Akshita Rathee

Enrollment No.
No.ASU2023010200235
BA LLB 2nd sem
 Introductor
y Notes on
Indemnity
and Guarantee
Contract
under
Indian Contract
Act, 1872
Contract of
Indemnity
Contract of Indemnity
(Section 124)
A Contract by which one
party promises to another to
save him from loss caused to
him by the conduct of the
promisor himself or by the
conduct of any other person is
called a Contract of Indemnity
 Parties to the
Contract of
Indemnity
◆ The person who promises to
protect another: INDEMNIFIER

◆ The person who is so

protected is: INDEMNITY-
HOLDER/ INDEMNIFIED
 Meaning of
Indemnity
Indemnity means enact to compensate
or protect somebody from the loss
or
make good to the loss. When one
person promises to another
that inpersoncase another person
suffers from some loss the first
person will compensate the loss.
 Essentials of Contracts of
Indemnity
▪ Essentialsof a Valid Contract.
▪ There must be loss either by
the promisor’s conduct or by any
▪other person’m
Contract sayconduct
be expressed or
implied.
▪ It is a Conti gent Contract by
natur n
Rights of Indemnity Holder
The rights of the indemnity holder
are dependent on the terms
of thecontract of indemnity as a
generalrule. Section 125 of the
Indian Contract Act, 1872
comes into play when the indemnity
holder is sued i.e.Under specific
situation.
The indemnifier will have to pay
damages which the indemnity
holder will claim in a suit.

2) The indemnity holder can even

compel the indemnifier to pay the
costs he incurs in litigating the suit.

3) If the parties agree to legally

compromise the suit, the
indemnifier has to pay the
compromise amount.
(b) all the costs of suits that he may
have had to pay to the third party
provided he acted as a man of
ordinary prudence and he did not act
in contravention of the directions of
the indemnifier or if he had acted
under the authority of the indemnifier
to contest such a suit.
In the case of ADAMSON v. JARVIS [1827]
(c) All the sums that he may
have paid under the termsof
any compromise of any
such suit
provided such
compromise is not contrary to the
indemnifier’s orders andwas a
prudent one or if he acted under
authorityof theindemnifier to
compromise the suite.
 Rights of Indemnifier
◆Rights under Doctrine
of Subrogation.

◆Tosue against third

party after
indemnifying the indemnity
holder.
Not to compensate for losses not
Covered under Contractof Indemnity.
Contract of
Guarantee
 Contract of Guarantee
(Sec.
126) is a contract
A Contract of Guarantee
to perform the promise, or
discharge the liability of a third
person in case of his default. The
person who gives the guarantee is
known as the ‘Surety’, the person in
respect of iswhoknown
is m the guarantee
as the
Debtor’
given ‘Principalthe
andperson to whom
g
,uarante is given is the
‘Creditor’
e called the
 Essential Features of
1. TGuarantee
ripartite Agreement:
Concurrence of three Contracts: The
Contracts connecting each-other as
contract between:
◆the Principal Debtor and
Creditor,
◆the Creditor and Surety,
and
◆the Surety andPrincipalDebtor
2. Liability:Under such contract the
primary liability is of the principal
 Contd
3. Essentialsof Valid.
Contract:
Requirements for Valid Contract i.e fre
consent, consideration, lawful . object
e
competency of the parties etc. are ,
necessary
to form this kind of But,
contract. of consideration,
respect in direc
consideration
n o in the contract t the
between
surety and creditor. Consideration
principal debtor is considered of
adequate
to for the surety be
 Types of
Guarantee
Specific Guarantee:
When a guarantee extends a
transaction
to or debt, it is know singl
Specific or Simple n e as
Guarantee
Continuing Guarantee: a
When a guarantee extends to a series
of transactions, it is called
Continuing Guarantee
 Revocation of Continuing
Guarantee
◆By Notice Revo
A
icn
.t
of

◆By Surety’s Death

(Sec. 131)
◆By Novation
◆By alteration in the
termsof contract.
◆ Release or discharge of
Principal Debtor.
◆ Arrangement between Principal
Debtor & Creditor
 Nature & Extent of Surety’s
◆Liability
In General circumstances, the
liability of surety arises only in case
of default of Principal Debtor so
his liability is secondary.
◆ Liability of Surety is co-extensive
wh
ti that of Principal Debtor-if
liability of Principal Debtor reduces
then surety’s liability also reduces
◆ When Creditor recovers a part of
his
loan from property of principal debtor.
 Contd
◆ .
If due to some reasons
the Principal Debtor cannot
beheld liable, still
surety can be held liable in
following situations-
▪If Principal Debtor is a minor
▪If Principal Debtor is declared
insolvent.
▪If liability of Principal Debtor
has become time-barred.
▪If creditor delays in filing suit
 Difference between
Indemnity Contract and
Guarantee Contract
1. Number of Parties: Indemnity
Contract includes Two Parties namely,
Indemnifier and Indemnity Holder . But
Guarantee Contract includes Three
Parties namely Creditor, Principal
Debtor and Surety .
2. Number of Contracts: In case of
Indemnity Contract , as there are only
two parties, there is possibility for existence
 Contd.
3. Nature: As indemnity contract includes
Two Parties and One Contract , it can
be said that indemnity contract is Simple
in nature . But Guarantee Contract
includes Three Parties and Three Sub-
Contracts and hencebe said that guarantee
contract is Complex in nature .
 Contd
.
4. Liability: In Contract of
Guarantee, there will be two types of
liabilities namely; Primary
and Secondary Liabilities which will be
with Principal Debtor and Surety
respectively . But in Contract of
Indemnity there is no
classification and sharing of liability where the
Absolute Liability rests with Indemnifier
Thank
s