1.

INTRODUCTION

Indemnity means a protection against loss, esp. in the form of a promise to pay or the

payment for loss of money, goods, etc. In a contract of indemnity, the person who promises
to indemnify is known as indemnifier', and the person in whose favor such a promise is
made is known as 'indemnified'or indemnity-holder a l u
Section 124 of the Indian C'ontract Act, 1872, makes the
provisions in this regards
This provision incorporates a contract where one party promises to save the other from loss
which may be caused, either by the conduct of
the promisor himself, or by the conduct of any
other person.
A di
 Contract of Indemnity
1
1.1 Meaning and Definition of Contract of Indemnity
Longman's Dictionary of Contemporary English. indemnity
means a
According to

for loss of money.

protection against loss, esp. in the form of a promise to pay or the payment
protecti

etc. As per Chambers New English Dictionary, indemnity is a security against.

or
goods,
epods, etc.
Compensation forloss,
etc.

ustration:

JA contract to indemily B against the consequences of any proceedings which

certain sum of Rs. 200. This is contract of indemnity.
may take against B in respect of a a

In a contract of indemnity, the person who promises to indemnify is known as

such promise is made is known as

person in whose favor
a
indemnifier, and the
indemnified' or 'indemnity-holder'.
(According to Section 124 of the Indian Contract Act, l872, "a contract of indemnity
the other from the loss caused to him
means a contract whereby one party promises to save
by conduct of the promisor himselfor by conduct of any other person".|
This provision incorporates a contract where one party promises to save the other

from loss which may be caused, either

By the conduct of the promisor himself; or

(2) By the conduct of any other person.
The definition covers indemnity for the loss caused by human agency only. It does

not cover cases where the indemnity arises from loss caused by events or accidents which do
not or may not depend upon the conduct of the indemnifieor any other person, or by reason
indemnifier.
of liability incurred by something done by the indemnified at the request of the
Bank of India,' it was held that a contract of
In Taxman Co. Ltd. v. The State

direct engagement, between two parties whereby one promises to save another
indemnity is a

third person. The

harmless from the result of the
conduct of the promisor himself or of any
Bank to repay the amount on first demand' and without contest
guarantee was given by the
the moment a demand was made without protest and
and protest. it must be deemed that
between the parties.
contest, the bank is bound to pay irrespective of disputes
 3.1.2 Insurance C'ontract, if Contract of lndemnity
India
Under ndian Law, Jt has been noted that Section 124 recognizes only such contrae
as a contract of indemnity Miere there is a promise to save another person from loss which
may be caused by the conduct of the promisor himself or by the conduct of any other person

lt does not cover a promise to compensate for loss not arising due to human ageney,

Therefore. a contract of insurance is not coverçd bythe definition ol Secton 124. CK

Thus. if under a contract of insurance, an insurer promises to pay compensation in the

event of loss by fire, such a contract does not come within the purview of Section l29/ Such
contracts are valid contracts, as being contingent contracts as defined in Section 31.

Under English Law, the word indemnity carries a much wider meaning than given in
the kndian Contract Act. It includes a contract to save the promise from a loss, whether

caused by human agency or any other event like an fire Under English law,
accident and a

contract of insurance (other than life insurance) is a contract ofindemnity.

In Dudgale v. Lovering,' it was held that under the English law, the indemnity has

the consequences of an
been defined as a promise to save a person without any harm from

implied from the circumstances of the case. Jn this case

act. This promise may be express or

The defendant as well as a company claimed them.

trucks were in possession of the plaintiff.
received. Yet they delivered
The plaintiffs demanded an indemnity bond, but no reply was

the truck to the defendant, it was held that the defendant was liable to indemnify the plaintiff

as the indemnity bond led to the creation of an implied promise.

in such
Life Insurance contract is, however, not a contract of indemnity, because
A contract of life insurance, for instance, may provide
contract different considerations apply.
expiry of a
of money either on the death of a person. or on the
the payment of a certain
sum

of
if the assured is still alive). In such a case, the question
stipulated period of time (even
the assured, or indemnity for the same does not arise.
amount of loss suffered by

if a certain sum is payable in the event of death, since, unfike

Moreover, even

of the assured becomes

person cannot be valued, the whole
amount
nronerty.the life of a
also, it iS not a contract of indemnity.
payable For that reason
asO.

of the Indemnity Holder

L3 Rights
In a suit against the
indemnity-holder. he may have been ges.
compelled to pay
and
curred
incuTred costs etc. in his own turn; he can bring an action
against the
(indemnifier)
emnifier) to
to recover damages and costs etc. paid by him. if the indemnifier has promised

an indemnity in a
case.Ihe provision s in this regard is contained in Section 125 ot
nu
Contract Act, 1872.

Section 125 says that the person to whom the indemnity is given. i. e. the promisec n

contract of indemnity, acting within the scope of his authority is entitled to recover irom n
cO

misorerfie has the following rights against the promisor

V. (i) An indemnity-holder is entitled to claim all damages which he may have Deen
tO
compelled to pay in any suit in respect of any matter to which the promise

indemnity applies.
incurred in
i) An indemnity-holder is entitled to recover all costs reasonably

resisting or reducing or ascertaining the claim.

claim on the best term he can and then
Wii) An indemnity-holder can compromise as
action on the contract of indemnity
Semg an
3.1.4 When can an Indemnifier be made Liable?
as to whether the indemnifier can
has been a controversy regarding the point,
There
has actually suffered the loss, or his
be asked to indemnify before the indemnity-holder
has been suffered by the indemnity-holder
iability arises only after the loss
In England
action could be brought by the indemnitv.
Common law, no
According to English
This crealed a great hardship for the indemnity-
holder until he had suffered actual loss.
the claim out ot his poCKet. Ihe Court of Equity has evolved
holder when he could not meet
indemnity-holder
can claim compensation even before he has
lhe law according to which an

the indemnirier to Save him irom the loss in respect of

Suffered actual loss. He can compel
indemnity has been promised.
i t y against which
In India
Courts in India ac ndia as to
has been
difference of opinion between various High
There a

wnether the indemnity-holder can claim indemnity before he has actually suffered the lose
SS.
The High Courts of Bombay, Calcutta', Madras", Patna and Allahabad have expressed in

favour of the application of law similar to that recognized in England by the Court of Equity.
The Lahore and Nagpur High Courts have expressed the opposite view. The view
expressed by Bombay and other High Courts appears to be more logical.
3.2 Contract of Guarantee
3.2.1 Meaning and Definition of Contract of Guarantee
According to Section 126 of the Indian Contract Act, 1872, *a 'contruct ofof
"contruct

guarantee is a contract to perform the promise, or discharge the liability of a third person in
case of his defaulr"

Section 126 further provides that:

The person who gives the guarantee is called the surety, the person is respect of
whose default the guarantee is given is called the principal debtor, and the person to
whom the guarantee is given is called the creditor".
A guarantee may be either oral or written.
Illustration:
A takes a loan from the bank. A promises to the bank to repay the loan. B also makes
a promise to the bank saying that if A does not repay the loan "then I will pay'. In this case, 4
is the principal debtor, who undertakes top repay the loan, B is the surety, whose liability i s
secondary because he promises to perform the same duty in case there is default on the part

of A. The bank in whose favor the promise has been made is the creditor.
 Tiaui UI UIC pIicpai utotOI, UNT pIcipai utvto
shall reimburse the surety for the same. 3In State Bank of India v. Prem Dass," it was held
that when a borrower and a guarantor both sign in favor of bank, they
an agreement a are

jointly and severally liable under that contract.

 gICeen Ts vora.
3.2.3
12.3 Main
Main Features of a Contract of
Guarantee
For the purpose of a valid contract of following points
ouarantee may be
tak
aCcount as main
features of a contract of
guarantee
) The contract may be either oral or in written
form
As per Section 126 of lndian Contract Act. 1872, a guarantee may be either oral or

written)On this point the position is different in EnglandAs per English Law for a valid
contract of
guarantee, it is necessary that it should be in writing and signed by the party to be

chargedtherewith.
 (ii) There should be
principal debt
Acontract of guarantee presupposes a principal debt or an obligation to be dischar
be discharg
by tE principal debior. The be liable only if principal debtor fails
surety undertakes to

discharge his obligation if there is no such principal debt, but there is a promise by one
in 1avour of another for
party
compensating in a certain situation, and the performance for
promise is
s
not dependent ufon the default of somebody else, it is a contract of
indemnity.7
Thus. when A and B
go to a shop, A purchases goods and B tells the seller 'if Adop
Tnot pay ou. I will pay you'. it is a contract of guarantee. On the other hand, if A is not the
principal debtor but only B makes a promise to the shopkeeper to pay, for
instance, B tells the
shopkeeper *Let him (4) have the goods, I will be your
paymaster, it is a contract of
indemnity
ii) Benefits to the principal debtor is sufficient consideration
As in any other contract, the consideration is also needed for contract
For the
a
of guarantee
surety's promise, it is not
necessary that there should be direct consideration between
the creditor and the
surety; it is enough that the creditor had done
the principal
something for the benefit of
debtor,(Benefits to the
principal debtor constitute a sufficient consideration to
the surety for
giving the guarantee. Section 127 makes clear
provisions in this regard:
Amthing done. or any promise made for the benefit
of the principal debtor may be a
sufficient consideration to surety for giving the
guarantee"
Illustration:"
B requests A to sell and deliver the
goods on credit. A agrees to do so,
give guarantee the
provided Cwill
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
sufficient consideration for C's
promise.
(iv) Consent of the surety should not have
been obtained
concealment
by misrepresentation or
The creditor should obtain the guarantee
not
by any misrepresentation or concealmen
of any material facts
concerning the transaction. If the guarantee has been obtained that a
the guarantee is invalid. Following provisions of Section 142& 143 will make it
clear:
 . Uarantee obtained by
misrepresentation invalid Any guarantee whicn nas

becn ohlaunea Dy mean.s of misrepresentation nmade by the creditor, or wilh hisS knowieuge
nd ussent, concerning a muleriul part of the transuction, is invalid.
143. Guarantee obtained by concealment invalid
7
- Any guarantee which the
creditor has obtained by means of keeping silence a s to material circumstance is invalia.

Illustration:
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. Cp

gives his guarantee for B's duly accounting. A does not acquaint C with B's previous

conduct. B alterwards makes default. The guarantee is invalid.

I n Bank of India v. Surendra Kumar Misra," it was held that guarantor was bound

by acknowledgment by the Principal Debtor. "This was a suit for recovery of loan, against

guarantor was barred by the time and Suit was decreed against principal debtor.
 3.2.5 eontinuing Guarantee
A guarantee may be an ordinary guarantee or a continuing guarantee.j In case of
single transaction but in
ordinary guarantee the surety is liable only in respect of a case of

transactions which come

continuing guarantee the surety is liable in respect of any successive

within its scope. (Section 129 of Indian Contract Act, 1872. makes the provisions for
continuing guarantee as:

of transactions is called
*A guarantee which extends to a series a
comlinuiag
guurute
For instance. a guarantee regarding the conduct of a cashier in respect of transactions during
a period of one year is a continuing guaranteè.

IMustrations:3

(aAin consideration that B will employ C in collecting the rent of B's zamindari
promises B to be responsible, to the amount of Rs.5, 000/, for due collection and paymentby

C of those rents. This is a continuing guarantee.

h 1aranteps navment to B a tea-dealer to the omount of f 100 f r
 al h e
auc ne of the instrument.
n Wali Mohd. v.
Ganpat, it was held that
in the cases of
veneral guarantees surc
liable for succesSsive
transactions. In this case,
in future when
security for the preso
sentation of judgment
required by the court was taken to be a
17.6 Revocation of a Continuing Guarantee
continuing guarantee.
The surety has been empowered to
revoke continuing guarantee as
a
to future
Iransaction, by giving a notice to the creditor,"25 revoke a
continuing guarantee. as to future
transactions, by a notice to the
creditor.|The
death of the surety also
puts an end to the
Continuing guarantee, unless there 1s a contract to the
contrary. His liability in respect of the
transactions which have already been made continues to exist,
whereas his liability for the
future transactions comes to an end. Unless there is a
contract to the contrary, the death of a
surety als0 automatically puts an end to continuing guarantee, as regards 26
future transactions.°
3.2.7 Discharge of a Surety from
Liability
A surety may be discharged from his liability in the following ways:
Revocation by surety (Section 130)
Once a guarantee has been acted upon it cannot be revoked. But an exception to this
Sneral rule is laid down in the of Section 130 of the Indian Contract Act which
provisions
ystates that a continuing guarantee can be revoked any time by the surety, as to future
actions, by notice to the creditor So, such revocation will be applicable to the future

action and notice of such intention is to be given to the creditors then only it will be
effective. Therefore.
CClIe. There it can be said that when a guarantee is continuing guarantee the surety
surety
an be
discharged by revocation.
 Ai By surety's death (Section 131) is of continuing tbe
where the guarantee
This second mode is also applicable
provisions of Sectiom 131 of the Indian Contract Act
are very
clear on this
point/Accord
to
Accordin
in the absence of any conract
the contran
rary.
To eclon 131. the death of a surety operates.

far as regards future transaclions.

So. when th
as a revocation ofa continuing guarantee, so

comes to an
end in relation to ful
Surety o1 a continuing guarantee dies. guarantee
the surety are discharged. far as tha So
ransactions. Such death determines the guarantee and
for such transactions
are concerned the legal heirs of
the surety can be sued
past transactions
surety is iable for
the representative of all
a
In Hasan Ali v. Wali Ullalh,
death. When the considerations for
transactions guaranteed by the surety before his
even by the death of the surety and
continuing guaratttece is indivisible it cannot be revoked
his estate continues to be liable to future obligations.

i i ) By variance in the terms of the contract (Section 133)

When the surety has undertaken liability on certain terms, it is expected that they wil1

remainunchanged during the whole period of guarantee. Section 133 of the Indian Contract
Act says. if there is any variance in the terms of the contract between the principal debtor and

the creditor, without the consent of the surety, the surety gets discharged as regards to the

transactions subsequent to the change.

For example, C contracts to lend B Rs. 5,000/ on 1s March. A guarantees repayment.
C pays Rs. 5,000/ to B on 1st January. A is discharged from his liability, as the contract has
been varied, inasmuch as Cmight sue B for the money before 1s March.
Ci By release or discharge of the principal debtor (Section 134)
It has already been noted that according to Section 128 of the Indian Coniract Act, the
liability of the surety is co-extensive with that of the principal debtor. Further Section 134 of

the Indian Contract Act says, if by any contract between the creditor and the
principal of the
creditor, the principal debtor is discharged, the surety will also be discharged from his
liability accordingly But the position becomes different after a decree has
jointly against the
been obtained
principal deblor and the
surety. In such a
case, the creditor may recover
only a part of the sum from the principal debtor and release him for
the balance and then sue
the surety for the balance.
 the principal debtor
When creditor compounds with, time to, or agrees not to sue

Section 135)
According to Section 135 of the lndian Contract Act. when creditor promises to give

ume to the principal debtor, or the promises not to sue the principal debtor, the surety 1S
creditor
discharged thereby.In the above stated cireumstances, the surety is discharged if the
a
and the principal debtor make such a contract without the consent of the surety. lthough
mere
promise by a creditor not to sue discharges the surety. yet a
the principal debtor

his part does not discharge the surety. The reason is that by promise
a
forbearance to sue on

sue results in the end of right of the creditor

to sue. whereas by mere
by the creditor not to

is extinguished and that can still be exereised.

forbearance to sue. the right to sue not

eventual remedy (Section 139)

(yiBy creditor's act or omission impairing surety 's
the
incorporates the rule that when
act or
Section 139 of the Indian C'oniruct Act

interest of the surety, and the

omission on the part of the creditor is inconsistent with the

the principal deblor, the surely is

same results in impairing surety's eventual remedy against

dischargedthereby.
guarantee to B for M's
For instance, A puts M as apprentice to B, and gives a

at least once a month, see M make up the cash. BB

fidelity. B promises on his part that he will,
embezzles. A is not liable to B on this guarantee.
omits to see this done as promised, and M
Canara Bank,° the property hypothecated to the bank was
Th M.R. Chakrapani v.

to know of this, he did not take any steps

debtor. After the bank came
sold bythe principal
and seize that property or to bring any kind of action against the principal
either to trace
Similar also the decision
debtor.The surety was
discharged by such inaction of the bank. was

Gujarat High
Court in Union Bank of India v. S.B. Mehta,29
of the
the creditor (Section 141)
(vil By loss ofsecurity by
tian 14I of the Indiun Coniract Act casts a duty on the creditor to preserve the
Sec
which the credilor
nas against the principal debtor when the contract of surety ship
The surety is entitled to
The surety
to such securitiesIfthe creditor loses such securities or
L .

entered
into.
is
the surety will be disch
the surety
discharged to the extent. If. however, the securities are lost
them,
with
parts
fthe creditor.
creditor. then the
the surety would not be discharged in sueh a case
without any
fault of the

216.
Kant.
1997
AIR
2 Guj
48
79
U R
1997 283
3.3 Rights of Surety
itor and
A surety has certain rights against the principal debtor. the ereditor and the
co
Sureties. His rights against each one of them are as following

3.3.1 Rights against the Principal Debtor

(i) Right of subrogation

Section 140 of the ndian Contract Act says that when the principal debtor makes
kes a
default, the surety makes tthe necessary
default in the such
performance.of his duty. and on a

payment or makes performance of all what he is liable for. he becomes invested with all th

ights which the ereditor had against the principal debtor. This is known as the surety's riuht

of subrogation.

(i) Right of indemnity against the principal debtor

Section 145 of the Indian Contract Act makes the provisions that on the default of the

principal debtor. the surety has to make the payment to the creditor. This payment is made by

the surety on behalf of the principal debtor. After making such payment. he can recover the

same from the principal debtor. Such a claim can be made by the surety only in respect of the

sums he has rightfully paid under the guarantee, but no sums which he has paid wrongfully

J3.2 Right against the Creditor

Right to securities with the creditor

It has been noted above that after the surety has performed his duty under the contract

is all the rights which available to the creditor against the

of guarantee, he subrogated to are

principal debtor. Section 14I of the Indian Contract Act makes a further provision, according
to which the surety is entitled to all the securities belonging to the principal debtor which are
with the creditor. The creditor should not lose those securities otherwise the surety will be

discharged to the extent the creditor loses or parts with the securities without the surety s

consent.

If the loss of the securities is due to the fault of the creditor, the surety is discharged
and not otherwise. This rule may apply to the goods pledged with the creditor and does not
apply to hypothecation, where the creditor does not have the possession of the goods.

3.3.3 Rights against the Co sureties

() Right of contribution against co-sureties

According to Section 146 of the Indian Contract Act, when two or more persons a
co-sureties for the same debt or duty, either jointly or severally, and whether under the sand

or different contracts. and wnetner with or without the knowledge of each other, the c

284
pTINCpal d e b t o P .

(o-suretiesboundin different sums

i iC o

Sometimes tne sureues may fix the maximum sum up to which their liabilities ca go.

may be different limits as to the amount for which the sureties are to be liable.
There
According to Section )47, "Co-sureties who are bound in different sums are havie t0

as far
wulually as
equally the limits of their respective obligations permit.
Illuatration:

A, B and C as sureties for D, enter into three several bonds each in different penaity,

namely. A in the penalty of 10.000 rupees. B in that of 20.000 rupees, C in that of 40,000
nan

upees. conditioned for D's duly accounting to E. D makes default to the extent of 30,000

rupees. A. B and C. are liable to pay 10.000 rupees.

3.3 Dietimetion between Contracts of Indemnity and Guarantee

- (1) There are two parties in a contract of indemnity, the indemnifier and the

indemnity-holder', or "indemnified. There are three parties in a contract of guarantee, the

creditor,principal debior" and surety'.

of indemnity consists of only one contract under which the
-(2) The contract
indemnifier promises to indemnify the indemnified in the event of a certain loss. The contract
contracts.
of guarantee consists of three

three contracts in a contract of guarantee. One contract is between the

There are

debtor and the creditor in respect

o1 a certain promise or obligation undertaken to be
principal
the surety undertakes to perform the
performed by the principal debtor. By a secona contraCt,
deblor nas underiaken,
in case principal debtor makes
the
same obligation which the principal
which is an impied one, is between the principal dehtor h and

a defaul, The third contract,

surety. debtor is bound to

contract, the principal indemnify the surety for whatever
By this 30 It means that after the
aid under the guarantee
under the guarantee.
rightfully paid surety
Sum the surety has . d with the rights u
rights which the creditor had
is invested
ith all against the
obligation,
he
discharges his
principal debtor.
 of the credilor. It presupposes
BI The vbject of a contract of guarantee is the security es
the principal debtor is
a principal debtor and a certain debt obligation for which
or an

the promisee against some likel

primarily liable. A contract of indemnity is made to protect

loss.
of guarantee, the liability of the surety is only a secondary one,
In a contract
default. The liability of the
Surety's liability arises only when the principal debtor makes a

He undertakes to be liable when the

indemnifier in a contract of indemnity is a primary one.
contemplated situation is there.
of guarantee, after the surety has discharged the liability, he can
(5)m a contract

a contract of indemnity, the

Fealize the payments made by him from the principal debtor. In
loss falls on the indemnifier.
in the of
-(6) Request by third party is essential in the case of guarantee whereas case

indemnity request or knowledge is not necessary.

of guarantee should be in writing, whereas a contract of
(7 England, a contract

in writing. In India, there is no such distinction, and both the

indemnity may be either oral or

contracts for indemnity and guarantee may be either oral or in writing.

4. SUMMARY
Indemnity means a protection against loss, esp. in the form of a promise to pay or the

payment for loss of money, goods, etc. In a contract of indemnity, the person who promises

to indemnify is known as indemnifier', and the person in whose favor such a promise is
made is known as indemnified' or "indemnity-holder'.
According to Section 124, a contract of indemnity means a contract whereby one

party promises to save the other from the loss caused to him by conduct of the promisor
himself or by conduct of any other person. This provision incorporates a
contract where one
narty promises to save the other from loss which
may be caused, either by the conduct of the
promisor himself, or by the conduct of any other person.
According to Section 126, a "contract of guarantee is a contract to perform the
promise, or discharge the liability of a third person in case of his default. The object of a
cantract of guarantee is to provide additional security to the
creditor in the form ofa
hy the surety to fulfill certain
promise
a
obligation. In case the
principal debtor fails to do that. There
are differences between conract or
indemnity and contract of
indemnity covers for the loss caused by human a0e
guarantee. The definition of