of the debts of the creditor. In Gajan Moreshwar case, Gajan
Moreshwar can’t sue K.D. Mohan, as it is a contract of indemnity. He can only sue
Moreshwar Madan. But in Punjab National Bank case, along with the principal debtor, the
surety can also be sued.
INDEMINITYImplied Indemnity was identified in the case of ‘SECRETARY OF STATE
vs. THE BANK OF INDIA’ [1938] where an agent presented a government promissory
note in his custody to a bank with a false presentation. The bank in good trust put into use the
promissory note for a refurbished promissory note which was issued from the Public Debt
Office. In the interim time, the real owner of the note sued the Secretary of State for
conversion. The Secretary of State, in turn, prosecuted the bank on the basis of implied
indemnity where it was held that the express indemnity clause is not necessary for face of
implied right to indemnity which is beforehand existing under the Indian Laws.
The contract of indemnity is an actionable claim provided it is not against public policy or
unlawful to be valid.  A right of indemnity lies where one party is required to make good
certain losses experienced by the other party. No third person or an intruder to the agreement
of indemnity cannot bring legal charges against the indemnified due to the standard of
secrecy of contract as settled in the case of NATIONAL PETROLEUM COMPANY vs.
POPAT LAL by the Bombay High Court.----------------IN ‘GAJAN MORESHWAR vs.
MORESHWAR MADAN’ 1942 case G.Moreshwar got a piece of land in then Bombay at
lease for a long period. He transferred the lease to M.Madan  for a limited period. M.Modan
started development over the above-mentioned plot and ordered his supplies from K D
Mohan Das. When Mohandas asked for the payment for the material he provided, the
accused could not pay up. Upon request of M Madan, G Moreshwar prepared a mortgage
deed in favour of K.D. Mohandas. The Interest rate was agreed upon, and G. Moreshwar put
a charge over his possessions. A date was pre-decided for the return of principal amount. M.
Madan had decided to repay the principal amount along with interest and to get the mortgage
deed released before a particular date. But M. Madan as per his assurance did not pay
anything to K.D. Mohan Das, and G. Moreshwar had to pay some interest. When after
several requests and intimations, M. Madan did not pay the principal amount along with
interest and also didn’t get the mortgage deed released, G. Moreshwar legally prosecuted M.
Madan for indemnity. The Privy Council held that if indemnity holder has incurred
responsibility and the responsibility itself is absolute and without limits, the indemnity holder
can ask the indemnifier to take care of the liability and pay it off. Thus, G. Moreshwar was
designated to be indemnified by M. Madan against all debt under the loan agreement and
deed of charge.----------There have been conflicting legal conclusions throughout. First
Indian case where the right to be indemnified was identified was of OSMAL JAMAL &
SONS LIMITED vs. GOPAL PURUSHOTHAM [1728]. But at present, a general
agreement is formed in favor of the opinion of the equity courts. In K. BHATTACHARJEE
vs. NOMO KUMAR [1899], SHYAM LAL vs. ABDUL SALAL [1931] and G.
MORESHWAR vs. M. MADAN cases, it was decided that the indemnified can constrain
the indemnifier to place him in a position to meet liability that may be built upon him without
waiting until the indemnified has cleared the same.--------- In JASWANT SINGH vs.
SECTION OF STATE, it was concluded that the rights of the indemnified are akin to the
rights of a surety under Section 141 where the indemnifier becomes entitled to the advantage
of all securities that the creditor has against the principal debtor whether the principal debtor
was apprehensive about the same or not. Where a person agrees to repay, he will, upon such
compensation, be labeled to succeed to all the ways and means by which the person initially
repaid might have secured himself against any loss or damages; or have arranged for
compensation for his loss or damages.------- New India Assurance Company Ltd. Vs
Kusumanchi Kameshwra Rao & Others, 1997, A Contract of indemnity is a direct
engagement between two parties thereby one promises to save the other harm. It does not
deal with those classes of cases where the indemnity arises from loss caused by events or
accidents which do not or may not depend on the conduct of indemnifier or any other person.
LIABILITY OF SURETY:- A bare perusal of section 128 of the Contract Act would make
it clear that the liability of a surety is co-extensive with that of he principal debtor. The word
co-extensive denotes that extent and can relate only to quantum of the principal debt. Refer a
case of Industrial Financial Corporation of India v/s Kannur Spinning & Weaving Mills
Ltd, 2002: However the liability of the surety does not cease merely because of discharge of
the principal debtor from liability.Bank of Bihar Ltd. v/s Damodar Prasad, 1969: 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.Maharashtra
Electricity Board Bombay v/s Official Liquidator and Another, 1982: 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. The gist of some the leading cases in which the liability of the
surety is co-extensive are given below to strengthening the answer of the question:-
·       Kellappan Nambiar v/s Kanhi Raman-1957: 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.
 That in case of State Bank of India v/s V.N. Anantha Krishnam-2005: that in view of the
provision of section 128 of Act the Presiding officer was not correct in giving directions to
the Bank to proceed against the property because cash credit facility and the liability of
surety was co-extensive with that of principal debtor.
·       In a case of Bank of Bihar Ltd. v/s Dr.Damodar Prasad -1969: 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.
·       A case of Industrial Financial Corporation of India v/s Kannur Spining &
Weaving Mills Ltd.-2002: It was held that the liability of surety does not cease merely
because of discharge of the principal debtor from liability.
·       In a case of Harigobind Aggarwal v/s State Bank Of India-1956: 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 reduced accordingly.-- A case
of law in this regard is of Andhra Bank Soryapeet v/s Anantnath Goel-1991: It was held
by the court that where there were joint promisors and consideration was paid by only one of
them the other piomisors were equally liable to pay amount.  The liability of son was co-
extensive with his father who was principal debtor in view of section 127 and 128 of the
Indian contract Act.GUARANTEE- A promises to a shopkeeper C that A will pay for the
items being bought by B if B does not pay this is a contract of guarantee. In case if B fails to
pay C can sue A to recover the balance the same was held in the case of Birkmyr v/s Darnell-
1704, the court held that when two persons come to shop one person buys and to give him
credit the other person promises, “ if he does not pay, I will”, this type of a collateral
undertaking o be liable for the default of another is called a contract of guarantee. It should
be without misrepresentation or concealment-A case of London General Omnibus V/s
Holloway- 1912:  A person was invited guarantee an employee, who was previously
dismissed for dishonesty by some employer. This fact was not told to the surety. Later on the
employee embezzled funds but the surety was not held liable.REVOCATION-  Lloyd’s v/s
Harper-1880: It was held that employment of a servant is one transaction.  The guarantee for
a servant is thus not a continuing guarantee and cannot be revoked as long as the servant is
the same employment. Wingfield v/s De St Cron-1919: 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.  As per provisions laid down
in Section 131 of the Act that the death of the surety acts as a revocation of continuing
guarantee with regards to future transactions if there is no contract to the contrary.
It is pertinent to mention here that there must not be any contract that keeps the guarantee
alive even after the death.  In the case ofDurga Priya v/s Durga Pada -1928 : 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. It
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.ORAL GUARANTEE-
In P.J. Rajappan v Associated Industries (P) Ltd [1990 (1) All India Bkg Law Judgments
321], the guarantor, having not signed the contract ofguarantee, wanted to wriggle out ofthe
situation. He contended that he did not stand surety for the performance ofthe contract.
Evidence showed involvement of the guarantor in the deal, having promised to sign the
instrument later. In Mathura Das v Secretary ofState (AIR 1930 All 848) and in Nandlal
Chanandas v Firm Kishinchand (AIR 1937 Sindh 50), it was held that contract of
guarantee can be created either by parol or by written instrument and that it may be express
or implied and may be inferred from the course of the conduct of the parties concerned.
There is overwhelming evidence in this case that the second defendant had guaranteed the
due performance ofthe contract by the first defendant, principal debtor. Hence the mere
omission on his part to sign the agreement cannot absolve him from his liability as the
guarantor. A contract ofguarantee should be entered into freely and voluntarily by the
guarantor. Fry J. in Davies v London and Provincial Marine Insurance Co.5 said
"Everything like pressure used by the intending creditor will have a very serious effect on the
validity of the contract.LIABILITY-The Supreme Court in Chattanatha Karayalar v
Central Bank of India Ltd laid down that ifa transaction is contained in more than one
document between the same parties, they must be read and interpreted together. Although a
guarantor may join the principal debtor in executing the promissory note he will not be a co -
obligant where the underlying transaction and the conduct of the parties show that he is a
surety under Section 126 of the Contract Act.GUARANTER A PREFERRED DEBTOR-
The Supreme Court in the State ofMaharashtra v Dr. M.N.Kaul8 confirmed the view that
under the law a guarantor cannot be made liable for more than he has undertaken; a surety is
a favoured debtor and he can be bound "to the letter of his
engagement".CONSIDERATION-In State Bank ofIndia v Premco Saw Mill13, the State
Bank gave notice to the debtor - defendant and also threatened legal action against her, but
her husband agreed to become surety and undertook to pay the liability and also executed
promissory note in favour ofthe State Bank and the Bank refrained from threatened action. It
was held that such forbearance on the bank’s part constituted good consideration for
guarantor. In Bank of Credit and Commerce International S.A. v V.KAbdul Rahiman14,
the Kerala High Court observed that a guarantee is a collateral engagement to answer for the
debt, default or miscarriage of another as distinguished from an original and direct
engagement for the party’s own act. For the validity of a contract of guarantee it is adequate
consideration if anything is done or any promise made for the benefit ofthe principal debtor.
The creditor must have done something for the principal debtor to sustain the validity of the
contract of guarantee. Anything done or any promise made for the benefit of the principal
debtor must be contemporaneous to the surety’s contract ofguarantee in orderto constitute
consideration therefor. A contract ofguarantee executed afterwards without any consideration
is void. The word ‘done’ in the Section 127 ofthe Indian Contract Act, 1872 is not indicative
ofthe inference that past benefit to'the principal debtor can be good consideration.SCOPE-In
Bank of Credit and Commerce International S.A. v V.KAbdul Rahiman, the Kerala
High Court observed that a guarantee is a collateral engagement to answer for the debt,
default or miscarriage of another as distinguished from an original and direct engagement for
the party’s own act. For the validity of a contract of guarantee it is adequate consideration if
anything is done or any promise made for the benefit ofthe principal debtor. The creditor
must have done something for the principal debtor to sustain the validity of the contract of
guarantee. Anything done or any promise made for the benefit of the principal debtor must be
contemporaneous to the surety’s contract ofguarantee in orderto constitute consideration
therefor. A contract ofguarantee executed afterwards without any consideration is void. The
word ‘done’ in the Section 127 ofthe Indian Contract Act, 1872 is not indicative ofthe
inference that past benefit to'the principal debtor can be good consideration. It was held by
the Calcutta High Court in Montosh Kumar Chatterjee v Central Calcutta Bank Ltd18
that the effect of a continuing guarantee is not to secure amounts advanced on different
occasions but to secure the floating balance which may be due from time to time and it is the
date of the accrual of that balance which is relevant for the purposes oflimitation when it is
sued for. The surety’s obligation to pay would arise immediately on default committed by the
principal debtor and once a cause of action against the surety has arisen the commencement
of the running of time is not further postponed till the making of a demand. SURETY AS
TRUSTEE-In the case V.Velayudhan v State Bank ofIndia19, the bank had obtained a
decree for recovery of a loan on the basis of a guarantee and since the principal debtor died,
the bank took execution proceedings against the guarantor. The guarantor pleaded that he had
no means to pay the debt which was not accepted by the court and it was held that the surety
could be proceeded against tinder Section 51 (c) ofthe Code of Civil Procedure, 1908 (for
arrest and imprisonment). The court further held that the surety who guaranteed repayment
had an obligation to account in fiduciary capacity.The Supreme Court in Jolly George
Varghese v The Bank of Cochin20 observed that the words "or has had since the date ofthe
decree, the means to pay the amount ofthe decree" occuring in Section 51, C.P.C. may imply,
ifsuperficially read, that if at any time after the passing of an old decree the judgment - debtor
had come by some resources and had not discharged the decree, he could be detained in
prison even though at the later point of time he was found to be penniless. This was not a
sound position apart from being inhuman going by the Art. 11 ofthe International Covenant
on Civil and Political Rights and Art. 21 of the Constitution.COEXTENSIVENESS-In
Gerrad v James2*, the English Court held that a Company Director who guaranteed a
contract by the company which is ultra vires that company, remained liable to the creditor.
The Bombay High Court held in E G. Bankruptcy : Jagannath v Shivnarayan25 that a
discharge of the principal debtor by operation of law does not discharge the surety. ----When
a surety guarantees the performance of a contractual liability on the part of the principal to
make certain payments to the creditor by instalments, there may now be difficulties in
construing the contract of guarantee in accordance with the principle of co - extensiveness.
The starting point ofthose difficulties is well explained in Lep Air v Moschi27. In that case,
the debtor defaulted under a contract for payment in instalments for services already
provided by the creditor. The creditor treated the contract as repudiated. The question which
arose was whether the creditor could sue the surety for the balance monies due under contract
at the time ofthe repudiation, notwithstanding that when he accepted the repudiation the
debtor’s primary obligation to pay specific instalments of money became translated into
secondary obligations to pay damages. The surety’s obligation was to see to it that the debtor
performed his contractual obligations, so that when the debtor defaulted, the surety became
liable to ‘pay the creditor a sum of money for the loss he thereby sustained’. State Bank
ofIndia v Indexport Registered32 The Supreme held in this case that a surety’s liability to
pay the debt is not removed by the reason ofthe creditor’s omission to sue the principal
debtor. The creditor is not bound to exhaust his remedies against the principal before suing
the surety, and a suit is maintainable against the surety though the principle has not been
sued. The Supreme Court cited the following passage from Chitty on Contracts. In Antrobus
v Davidson41, an application made by the executor ofthe deceased creditor against the
representatives ofthe deceased surety for an order that the latter should set aside a sufficient
sum of the estate to answer future contingent demands, was dismissed. In Amrit Lai
Goverdhan Lalan v State Bank of Travancore46, the bank lost goods of Rs.35,690/- with
it due to its negligence. The Supreme Court held that the surety was discharged of the
liability to the bank to the extent of Rs.35,690/-.It was decided by the Bombay High Court in
State Bank ofIndia v Fravina Dyes Intermediate57 that the guarantor by invoking the
doctrine of subrogation can apply for a temporary injunction against the debtor even before
making payment to the creditor if he apprehends that the debtor threatens or is about to
remove or dispose of his property with intent to defraud the creditor. That is, the guarantor is
entitled to a grant of Quia Timet injunction against the principal debtor under certain
circumstances. In Bank ofIndia v YogeshwarKant Wadhera60, the Punjab and Haryana
High Court held that where the delivery of goods is not given to the creditors as in the case of
hypothecatee (bank), the surety was not entitled to claim protection ofSection 141 ofthe
Indian Contract Act, 1872. As in hypothecation the possession ofthe goods is with the
borrower, it will be wrong to say that the goods are in constructive possession ofthe creditor -
bank because it has no effective control over them. By hypothecation, only an equitable
charge is created and nothing more and therefore the Section 141 is not applicable to
hypothecation. In Coutts & Co v Brown Lecky63, where an overdraft to a minor was
guaranteed by an adult, Oliver J. held that since the overdraft was absolutely void under the
provisions of the Infants Relief Act 1874, the guarantee was unenforceable by the bank. As a
guarantee is a secondary or ancillary undertaking, it cannot be more effective than the
primary obligation which it aims to secure. Bombay High Court in Kashiba v Shripat67
held that the surety to a bond passed (executed) by a minor was liable. When the original
agreement is void e.g. a contract by minor, the surety is liable as a principal debtor. This case
laid down the principle that the surety for a minor’s contract is liable while the minor being
principal debtor is not liable.--------------BANK GUARANTEE------- The concept of bank
guarantee is basically introduced to reduce the transaction risks. Bank guarantee enabled
various new firms to set-up efficiently, now firms can start-up with small sum of money also.
The Entrepreneurs who are starting their business don't have large sum for investment are
benefited a lot as now they can raise their money in credit with the help bank as a Surety and
the creditor also in the name bank can give loans without any risk as if the debtor can't be
able to pay then they can be reimbursed by the Bank. Bank guarantee is one of the reliable
source in trade and reduces the risk in business transactions. The Bank guarantee not only
secures the seller rather it also secures the advances or the payment made by the buyer.
There are various types of Bank guarantee being used in different circumstances according to
their relevance and needs:1.Advance Payment Guarantee3: This type of guarantee is generally
used in the business transactions including exports and imports but it is also extended to
Domestic trade. This guarantee is exercised by the buyers of goods to secure the Advances
made by them. Illustrations: 'A' orders machineries for his factory from 'B' the seller, Further
'B' wants some advances before the delivery of goods, advances made by 'A' but latter on the
goods were not delivered and 'B' declared the agreement to be void, in these cases 'A' can
recover his advanced money from the guaranteeing bank . As in the case of Meritz Fire &
Marine Insurance Co Ltd v Jan De Nul NV,(137 Con LR 41) the Court of Appeal’s decision
reiterated that, in this case the advance payment guarantees paid can be recovered as it is the
primary obligation of the guaranteeing bank is to pay upon the presentation of the correct
documents.2.The Payment Guarantees4 : Payment guarantee is a kind of guarantee or
promise given by the debtor or buyer that makes him bound for the payment. The extra
benefit of "payment guarantee" is that it provides extra security as the guarantee is extended
with some co-lateral securities also like property. Most often this type of guarantee is used by
the lending Bank as a Indemnity. If the bank has paid to creditor on default made by the
debtor then the bank can recover the sum from the co- lateral security granted by the debtor.
This is an extra non-conditional guarantee to the exporters which enhances security in
transaction.Apart from these two, other bank guarantees like Bank Guarantee for Warranty
Obligations, Attributes of Guarantees as Security are also available5.Also JSW Energy's
power plant deals with JSPL, Nimbus Communications dealings with the Board of Control
for Cricket in India, manifests the need of Bank guarantee at present. EXCEPTIONS-
Although Bank guarantee is meant for the security of the creditor but there are some
exceptions where the creditor can't exercise his right of encashment. The exceptions
are:1.Fraud:- An injunction against encashment of bank guarantee can be issued when there
is clear fraud on the part of beneficiary, which the bank notices. The fraud must be as to
vitiate the whole transaction. This principal was underlined in the case of Sztejn v J. Henry
Schroder Banking corpn, ((1941) 3 HYS 2d631). The basic reason for the injunction in case
of fraud is to protect the misuse of this credit system. This concept is the clear application of
the maxim "ex turpi causa non obiter actio" which means that the "truth unravels all"7 Also in
the case of Rigoss Exports International (P) Ltd. v Tartan Infomark Ltd (AIR 2001 Delhi
285) it was held that the since the bank guarantee is obtained by the fraud therefore they were
vitiated and the beneficiary is not entitles to get claim the amount. Further it was also held
that in such circumstances, the court can intervene, and prevent encashment of bank
guarantee.2.Irretrievable harm or injustice: There is another exception to the encashment of
bank guarantee is irretrievable harm or injustice to one of the parties concerned as in most of
the cases history shows that the encashment of money under bank guarantee adversely affects
the bank as well as the customer on whose behalf guarantee is given, the harm or injustice
contemplated under this head must be of such an exceptional and irretrievable nature has
adverse effect on commercial transactions including national along with international trade.
JUDICIAL INTERVENTION-As we have seen that the bank guarantees secures the third
party as in case of default by the debtor all the liabilities of the debtor will be discharged by
the Bank. But the liability of the bank is secondary which means that the Bank can only be
held liable in the case of default of the Debtor, Bank can be held liable and can be exercised
independently even if any disputes pending in the matter of transaction between Creditor and
Debtor. Various recent judgements from Supreme court and High courts made circumstances
vivid, where there is a need of Judicial Intervention.The Supreme Court in the case of
Tarapore and Co. v VO Tractors Export,( AIR 1970 SC 891) held that the contract created
between the creditor and the bank is separate from the original contract.BANYAN TREE-
Tony is a partner in a partnership firm called Avenger. He gets into a contract with T’Challa
for development of energy technology using the Tesaract. This contract was formed without
the knowledge of the other partners. T’Challa hires Steve for transporting the Tesaract from
Wakanda to New York. Steve in turn gives it to Bucky and tells T’Challa that “I will insure
that the tesaract reaches Tony”. While transporting it, Bucky loses it and dies. Meanwhile the
other Avengers are questioning the rights of Tony to get into the contract and Steve is citing
‘impossibility of performance’ as he is heartbroken at the death of this best friend.Now
answers the following question:What are the rights and liabilities of Steve towards T’Challa
and Bucky? Identify the type of contract and give its essentials.ANSWER- Rights and
liabilities of Steve are determined by the nature of contractual relationship between them. As
per the facts, T’Challa hired Steve and thus creating an employer-employee* relation
between them.Steve in turn gives it to Bucky, the facts here do not clearly mention that
Bucky was working on behalf of Steve. No pre-existing contractual relationship or contract
has been mentioned by the facts. So the assumption I am taking is that they are just friends
and Bucky is acting as a good friend to Steve. The relationship between is that of a principle
and agent*.(* in both these contractual relationships you can come up with different set of
answers backed up by the facts and the argument) (Depending on the complexities of the
facts your arguments may increase in number)The identification of relationships allows us to
establish the liability of Steve.
In case of T’Challa, the liability of Steve is…and discuss employee’s liability with the help
of statutes/case laws/ illustrations.In case of Bucky, the liability of Steve is…and discuss
principle’s liability with the help of statutes/ case laws/ illustrations. The type of contract that
exists between T’Challa and Steve is that of contract of hire. And the facts are silent about
any kind of contract between Steve and Bucky.
The essential of a contract are- Offer,acceptance,meeting of minds,consideration,capacity
,legality.
FIDELITY –employee-non monetary