CONTRACT OF INDEMNITY

The term Indemnity literally means “Security against loss”. In a contract of indemnity one party
– i.e. the indemnifier promise to compensate the other party i.e. the indemnified against the loss
suffered by the other.

The English law definition of a contract of indemnity is – “it is a promise to save a person
harmless from the consequences of an act”. Thus it includes within its ambit losses caused not
merely by human agency but also those caused by accident or fire or other natural calamities.

A Contract of indemnity is a direct engagement between two parties whereby

one promises to save another from harm. According to section 124 of the Indian
Contract Act a contract of indemnity means,” 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.”

The definition provided by the Indian Contract Act confines itself to the losses
occasioned due to the act of the promisor or due to the act of any other person.
This gave a very broad scope to the meaning of indemnity and it

included promise of indemnity due to loss caused by any cause whatsoever.

Thus any type of insurance except life insurance was a contract of indemnity
however Section 124 of Indian Contract Act 1872 makes the life insurance was
a contract of indemnity. However the Contract Act -1872 makes the scope
narrower by defining the contract of indemnity.

DEFINITION: - As provisions made in section 124 of the Indian Contract Act-

1872 says that, “whenever one party promises to save the other from loss
caused to him by the conduct of the promisor himself or by the conduct of other
by the conduct of the any other person is called a Contract of Indemnity.”
Illustration

A contracts to indemnify B against the consequences of any proceedings which

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

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New India Assurance Company Ltd. Vs Kusumanchi Kameshwra Rao &
Others, 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.

ESSENTIAL ELEMENTS:The following are the essentials of the Contract of

Indemnity:-
1. There must be a loss.
2. The loss must be caused either by he promisor or by any other person.
3. Indemnifier is liable only for the loss.

Thus it is clear that this contract is contingent in nature and is enforceable only
when the loss occurs.

Right of the indemnity holder – (Section 125)

An indemnity holder (i.e. indemnified) acting within the scope of his authority
is entitled to the following rights –
1. Right to recover damages – he is entitled to recover all damages which he
might have been compelled to pay in any suit in respect of any matter covered
by the contract.
2. Right to recover costs – He is entitled to recover all costs incidental to the
institution and defending of the suit.
3. Right to recover sums paid under compromise – he is entitled to recover
all amounts which he had paid under the terms of the compromise of such suit.
However, the compensation must not be against the directions of the
indemnifier. It must be prudent and authorized by the indemnifier.
4. Right to sue for specific performance – he is entitled to sue for specific
performance if he has incurred absolute liability and the contract covers such
liability. The promisee in a contract of indemnity, acting within the scope of his
authority, is entitled to recover from the promisor-

(1) Right of recover Damages: - All the damages that he is compelled to pay in
a suit in respect of any mater to which the promise of indemnity applies.

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(2) Right of recover all Costs: - All the costs that he is compelled to pay in such
suit if in bringing or defending it he did not contravene the orders of the
promisor and has acted as it would have been prudent for him to act in the
absence of the contract of indemnity or if the promisor authorised him in
bringing or defending the suit.

(3)Right of recovery all sums :- All the sums which he may have paid under the
terms of a compromise in any such suite if the compromise was not contrary to
the orders of the promisor and was one which would have been prudent for the
promisee to make in the absence of the contract of indemnity.

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 Contract of Guarantee.
(Sec 126-147)

The term "guarantee" is defined by the Black Laws Dictionary as "the certainty that a legal
contract will be duly enforced."A guarantee contract is regulated by Indian Contract Act, 1872,
and comprises of 3 parties, including one who serves as the guarantor if the defendant fails to
meet his obligations. Whenever a party seeks a loan, products, or employment, a guarantee
contract is usually required. In such arrangements, the guarantor promises the creditor that the
person in need can be trusted, and that in the event of a default, he will accept responsibility for
payment.

Section 126 of The Indian Contract Act, 1872 defines a guarantee as - a contract to perform
the promise, or discharge the liability, of a third person in case of his default.
The person who gives the guarantee is called the ‘surety’;
The person in respect of whose default the guarantee is given is called the ‘principal debtor’,
And the person to whom the guarantee is given is called the ‘creditor‘

Example, Mr. X advances a loan of 25000 to Mr. Y and Mr. Z promise that in case Mr. Y fails
to repay the loan, then he will repay the same. In this case of a contract of guarantee, Mr. X is a
Creditor, Mr. Y is a principal debtor and Mr. Z is a Surety.

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.

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(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

ESSENTIAL
1. A principal debt must pre-exist
2. Consideration
3. No misrepresentation or concealment of facts
4. A guarantee may be either oral or written

1. A principal debt must pre-exist - A contact of gurantee seeks to secure payment of

a debt, thus it is necessary there is a recoverable debt. There can not be a contract to
guarantee a time barred debt.

case Swan v. Bank of Scotland {(1836)

‘The payment of the overdraft of a banker’s customer was guaranteed by the

defendant. The overdrafts were contrary to a statute, which not only imposed penalty
upon the parties to such drafts but also made them void. The customer having
defaulted, the surety was sued for the loss.’ But he was held not liable. The court said
that “If there is nothing due, no balance, the obligation to make that nothing good
amounts itself to nothing. If no debt is due, if the banker is forbidden from having any
claim against his customer, there is no liability incurred by the co-obligers.”

Case Coutts & Co v Brown Lecky and others [1946] 2 All E.R. 207

court held that to be legally effective a guarantee must be given for debt which is
enforceable. If the debt is not enforceable, the guarantee will not be enforceable. Thus
a minor not being answerable for a debt he incurs, a guarantee for such debt is
likewise void.

Case Manju Mahadev v Shivappa (1918) 42 Bom. 444

The Court observed “The word ‘liability’ in Section 126 of the Indian Contract Act,
1872, means a liability which is enforceable at law, and if that liability does not exist,
there cannot be a contract of guarantee. A surety, therefore, is not liable on a

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 guarantee for payment of a debt which is statute-barred.”

Case KASHIBA V. SHRIPAT (1895) 19 ILR Bom. 697

The case is about whether the contract of guarantee will be valid even if the principal
debtor is not competent to contract.

Facts:
A minor named Laxmibai entered into a bond to secure payment to the plaintiff for
Rs 1000. But at the time of execution, she was a minor and her father joined in the
bond as a surety and said that under a contract, if she fails to pay, he will pay the
above-mentioned amount without pleading her excuse and take back this bond. And if
not so paid, they should get it paid off his income. The question was whether the
father was liable on this guarantee in the view of Laxmibai herself not being liable
because of her minority. in this case, the contract of so-called surety is not collateral,
but a principal contract. It is a conditional promise founded upon a valuable
consideration.

Judgment:
The court held the father liable for the payment and said in cases like this the surety
does not just act as collateral but becomes the principal debtor. In circumstances
where the principal debtor is not competent to contract, the surety will act as principal
debtor and will be held for payment of debt personally. And there is no reason why a
person couldn’t guarantee the performance of a third person by a duty of imperfect
obligation.

2. Consideration.

There must be consideration between the creditor and the surety so as to make the
contract enforceable. The consideration must also be lawful. Section 127 of the
Contract Act provides that 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. Thus, any benefit received by the debtor is adequate consideration to bind
the surety. A past consideration is no consideration for a contract of guarantee. There
must be a fresh consideration moving from the creditor.

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 Case Ram Narain v Lt. Col. Hari Singh, AIR 1964 Rajasthan 76 ,
The Court held that A contract of guarantee executed after the contract between the
creditor and principal debtor and without consideration is void. It must be
contemporaneous with the contract of the creditor and principal debtor. The past
benefit to the principal debtor is not a good consideration.

3. No misrepresentation or concealment of facts –

The guarantee should not be obtained through misrepresenting facts to the surety.
Though not all facts need to be mentioned to him, any facts that affect the surety’s
extent in the liability must be brought to his notice accurately. This can be seen in
Section 142 of The Indian Contracts Act.
The creditor must inform the surety of all the facts that affect his liability.
Concealment of any facts will invalidate the contract. This is highlighted in section
143 of the Indian Contracts Act, 1872

Case London General Omnibus vs Holloway 1912,

In this case a person was invited to guarantee an employee, who was previously
dismissed for dishonesty by the same employer. This fact was not told to the surety.
Later on, the employee embezzled funds but the surety was not held liable.

4. A guarantee may be either oral or written –

A contract of guarantee may either be oral or written. It may be express or implied

from the conduct of parties. Contracts of guarantee have to be interpreted taking into

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account the relative position of the contracting parties in the backdrop of the contract.
The court has to consider all the surrounding circumstances and evidence to come to a
finding when the guarantor refutes his liability.

It is to be noted that under English Law (the Statute of Frauds (29 Car. II,
c.3) Section 4), a Contract of Guarantee must always be in writing.

Case Mathura Das v Secretary of State (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 oral or by a 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 of the 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.

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
.
(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 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.

v) Surety’s liability may be conditional. The surety may impose certain

conditions in the contract of guarantee. Until those conditions are met, the
surety shall not be liable.

Example : A guarantees to B the payment of a bill of exchange by C, the

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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.

Case Maharashtra Electricity Board Bombay v. Official Liquidator and

Another, Air 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.

Case Kellappan Nambiar v. Kanhi Raman 1956 Madras

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.

Case Bank of Bihar v. Damodar Prasad and another (AIR 1969 SC 297),

The plaintiff bank lent money to Damodar Prasad, on the guarantee of Paras Nath
Sinha. In spite of demands by the bank, the loan was neither repaid by Damodar
Prasad (principal debtor), nor by Paras Nath Sinha (the surety). The bank then filed a
suit against both the principal debtor and the surety. A decree was passed in favour of
the bank but with the condition that the plaintiff bank shall be at liberty to enforce its
dues against the surety only after having exhausted its remedies against the principal
debtor. In its appeal before the Supreme Court, the plaintiff bank challenged the
validity of the condition in the decree that the bank should enforce the decree against
the surety only after having exhausted the remedies against the principal debtor.

Where in a guarantee deed, liability of guarantor was coextensive with that of

principal debtor. No clause in guarantee deed which provided contrary to contract.
Liability of guarantor was not discharged. Suit filed by appellant was decreed against
defendant Nos. 2 and 3. Appellant-Bank was at liberty to recover loan amount jointly
and severally from all the defendants.

Case In contrast to the above case the case of State Bank of India vs Indexport
Registered and Others (AIR 1992 SC 1740), 1992 has pointed and emphasized on
the fact that it is not compulsory for the creditor to exhaust all the remedies against
the debtor (defendant 1) to exercise his right to recover from the surety (defendant 2).
Case In State Bank of India v. V.N. Anantha Krishnam 2005

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 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.

Case Union Bank of India v. Manku Narayan,Air 1987 SC

It has been held by the Supreme Court that when there is a decree against the
principal debtor, the guarantor and also against the mortgaged property, the decree
holder bank should first proceed against the mortgaged property and then against the
guarantor.

Liability of co-surety

It has been noted above that the liability of sureties is coextensive with that of the
principal debtor. It implies that the creditor can proceed against the principal debtor
or the surety, at his discretion, unless it is otherwise provided in the contract. The
same principle is applicable with regard to the rights and liabilities of the co-sureties.
Since the liability of the co-sureties is joint and several, a co-surety cannot insist that
the creditor should proceed either against the principal debtor or against any other
surety before proceeding against him.

Case State Bank of India v. G.J. Herman, Air 1998 Ker 161

It has been held that when there is a composite decree against the principal debtor
and the sureties, the creditor has the discretion to decide against whom he wants to
proceed. Neither the court nor a co-surety can insist that the creditor should first
proceed against another surety before proceeding against him. Such a direction would
go against the coextensiveness of the liability of the sureties with that of the principal
debtor.

KINDS OF GUARANTEE

Guarantee may be classified under the following two categories:

I. Specific guarantee
II. Continuing guarantee

I. SPECIFIC GUARANTEE
A guarantee which extends to a single debt or specific transaction is called a specific
guarantee. The liability of the surety comes to an end when the guaranteed debt is
duly discharged or the promise is duly performed.

Example:- X guarantees payment to Y of the price of the five bags of flour to be

delivered by Y to Z and to be paid for in a month. Y delivers five bags to Z, Z pays

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for them. This is a contract of specific guarantee because X intended to guarantee
only for the payment of price of the first five bags of flour to be delivered at one time.
[Kay v. Groves)

II. 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 ` 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.

REVOCATION OF CONTINUING GUARANTEE

Or
DISCHARGE OF A SURETY

A surety is said to be discharged when his liability as surety comes to an end. The
various modes of discharge of surety are discussed below:
(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.

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(i) By revocation of the contract of guarantee.
(a) Revocation of continuing guarantee by Notice (Section 130): The
continuing guarantee may at any time be revoked by the surety as to future transactions by notice
to the creditors. A specific guarantee can be revoked only if liability to principal debtor has not
accrued.
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

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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
dishonors the bill at maturity. A is liable upon his guarantee.
Example 3: X gives guarantee to the extent of ` 50,000 for the loans given from time to time by
A to B. A gave a loan of ` 10,000 to B. Afterwards, X gives notice of revocation. X is discharged
from all liability to A for any loan granted after the revocation of guarantee but he is liable to A
for ` 10,000 on default of B.
(b) Revocation of continuing guarantee by surety’s death (Section 131): In the absence of
any contract to the contrary, the death of surety operates as a revocation of a continuing
guarantee as to the future transactions taking place after the death of surety. However, the
surety’s estate remains liable for the past transactions which have already taken place before the
death of the surety.

(c) By novation [Section 62]: The surety under original contract is discharged if a fresh contract
is entered into either between the same parties or between the other parties, the consideration
being the mutual discharge of the old contract.
(ii) By the conduct of the creditor, or
(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

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 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 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 on the 1st March. A guarantees repayment.

C pays the ` 5,00,000 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.
Variation which is not substantial or material or which is beneficial to the surety will not
discharge him of his liability.
Case M.S Anirudhan v Thomco’s Bank Ltd. AIR 1963 SC 746,
The surety guaranteed the repayment of loan provided by the bank to the principal debtor of only
upto ` 25,000. Subsequently, since the bank was willing to provide loan only upto ` 20,000, the
principal debtor reduced the amount to ` 20,000 in the guarantee form and without intimation to
the surety gave it to the bank which was then accepted. On default by the principal debtor, the
court held that the surety’s liability was not discharged as the alteration was beneficial to him
and not substantial.
(b) By release or discharge of principal debtor (Section 134):
The surety is discharged if the creditor:

i. enters into a fresh/ new contract with principal debtor; by which the principal debtor is
released, or
ii. does any act or omission, 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
promises not to sue, the principal debtor, discharges the surety, unless the surety assents
to such contract.

i. Composition: If the creditor makes a composition with the principal debtor, without

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 consulting the surety, the latter is discharged. Composition inevitably involves variation
of the original contract, and, therefore, the surety is discharged.

ii. Promise to give time: When the time for the payment of the guaranteed debt comes,
the surety has the right to require the principal debtor to pay off the debt. Accordingly, it
is one of the duties of the creditor towards the surety not to allow the principal debtor
more time for payment.

iii. Promise not to sue: If the creditor under an agreement with the principal debtor
promises not to sue him, the surety is discharged. The main reason is that the surety is
entitled at any time to require the creditor to call upon the principal debtor to pay off the
debt when it is
due and this right is positively violated when the creditor promises not to sue the
principal debtor.

(d) 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. It is the plain duty of the creditor not to do anything
inconsistent with the rights of the surety. A surety is entitled after paying off the creditor,
to his indemnity from the principal debtor. If the creditors act or omission deprives the
surety of the benefit of this remedy, the surety is discharged.

Case State bank of Saurashtra V Chitranjan Rangnath Raja (1980) 4 SCC 516]

In this case before the Supreme Court of India, “A bank granted a loan on the security of
the stock in the godown. The loan was also guaranteed by the surety. The goods were lost
from the godown on account of the negligence of the bank officials. The surety was
discharged to the extent of the value of the stock so lost.”

Case State of M.P. v. Kaluram, Air 1967 SC

The State of M.P. made a contract for the sale of 'felled trees' with one Jagat Ram, who
was the highest bidder in the auction sale. The payment for these trees was to be made by
instalments. Kaluram was a surety for the payment by the purchaser of trees. The purchaser
failed to pay the second and subsequent instalments. The State of M.P. did not take any
steps to recover this amount, nor did they stop the removal of the felled trees on default of
payment. It was held that since the State Govt. had failed to take necessary steps to recover
the amount from the purchaser by allowing him to take away the trees, the surety's remedy
against the purchaser (Jagat Ram) had thereby been impaired, the surety (Kaluram) was
discharged from his liability.

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(iii) 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.

DISTINCTION BETWEEN CONTRACT OF INDEMNITY AND CONTRACT OF

GUARANTEE

BASIS CONTRACT OF CONTRACT OF

INDEMNITY GUARANTEE

1. No. of There are two parties- There are three parties-principal

parties indemnifier and the
indemnity-holder
2. No. of There is only one contract
contracts between indemnifier and
indemnity-holder
debtor, creditor and surety
There are three contracts, one
between creditor and principal
debtor, second between surety

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3. The indemnifier undertakes
Undertaking to save the indemnity-
holder from any loss
4. Nature of The liability of indemnifier
liability is
primary and unconditiona
5. Nature of The liability arises only on
event. the
happening of a contingency
6. Request The indemnifier need not
act at the request of
indemnity-holder
7. Right to sue The indemnifier cannot sue
a third party in his own
name because of absence of
privity of contract between
him and a third party. He
can sue the third party in
his own name if there in an
assignment in his favour
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and principal debtor, and third
between surety and the creditor
The surety undertakes for the
payment of debts of principal
debtor.
The liability of surety is secondary
and conditional. Surety's liability is
secondary in the sense that the
primary liability is of principal
debtor. Surety's liability is
conditional in the sense that it arises
only on default of principal
Debtor
The liability arises only on the
. non-performance of an existing
promise or non-payment of an
existing debt
The surety acts at the request of the
principal debtor.
A surety, on discharging the debt of
principal debtor, can sue 'the
principal debtor in his own