NAME: SOURIKA JANA

SUBJECT: SPECIAL CONTRACTS

PRN: 20010223063
DIVISION D
GROUP III
COURSE: BA LLB
BATCH: 2020-2025

ANSWER 1
INTRODUCTION

Section 124 of the Indian Contract Act 1872 lays down the principles under
contract of indemnity.

“—A contract by which one party promises to save the other from loss caused to
him by the contract of the promisor himself, or by the conduct of any other
person, is called a “contract of indemnity”.

It is a type of contract where one party promises to indemnify another in case of

any unexpected or expected loss caused due to the act of the promisor himself
or any third party. The person who promises to indemnify the other is called the
indemnifier and the person to whom it is promised is called the indemnity
holder. The objective of the contract is to protect the promise from unanticipated
losses.

ISSUE

(a)What is the difference between damages and indemnification clause in the

contracts, and to what extent indemnification clause is beneficial then the
damages clause in the contracts?

(b) When can you say that the liability of the indemnifier arises?

RULES
Section 124 of the Indian Contract Act 1872 states that

—A contract by which one party promises to save the other from loss caused to
him by the contract of the promisor himself, or by the conduct of any other
person, is called a “contract of indemnity”.

For example: 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.

Section 74 of the Indian contract Act 1872 defines damages as

74. Compensation for breach of contract where penalty stipulated for.—1 [When
a contract has been broken, if a sum is named in the contract as the amount to
be paid in case of such breach, or if the contract contains any other stipulation
by way of penalty, the party complaining of the breach is entitled, whether or
not actual damage or loss is proved to have been caused thereby, to receive
from the party who has broken the contract reasonable compensation not
exceeding the amount so named or, as the case may be, the penalty stipulated
for.

ANALYSIS

In the landmark judgement of Gajanan Moreshwar Parelkar vs Moreshwar

Madan Mantri (AIR 1942 Bom 302, 304),

FACTS:

 The plaintiff Gajanan Moreshwar Parelkar had entered into a contract with
Bombay Municipal Corporation on a 99-year lease. This was one contract.
He then entered into a separate contract with the defendant Moreshwar
Madan Mantri to construct a building on the said land. The defendant then
contracts a supplier Keshavdas Mohandas for two times for the supply of
raw material each time for an amount of 5000 rupees resulting in the sum
of 10000 rupees. The defendant didn’t pay this amount to Keshavdas
Mohandas and claimed this amount from the defendant. So, the plaintiff
mortgaged a part of his property to Keshavdas. The defendant further
 requested the plaintiff to pass the possession of land to him and he would
discharge the plaintiff from all of his liabilities and the plaintiff agreed.
However, the defendant failed to keep his part of the agreement. The
plaintiff then sued him for indemnifying him for his losses.

HELD

 The defendant contended that since the plaintiff had suffered no actual
loss, he would not be liable to indemnify the plaintiff. The liability of the
plaintiff was not absolute but contingent and there is nothing to show that
if the mortgagee were to sue him for the enforcement of the mortgage,
after selling off of the property there is no proof that there will be deficit
for the plaintiff to pay.
 The court decided that the plaintiff couldn’t sue the defendant for the
anticipation that the proceeds realised by the sale of the mortgaged
property would be insufficient to pay off his debts and there would be
some deficit left. The court decided that it was a contra t of indemnity.
The court also provided the plaintiffs to choose repudiation of the
mortgage wholly and recover the full amount from defendant no. 2 but
the plaintiffs opted for the recovery from the mortgaged property. Thus,
there being no actual clue to the apprehension that the recovery from the
sale of mortgaged property shall be insufficient the said decree couldn’t be
awarded. However, the court didn’t accept the contention of the defendant
stating that since there was no actual loss, he was not liable for
indemnification. If the indemnity holder had an absolute liability, then he
can ask the indemnifier to place him in a position so he can incur his
liability. Hence the defendant was asked to indemnify the plaintiff against
all the liability under the mortgage and deed of charge.

In the landmark judgement of Osman Jamal & Sons v. Gopal Purushottam

[ILR (1928) 56 Cal 262],

FACTS

 A company was acting as the commission agents of the defendant’s firm

and in that capacity brought certain goods for the defendant which they
refused to accept. The supplier of the goods filed a suit for the recover of
 the sum from the company. But the company went into liquidation before
they could pay the dues. The plaintiff sued the defendants for the
recovery of the amount.

HELD

 It was held that the Official Liquidator could recover the amount even
though the company had not actually paid the vendor. The court,
however, directed that the amount should be set apart so that it is used in
full payment of the vendor in respect of whose contract the company had
incurred liability. The High Courts of Allahabad, Madras and Patna have all
expressed their concurrence in the principle that as soon as the liability of
the indemnity holder to pay becomes clear and certain he should have the
right to require the indemnifier to put in a position to meet the claim.

Here in our case, the defendant Company A and the plaintiff Company B entered
into a contract which mentioned that in case of default the non-defaulting party
will be paid 10% of the damages by the defaulting party in case of breach of
contract. It was further mentioned that if any losses occurred due to the conduct
of the either of the parties or other parties, shall indemnify for the losses. A
contractor C filed a suit against the plaintiff claiming a sum of 25 lakh rupees.
The plaintiff asked the defendant to indemnify him for the losses.

Here the plaintiff bears a personal covenant to the contract and bears a loss of
25 lakhs. The liability of the plaintiff is absolute. If the indemnity holder has to
show actual loss has been incurred it would be miscarriage of justice. In cases
where the indemnity holder is insolvent or unable to pay the due any suit
against the promise would be considered premature. In 1914 the court of equity
stated that in those cases the contract of indemnity will have little significance if
the indemnity holder was made liable within the first instance.

The courts hence held that you don’t need to be damnified for you to be
indemnified.

With respect to the above case laws, if Plaintiff was under a personal covenant
to pay off the mortgagee. Indemnified can make the indemnifier to place him in
a position where he could pay off his losses. It is the absolute liability of the
indemnifier to put him in that position. Even if there is no actual loss, there is
legal loss and hence he can claim to be indemnified by the defendant company
A.

CONCLUSION

(a) Indemnity can be claimed for loss arising out of the action of a third
party to a contract, whereas damages can only be claimed for loss
arising out of the actions of the parties upon breach of
contract. Indemnity is defined under section 124 of the Indian Contract
Act, whereas Damages are dealt under sections 73-74 of the Indian
Contract Act.
In case of indemnity there is no clause of reasonability, foreseeability
or remoteness unlike that of damages and penalty. So the parties have
a better chance of claiming money through the clause of indemnity
rather than damage and breach of contract. The indemnity clause
favours the indemnity holder and protects him for losses whereas
damages is more favourable for the non-defaulting party.
(b) The Indian contract Act does not provide for any specific rule for the
commencement of liability under the contract of indemnity. Different
high courts have hold different views some stating the necessity of
actual loss and some holding the opposite view. However, from the
case of Gajanan Moreshwar Parelkar vs Moreshwar Madan Mantri, we
can find that there is no need for the actual loss for the indemnity
contract to kick in. Hence as long as the indemnity holder has an
absolute liability towards the concerned party, the indemnifier will be
liable.

ANSWER 2

INTRODUCTION

Guarantee is an underwriting to be liable for another and their collateral. It is a

collateral undertaking to pay the debt of another in case he does not pay it. In a
banking context it is an undertaking given by the guarantor to the banker
accepting responsibility for the debt of the principal debtor, the customer, should
he or she default. The guarantor may or may not be customer. The person who
promises is called the guarantor or surety, the person who has the debt which
the promisor undertakes to be liable for is called the principal debtor and the
promise is given to the person who owes money to the principal debtor and is
called the creditor.

The liability of the surety is co extensive with that of the principal debtor. He is
liable for the exact amount of money that the debtor is due for and neither more
or less.

ISSUE

Whether the bank has to exhaust their remedy against the principal debtor
before suing the surety for the recovery of the amount?

RULES

Section 128 of the Indian contract Act 1872 defines the liability of the
surety

“128. Surety’s liability. —The liability of the surety is co- extensive with that of
the principal debtor, unless it is otherwise provided by the contract.”

For 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.

Section 126 of the Indian contract Act 1872 defines

126. “Contract of guarantee”, “surety”, “principal debtor” and “creditor”. —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 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”. A guarantee may be either oral or
written.

ANALYSIS
The plaintiff bank had lent certain amount of money to defendant no.1 Damodar
Prasad. The guarantee of this contract was given on account of Defendant no.2
Paras Nath Sinha. The plaintiff then made repeated demands to the defendants
for the payment of the due but neither the defendants acted upon their
respective contracts and neither paid the amount due or the interest. The surety
then agreed to pay the creditor up to 12000 rupees and interest thereon two
days after demand. The plaintiff filed a suit claiming the total amount.

HELD

The trial court passed a decree in its favour but stated that the plaintiff will be
liable to sue the surety only after exhausting its remedies against the principal
debtor. This then led to an appeal before the Patna High court which then
dismissed it. However, the apex court accepted the contentions raised by the
appellant and stated that the very purpose of guarantee will be defeated if the
creditor has to go through a rigorous process of exhausting its remedies against
the principal debtor and then sue the surety for his sues. The court upheld the
section 128 of the Indian contract Act and stated that the liability of the surety is
co extensive with that of the debtor and hence would be liable to pay his dues
without the creditor exhausting his remedies. Paras Nath Sinha was hence liable
to pay the defendant no.1’s dues to the bank.

In the hypothetical situation given to us, Mr. A principal debtor issued a loan
from XYZ bank the plaintiff for an amount of 50lakhs. The bank agreed on the
loan provided that Mr. B will stand as guarantee and will be liable to pay the
entire amount in case Mr. A default in the payment of 40lakhs. When Mr. A
defaulted and the bank asked Mr. B for the payment, Mr. B refused to pay the
amount on the grounds that his liability was secondary and hence the bank had
to exhaust their remedies against the principal debtor first.

In relation to the case stated above, it is not necessary anymore for the creditor
to exhaust his remedies against the principal debtor before he can move to sue
the surety. The surety cannot dictate the creditor upon exhaustion of his
alternative remedies before approaching the surety. But once the surety has
discharged of his liability and paid the sum, he steps into the shoes of the
creditor and is liable to the same rights as that of the creditor.
CONCLUSION

The bank was therefore correct in holding Mr. B liable for the payment of the
dues as his liability is co-extensive with that of Mr. A.