INDEMNITY & GUARANTEE

Contract of Indemnity
Meaning of Indemnity
 The term “indemnity” means to make good the loss
or to compensate the party who has suffered some
loss.
Contract of Indemnity (Sec 124)
 “A contract by which one party promises to save the
other from loss caused to him by the conduct of
promisor himself, or by the conduct of any other
person, is called a contract of indemnity.”
 EXAMPLE: A contracts to indemnify B against the
consequences of any preceding which C may take
against B in respect of a certain sum of Rs 200.
 The contract of indemnity would not cover the cases
of loss caused by the events or accidents which do
not depend upon the conduct of the promisor or any
other person (contract of insurance).
Parties involved in the contract
 Indemnifier:
The person who promises to make good the loss is
called the “indemnifier”. In the previously
mentioned example, A is the indemnifier.
 Indemnity Holder:
The person whose loss is to be made good is called
“indemnity-holder”. In the example, B is the
indemnity-holder.
Rights of Indemnity Holder (Sec 125)
 An indemnity holder is entitled to recover the
following from the indemnifier;
a) All damages which he may be compelled to pay in
any suit in respect of any matter to which the
promise to indemnify applies.
b) All costs which he may be compelled to pay, in
bringing or defending such suit if, he did not break
the orders of the promisor.
c) 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.
Commencement of the liability of Indemnifier

 The liability of an indemnifier commences as soon

as the liability of the indemnity holder becomes
absolute and certain.
 EXAMPLE:
X promises to compensate Y for any loss that he
may suffer by filling a suit against Z. The court
orders Y to pay Z damages of Rs 5,000. As the loss
has become certain, Y may claim the amount of loss
from X and pass it on to Z.
Mode of Contract of Indemnity
 A contract of indemnity may be “express” or
“implied”.
a) A contract of indemnity is said to be express when
a person expressly promises to compensate the
other from loss.
b) A contract of indemnity is said to be implied
when it is to be inferred from the conduct of the
parties or from the circumstances of the case.
Mode of Contract of Indemnity
 EXAMPLE:
X an auctioneer, sold some goods at the instruction
of Y. Later on, it is discovered that the goods
belonged to Z and not Y. Z recovered damages
from X for selling his goods. Here, X is entitled to
recover the compensation from Y because there
was an implied promise to compensate the
auctioneer for any loss which he may suffer on the
defective title of goods sold by auction.
Essential elements of Contract of Indemnity

 In addition to the implied or express promise to

indemnify, all the essentials of a valid contract
must also be present.
 EXAMPLE:
X asks Y to beat Z and promise to indemnify Y
against the consequences. Y beats Z and is fined Rs
1,000. Y can’t claim this amount from X because
the object of the agreement was unlawful.
Contract of Guarantee
Contract of Guarantee (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.

 Example: X and his friend Y enter a shop and X

says to Z “supply the goods required by Y” and if
Y does not pay you. I will pay you, says X.
 This is the contract of guarantee
Parties involved in contract
 Surety :The person who gives the guarantee
(guarantor). X is surety in above example.

 Principal Debtor: the person in respect of whose

default the guarantee is given. Y is debtor.

 Creditor : the person to whom the guarantee is

given. Z is creditor.
 Essential features of a contract of Guarantee

Essential features

Guarantee not to Guarantee not

Essentials of be obtained by to be obtained
Tripartite Consent of Existences
valid misrepresentatio by concealment
Agreement three parties of liability n of material facts
contract
(section 142) (section 143)
Kinds of guarantee

Kinds

Specific guarantee Continuous guarantee(sec 129)

Rights of Surety
1) Right of subrogation (interchange):
 When the surety has paid the guaranteed debt on
default of the principal debtor, he is then entitled to
all the rights which the creditor had against the
principal debtor.
Rights of Surety
2) Right to securities:
 Surety is entitled to the benefit of all the securities
given by the principal debtor to the creditor.
 Surety can recover the securities only after making
full payment.
Rights of Surety
3) Right of surety when the creditor loses the
securities of the principal debtor:
 If the creditor by negligence loses any security
held by him, the liability of the surety is reduced
to the extent of the value of those securities.
Rights of Surety
4) Right of reimbursement (compensation) from
the principal debtor:
 A surety is entitled to recover from the principal
debtor whatever amount, he has rightfully paid to
the creditor.
Modes of discharge of guarantee

By revocation of contract of guarantee

By the death of
By notice(sec130) surety(sec131)
 By conduct of creditor

Release or discharge of
Variance in terms of
the principal
contract (sec133) debtor(sec134)
By invalidation of contract

Guarantee obtained Guarantee obtained

by misrepresentation by concealment
Distinction Between Contract Of Indemnity And
Contract Of Guarantee

Basis Contract of indemnity Contract of guarantee

No. of parties There are two parties i.e. There are three parties-
indemnifier and indemnity- principal debtor, creditor
holder. and surety
No of contracts There is only one contract There are three contracts,
between parties. one between creditor and
debtor, second between
surety and debtor, third
between surety and
creditor
Undertaking The indemnifier undertakes The surety undertakes for
to save the indemnity the payment of debts of
holder from any loss principal debtor
Nature of liability The liability of indemnifier The liability of surety is
is primary and secondary and conditional,
unconditional in sense that primary
liability is of debtor