INTRODUCTION TO BUSINESS LAW

COURSE CODE: BUS 360

SECTION: 01

LECTURE 5:
LAW OF CONTRACT: INDEMNITY AND GUARANTEE
SOURCE: BOOK 1: CHAPTER 13, COMMERCIAL LAW AND INDUSTRIAL LAW, 27 TH EDITION BY
ARUN KUMAR SEN AND JITENDRA KUMAR MITRA

Course Instructor: Seeratus Sabah

 Terms to remember
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1. Indemnifier
2. Indemnity-holder
3. Guarantor/Surety
4. Contract of indemnity
5. Contract of guarantee
6. Principle debtor
 What is a contract of indemnity?
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A contract of indemnity is a contract by which one party

promises to save the other party from loss caused to him by
the conduct of the promisor himself, or by the conduct of
any other person.
Section 124 of the Indian Contract Act
 Includes only (i) express promises to indemnify and (ii)

only those cases where the loss arises from the conduct of
the promisor or of any others person.
 It does not include (i) implied promises to indemnify and

(ii) cases where loss arises from accidents and events not
depending on the conduct of any person.
 Contract of guarantee
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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: If A lends 5000 taka to B and C promises to
A that if B does not pay the money, C will do so.
This is a contract of guarantee. B is called the
Principal Debtor. A the Creditor, and C the
Guarantor or the Surety.
 Rules of contract of guarantee
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 A contract of guarantee may be either oral or written.

 A contract of guarantee (and also a contract of

indemnity) must satisfy all the essential elements of a

contract. (For example, the object must be lawful; there
must be free consent etc.)
But two points are to be noted :
1. In a contract of guarantee, the principal debtor may be a
minor. In this case the surety is liable to pay even
though the minor may not be. The contract will be
enforced as between the surety and the creditor.
 Rules of contract of guarantee
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2. In a contract of guarantee, the consideration

received by the principal debtor is taken to be
sufficient consideration for the surety. Anything
done, or any promise made, for the benefit of the
principal debtor may be sufficient consideration to
the surety for giving the guarantee.
 Case example
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Example 1: B (buyer) requests A (seller) to sell

and deliver to him goods on credit. A agrees to
do so, provided C (guarantor) 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.
 Case example
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Example 2: A sells and delivers goods to B. C

afterwards requests A to forbear
(withhold/holdback) 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.
 DIFFERENCES BETWEEN CONTRACTS OF
INDEMNITY
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AND CONTRACTS OF GUARANTEE

1. In a contract of indemnity, there are two parties ;

the indemnifier and the indemnity-holder. In a
contract of guarantee there are three parties, the
creditor, the principal debtor, and the surety.
2. In a contract of indemnity, the liability of the
indemnifier is primary; in a contract of guarantee,
the liability of the surety is secondary, i.e. the
surety is liable only if the principal debtor fails to
perform his obligations.
 DIFFERENCES BETWEEN CONTRACTS OF
INDEMNITY
10
AND CONTRACTS OF GUARANTEE
3. In a contract of guarantee there is an existing debt or
duty, the performance of which is guaranteed by the
surety. In a contract of indemnity, the liability of the
indemnifier arises only on the happening of a
contingency.
4. In a contract of guarantee, the surety after he
discharges the debt owing to the creditor, can
proceed against the principal debtor; in a contract of
indemnity the loss falls on the indemnifier except in
certain special cases.