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A Project Report on Features and Distinctiveness of Contracts

of Indemnity and Guarantee: An Analysis


LAW OF CONTRACTS-II

Submitted by:Aaditya Vasu


2013001
SEMESTER 3rd
DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY
VISAKHAPATNAM

Acknowledgement
Writing a project is one of the most significant academic challenges I have ever faced. Though
this project has been presented by me but there are many people who remained in veil, who gave
their all support and helped me to complete this project.
First of all I am very grateful to my subject teacher Miss Parvathy SS, without the kind support
of whom and help the completion of the project was a herculean task for me. She donated her
valuable time from her busy schedule to help me to complete this project and suggested me from
where and how to collect data.
I am very thankful to the librarian who provided me several books on this topic which proved
beneficial in completing this project.
I acknowledge my friends who gave their valuable and meticulous advice which was very useful
and could not be ignored in writing the project. I also owe special thanks to my parents for their
selfless help which was very useful in preparing the project & without whose support this project
wouldnt have been prepared.

Aaditya Vasu
3rd Semester
2013001

Index
1. Introduction_______________________________________________________(4)
2. Research Methodology______________________________________________ (4)
3. Objectives________________________________________________________ (4)
4. Contract of Indemnity under English Law_______________________________ (5)
5. Indemnity as per Indian Contract Act, 1872______________________________(5)
6. Insurance Contract of Contract of Indemnity_____________________________ (8)
6.1 India__________________________________________________________(8)
6.2 England_______________________________________________________ (9)
7. Rights of Indemnity holder___________________________________________ (9)
8. Rights and duties of Indemnifier_______________________________________(11)
8.1 Rights of Indemnifier_____________________________________________(11)
8.2 Duties of Indemnifier_____________________________________________(11)
9. Commencement of Liability__________________________________________ (11)
10. Definition of Guarantee______________________________________________(13)
11. Essential of Guarantee_______________________________________________(14)
12. Liability of Surety__________________________________________________(16)
13. Difference between Contract of Indemnity & Guarantee____________________(17)
14. Conclusion________________________________________________________(19)
15. Bibliography_______________________________________________________(20)

INTRODUCTION
When we are discussing about the Contracts of Indemnity and Guarantee, the first thing we have
to do is to define the both types of Contracts. Contract of Indemnity means enact to compensate
or protect somebody from the loss or make good to the loss. When one person promises to
another person that in case another person suffers from some loss the first person will
compensate the loss. An indemnity is a sum paid by party A to party B by way
of compensation for a particular loss suffered by B. The indemnitor (A) may or may not be
responsible for the loss suffered by the indemnitee (B). Forms of indemnity include cash
payments, repairs, replacement, and reinstatement. In the same context Contract of Guarantee
means an act 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 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.

RESEARCH METHODOLOGY
This topic FEATURES AND DISTINCTVENESS OF CONTRACT OF INDEMNITY
AND GUARANTEE-AN ANALYSIS, a comparative study is not a very vast topic but is a
type of liability commonly found in the Law of Contracts. It can be studied along with the
comparison with English Law. My observations and conclusions are based upon the secondary
materials. The methodology adopted by me to draw conclusion about the topic is basically
depended upon non-doctrinal research. I took the help of various research papers having focus
upon the study of Contract, Indemnity, rights of indemnity holders, how the liability will be
discharged under guarantee, Consideration for Contract of Guarantee. I also took help from text
books, magazines, public opinion but to a very limited scope which was basically a feedback
from my friends and the most non exhaustive resource that is the Internet. The books I referred to
were mine as well as from the library of Damodaram Sanjivayya National Law University.

OBJECTIVES
1. What is the main features of Contract o Indemnity and Guarantee?
2. What is the main distinctiveness between Contract of Indemnity and Guarantee?
3. Scope of the Study of Contract of Indemnity and Guarantee.

Contract of Indemnity under English Law


An illustration in English Law of the meaning and effect of a contract of indemnity is to be found
in the facts of Adamson v. Jarvis:1
The plaintiff, an auctioneer, sold certain cattle on the instruction of the defendant. It
subsequently turned out that the livestock did not belong to the defendant, but to another person,
who made the auctioneer liable and the auctioneer in his turn sued the defendant for indemnity
for the loss he had thus suffered by acting on defendants directions.
The Court laid down that the plaintiff having acted on the request of the defendant was entitled
to assume that, if, what he did, turned out to be wrongful, he would be indemnified by the
defendant.
Thus indemnity in English law means a promise to save a person harmless from the
consequences of an act. The promise may be express or it may be implied from the
circumstances of the case.
The English definition of indemnity is wide enough to include a promise of indemnity against
loss arising from any cause whatsoever, e.g., loss caused by fire or by some other accident.
Indeed, every contract of insurance, other than life assurance, is a contract of indemnity.
According to Longmans Dictionary of Contemporary English, indemnity is protection against
loss, especially in the form of a promise to pay, or payment for loss of money, goods, etc.
It is a security against, or compensation for loss, etc.2 an expressed or implied contract to
compensate an individual for loss or damage.

Indemnity as per Indian Contract Act, 1872.


Indemnity literally means,
(1) Payment for damage, a guarantee against losses.

1
2

(1872) 4 Bing 66: 5 LJ (OS) (CP) 68: 29 RR 503.


Chambers New English Dictionary.

(2) A bond protecting the insured against losses caused by others failing to fulfill their
obligations.
(3) The granting of exemption from prosecution.
(4) an option to buy or sell a specific quantity of stock at a stated price within a given period of
time
It is entered into with the object of protecting the promises against anticipated loss. The
contingency upon which the whole contract of indemnity depends is the happening of loss.
ILLUSTRATIONS: (b) A lost his share certificate. He applied to the company for the issue of a
duplicate certificate. The Company asked A to furnish an indemnity bond in its favour to
protect it against any claim that may be made by any person on the original certificate. A,
accordingly executed the indemnity bond. It is a contract of indemnity between A and the
Company. A is the indemnifier and the Company is the indemnified or indemnity-holder.
A contract of indemnity is one whereby a person promises to save the other from loss caused to
him by the conduct of the promisor himself or of any third person. For example, a shareholder
executes an indemnity bond favouring the company thereby agreeing to indemnify the company
for any loss caused as a consequence of his own act. The person who gives the indemnity is
called the 'indemnifier' and the person for whose protection it is given is called the 'indemnityholder' or 'indemnified'. A contract of indemnity is restricted to cover the loss caused by the
promisor himself or by a third person. The loss must be caused by some human agency. Loss
arising from accidents like fire or perils of the sea are not covered by a contract of indemnity.
As per Section 124 of the Indian Contract Act, the contract of indemnity is defined as, a
contract by which one party promises to save other from loss caused to him by the conduct of the
promisor himself, or by the conduct of any other person.
Well, this section is not so difficult to understand when you relate it to practical house. Suppose
you are hired by a newspaper to write articles for them as a freelancer. Typically, your contract
would have an indemnity clause so that if you write something against a very important person
and that person files a suit against the newspaper for defamatory material, the newspaper can

show the indemnity clause that you signed, protecting them from any form of loss caused due to
your conduct.
Then, the onus of fighting the defamation suit becomes your responsibility. Thats not all about
the contract of indemnity as it is incorporated in most contracts, particularly in real estate
purchase and bank loans. A person who promises to bear the loss is known as indemnifier and
the person whose loss is covered is known as indemnified. These types of contracts are mainly
formed between insurance companies and their customers.
124. "Contract of indemnity" defined
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".

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.

The only illustration appended to the section says that if a person promises to save another from
the consequences of a proceeding which may be commenced against him it is a contract of
indemnity. The person who gives the indemnity is called the indemnifier and the person for
whose protection it is given is called the indemnity-holder or indemnified.

According to Section 124 of the Indian Contract Act, 1872, 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. This provision incorporates a
contract where one party promises to save the other from loss which may be caused, either
i.

By the conduct of the promisor himself, or

ii.

By the conduct of any other person.

This definition covers indemnity for loss caused by human agency only. 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 upon the conduct of the indemnifier or any other person, or y the
reason of liability incurred by something done by the indemnified at the request of the
indemnifier.3
The definition excludes from its purview cases of loss arising from accidents like fire or perils
of the sea. Loss must be caused by some human agency. Contracts of insurance against loss are
covered by the chapter on Contingent Contracts.

INSURANCE CONTRACT IF CONTRACT OF INDEMNITY


India:
It has been noted above that Section 124 recognizes only such contract as a contract of indemnity
where there is a promise to save another person from loss which may be caused by the conduct
of the promisor himself or by conduct of any other person. It does not cover a promise to
compensate for loss not arising due to human agency. Therefore, a contract of insurance is not
covered by the definition of Section 124. Thus, if under a contract of insurance, an insurer
promises to pay compensation in the event o loss by fire, such a contract does not come within
the purview of Section 124. Such contracts are valid contracts, as being contingent contracts as
defined in Section 31.
In United India Insurance Company v. M/s. Aman Singh Munshilal,4 the cover note
stipulated delivery to consigner. Moreover, on its way to the destination the goods were to be
stored in a godown and thereafter to be carried o the destination. While the goods were in
godown, the goods were destroyed by the fire. It was held that the goods were destroyed during
transit, and the insurer was liable as per the insurance contract.
Liability of insurer and breach of fidelity insurance contract
Where insured bad of fertilizers stored in plaintiffs godown, were found missing due to act of
embezzlement by the employees of plaintiff Company. Defendant Company had insured to
3
4

Gajanan Moreshwar v. Moreshwar Madan, A.I.R. 1942 Bom. 302, at p. 303


A.I.R. 1994 P. & H. 206.

indemnify plaintiff against any loss sustained by such act. The alleged breach of condition in the
contract notice to be given to the defendant regarding discovery of such act could not be said to
be fundamental breach. Held, that it would not permit the defendant to negate the legitimate
claim of the plaintiff, hence decreeing suit of declaration and recovery of amount with interest by
Trial Court was proper.5
England:
Under English law, the word indemnity carries a much wider meaning than given to it under
the Indian Contract Act. It includes a contract to save the promise from a loss, whether it be
caused by human agency or any other event like an accident and fire. Under the English law, a
contract of insurance (other than life insurance) is contract of indemnity.
Life insurance contract is, however, not a contract of indemnity, because in such a contract
different considerations apply. A contract of life insurance, for instance may provide the
payment of a certain sum of money either on the death of a person, or on the expiry of a
stipulated period of time. In such a case, the question of amount of loss suffered by the assured,
or indemnity for the same does not arise. Moreover, even if a certain sum is payable in the event
of death, since, unlike property, the life of a person cannot be valued, the whole of the amount
assured becomes payable. For that reason also, it is not a contract of indemnity.
The Indian Contract Act does not specifically provide that there can be an implied contract of
indemnity. The Privy Council has, however, recognized an implied contract of indemnity also. 6
The Law Commission of India in its Report7 has recommended the amendment of Section 124.
According to its recommendation, the definition of the Contract of Indemnity in Section 124
be expanded to include cases of los caused by events which may or may not depend upon the
conduct of any person. It should also provide clearly that the promise may also be implied.

RIGHTS OF INDEMNITY HOLDER


In a suit against the indemnity holder, he may have been compelled to pay damages, and incurred
costs, etc. in his own turn, he can bring an action against the promisor (indemnifier) to recover
5

Oriental Insurance Co. Ltd., Ahmedabad v. Gujarat State Warehousing Corpn. Ahmedabad, A.I.R. 2003 Guj. 159.
Secretary of State V. The Bank of India Ltd., A.I.R. 1938 P.C. 191.
7
13th Report, 1958, on the Indian Contract Act, 1872.
6

damages and costs, etc. paid by him, if the indemnifier has promised an indemnity in such a case.
The provision in this regard is contained in Section 125, which reads as under:
124. Rights of Indemnity holder
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to
recover from the promisor:(1) All damages which he may be compelled to pay in any suit in respect of any matter to which
the promise to indemnify applies;
(2) all costs which he may be compelled to pay in any such suit, if in bringing of defending it, he
did not contravene the orders of the promisor, and acted as it would have been prudent for him to
act in the absence of any contract of indemnity, or if the promisor authorised him to bring or
defend the suit;
(3) all sums which he may have paid under the terms of any compromise of any such suit, if the
compromise was not contract to the orders of the promisor, and was one which it would have
been prudent for the promise to make in the absence of any contract of indemnity, or if the
promisor authorised him to compromise the suit.
The indemnity-holder, acting within the scope of his authority, is entitled to recover the
following amounts(1) All damages which he may be compelled to pay in any suit in respect of any matter to
which the promise of indemnity applies;8
(2) All costs which he may be compelled to pay in such suits if, in bringing or defending it,
he did not contravene the order of the promisor, and acted as it would have been prudent
for him to act in the absence of any contract of indemnity, or, if the promisor authorised
him to bring or defend the suit;9
(3) 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, and was one which it
would have been prudent for the promise to make in the absence of any contract of
indemnity, or if the promisor authorised him to compromise the suit.
8
9

Parker v Lewis, (1873) LR 8 Ch 1035;


Bepin v Chunder Seekur Mookerjee, 1880 ILR 5 Cal 811;

10

A person who encashes an indemnity bond which is in nature of a bank guarantee can retain only
that part of the amount of the bond which represents the damage or loss suffered by the bondholder as a result of the contracting partys breach. Anything more would be undeserved windfall
for one party and penalty of the other.10
Where a motor vehicle (truck) was under indemnity insurance for Rs.200000 and it was stolen
with no chances of recovery, it was held that the proper amount of indemnity was as fixed by the
surveyor at Rs. 1,87,492 and that it was payable with 18% interest for the delay period. The
settlement of claim at a lesser amount by insurance authorities was arbitrary and unfair under
Article 14 of the Constitution.11

RIGHTS AND DUTIES OF INDEMNIFIER


Rights of the indemnifier:
The rights of the indemnity-holder are the duties of indemnifier, and duties of the indemnityholder are the rights of the indemnifier. There are not prescribed any specific rights of the
indemnifier either in Nepalese law or in Indian law. However, he is not liable for indemnity.
(i) If indemnity-holder acts negligently.
(ii) If indemnity-holder is acting with the intention of causing any loss or damage.
(iii) If he is acting against the instructions of the other party (promisor).
Duties of indemnifier:
The duties of an indemnifier arise in the following circumstances:
(i) There must be a loss in accordance with the contract to make the indemnifier liable.
(ii) There must be an occurrence of the anticipated event. Without any occurrence of the
prescribed event, there is no indemnity by the indemnifier.
(iii) Where the right of indemnity is used by the indemnity-holder prudently and
the instruction of the indemnifier is not contravened or when there is no breach of contract.
(iv) If the costs demanded by the indemnifier are not caused by negligence, haphazard behavior.
COMMENCEMENT OF LIABILITY

10
11

Cargill International SA v Bangladesh Sugar & Food Industries Corpn, (1996) 4 All ER 563.
Mohit Kumar Saha v New India Assurance Co Ltd, AIR 1997 Cal 179.

11

When can indemnifier be made liable? Can he claim to be indemnified before he is demnified
?There has been a controversy regarding the point, as to whether the indemnifier can be asked to
be indemnify before the indemnity-holder has actually suffered the loss, or his liability arises
only after the loss has been suffered by thee indemnity-holder.
According to English Common Law, no action could be brought against the indemnifier
until the indemnity-holder had suffered actual loss. The situation created a great hardship in
those cases where the indemnity-holder was not in a position to meet the claim out of his pocket.
Relief was not provided to the indemnity-holder in such cases by the Court of Equity. According
to the rules evolved by the Court of Equity, it was no more necessary for the indemnity-holder to
be demnified before he could be indemnified. In other words, the indemnity-holder can compel
the indemnifier to save him from the loss in respect of liability against which indemnity has been
promised.
There has been a difference in opinion between various High Courts in India as to whether the
indemnity-holder can claim indemnity before he has actually suffered the loss.
According to the view expressed by Lahore12 and Nagpur13 High Courts, a person must
be demnified before he can be indemnified, i.e., no indemnity can be claimed until the
indemnity-holder has already actually suffered the loss.
The High Courts of Bombay, Calcutta, Madras, Patna, and Allahabad have expressed a
different view, and they are in favour of the application of law similar to the one recognized in
England by the Court of Equity. According to the decisions of the courts, an indemnity-holder
can compel the indemnifier to indemnify even before the indemnity-holder has actually suffered
the loss.
In State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd.,14 the respondent, a cooperative society, having a sugar factory, entered into a contract with one M/s. Pentagon
Engineering Pvt. Ltd. for the installation of a paper plant. As per the agreement the Pentagon
furnished a Bank Guarantee/Indemnity for the release. The retention money of 10% from the
Proforma Invoices of the material reached at the site. The operative portion of the Bank
12

Sham Sunder v. Chandu, A.I.R. 1935 Lahore 974.


Ranganath v. Pachusao, A.I.R. 1935 Nag. 117
14
A.I.R. 2007 S.C. 2361
13

12

Guarantee read as to indemnify and keep indemnified Mula Sahakari Sakhar Karkhana Ltd.
against all losses, claims damages actions and cost in respect of such sums which the supplier
shall become liable to pay as the terms of the said order.
Disputes and differences arose between the parties and as a result, the respondent terminated the
contract and invoked the Bank guarantee against the Pentagon. Holding that the document
indemnifying the respondent was a contract of indemnity and not guarantee, the Apex Court said
that the claim made by the assured on termination of contract need not be honoured by the Bank
without

the

proof

of

loss.

Definition of Guarantee
Contract of guarantee is defined in section 126 of Indian contract act.
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 guarantee
is given is called creditor a guarantee may be either oral or written.15
For example: A takes a loan from a bank A promises to the bank to repay the loan B also makes
the promise to the bank saying that if A does not repay the loan then I will pay .in this case A is a
principal debtor who undertakes to repay the loan B Is the surety, whos liability is secondary
because he promises to perform the same duty in case there is default on the on part of A. the
bank in whos favors the promise has been made is the creditor.
The object of a contract of guarantee is to provide additional security to the creditor in the form
of the promise by the surety to fulfill a certain obligation in case the principal debtor fail to do
that in every contract of guarantee there are three parties the creditor the principal debtor and the
surety there are three contracts in contract of guarantee .firstly the principal debtor himself
makes a promise in favors of creditor to perform a promise, secondly the surety undertakes to be

15

Contract act section 126

13

liable towards to the creditor if the principal debtor makes a default.16 Thirdly an implied
promise by the principal debtor in favor of the surety that in case the surety has to discharge the
liability of the default of the principal debtor, the principal debtor shall indemnify the surety 17.
The contract of guarantee is no doubt tripartite in nature18 but it is not necessary or essential that
the principal debtor must expressly be a party to that document. In a contract of guarantee, the
principal debtor may be a party to the contract by implication. Thus, there is a possibility that a
person may become a surety without the knowledge and consent of the principal debtor. The
function of contract of guarantee is to enable a person to get a loan, or goods on credit, on an
employment. Some person comes forward and tells the lender, or the supplier or the employer
that he (the person in need) may be trusted and in case of any default .for e.g. in old case of
Birkmy vs Darnell19 the court said
if two comes to a shop and one buys, and other to give him credit, promises the seller, if he
does not pay you, I will pay.
This type of collateral undertaking to be liable for the default of another is called a contract of
guarantee. In English law a guarantee is defined as a promise to answer for the debt, default or
miscarriage of another20

Essentials of Guarantee
1. The contract may be either oral or in writing
According to sec 126, a guarantee may be either oral or written. On this point, the position in
India is different from that in England. According to English law, for a valid contract of
guarantee, it is necessary that it should be in writing and signed by party to be charged therewith.
In English law under the provisions of statutes of fraud a guarantee is not enforceable unless it is
in writing and signed by the party to be charged 21
16

Ibid1
Section 145also see NS bank Vs Union of India, AIR 1991 AP 153,at 158
18
Mahabir shum sher vs Lloyds bank, air 1969 cal 371
19
(1709) 91 ER 27:1 Salk 27.
20
S.4, statute of frauds 1677, 29 II. C 3
21
S.chattantha karayalar vs central bank.
17

14

2. There should be a principal debt


A contract of guarantee pre supposes a principal debt or an obligation to be discharged by the
principal debtor. The surety undertakes to be liable only if the principal debtor fails to discharge
his obligation. If there is no such principal debt, but there is a promise by one party in favor of
another for compensating in a certain situation, and the performance of this promise is not
dependent upon the default of somebody else, it is a contract of indemnity. The purpose of a
guarantee being to secure a payment of debt, the existence of a recoverable debt is necessary. 22
3. Consideration

Like every other contract, a contract of guarantee should also be supported by some
consideration. A guarantee without consideration is void23. For suretys promise, it is not
necessary that there should be a direct consideration between the creditor and surety; it is enough
that the creditor had done something for the benefit of the principal debtor. Benefit to the
principal debtor constitutes a sufficient consideration to the surety for giving the guarantee. This
is clear from sec 127 which read as under
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.
Illustrations

(a) B requests A to sell and deliver to him goods on credit. A agrees to do so , provided C promises
will guarantee the payment of the prices of the goods .C promises to guarrntee the payment in
consideration of As promise to deliver the goods . this is a sufficient consideration for Cs
promise

4. Consent of the surety should not have been obtained by misrepresentation or concealment

22
23

Mountstephens vs lakeman, 1871 lr 7 QB 196, 2012 Ex, affirmed ,LR 7 HL 17.


Janak paul vs dhokal mall kidarbux ,(1935) 156 IC 200,

15

The creditor should not obtain guarantee either by any misrepresentation or concealment of any
material facts concerning the transaction. If the guarantee has been obtained that way, the
guarantee is invalid. The position is explained by section 142 and 143 which are as under
142. Guarantee obtained by misrepresentation invalid.-Any guarantee which has been
obtained by means of misrepresentation made by the creditor , or with his knowledge ans
assent, concerning a material part of the transaction, is invalid.
143. Guarantee obtained by concealment invalid.- Any guarantee which the creditor has
obtained by means by means of keeping silence as to material circumstances is invalid
Illustrations
(a) A engages B as a clerk to collect money. B fails to account for some of his receipts and A in
consequence calls upon him to furnish security for his duly accounting gives his guarantee for
Bs duly accounting . A does not acquaint C with Bs previous conduct. B afterwards makes
default.

(b) The guarantee is invalid , A guarantee to C payment for iron to be supplied by him to B to the
amount of 2000 tons. B and C have privately agreed that B should pay five rs er ton beyond the
market price, such excess to be applied in liquidation of an old debt. This agreement is concealed
from A is not liable as a surety.

(c) According to the above stated provision, obtaining a persons consent to act a surety either by
misrepresentation, or by keeping silence as regards material circumstances, renders such a
contract invalid. Keeping silence as regards material circumstances, which could affect the
suretys mind to stand as surety or not, would render the guarantee void. Thus if a cashier has
been found guilty of embezzlement, but this fact is not disclosed when a surety has been made to
guarantee the future conduct of the cashier, the surety will not be liable as such, under these
circumstances. Similarly, if a surety is made to guarantee an employees existing and future

16

liabilities, without being informed that the said employee is already indebted to an extent more
that of the guarantee, the guarantee is invalid.24

Liability of surety: its nature and extent


According to section 128 , the liability of the surety is coextensive with that of that of the
principal debtor, unless it is otherwise provided by the contract
The provisions that the suretys liability is coextensive with that of the principal debtor mean that
his liability is exactly the same as that of the principal debtor. For instance, the principal debtor
makes a default in the payment of the debt Rs 10000. The creditor may recover from the surety
the sum of 10000 plus the interest becoming due thereon as well as the amount spent by him in
recovering that amount. This may be further explained by the e.g. A guaranteed to B the payment
of bill of exchange by C, the acceptor. 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. If the principal debtors liability is
reduced, e.g. after the creditor has recovered the part of the sum due from him out of his
property, the liability of the surety is also reduced accordingly. 25In Narayan singh vs
chattarsingh26it has been held that if the principal debtors liability is scaled down in an
amendment decree or otherwise extinguished in whole or in part by a statute, the liability of the
surety pro tanto be reduced or extinguished. If the principal debtor happens to be a minor and the
agreement is made by him is void, the surety too cannot be made liable in respect of the same
because the liability of the surety is coextensive with that of principal debtor. It has been held in
an English case27 , that the guarantee of the loan or an overdraft to an infant is void, because the
loan to infant is itself is void ab initio.

DIFFERENCE BETWEEN CONTRACT OF INDEMNITY & GUARANTEE.


There are distinguishing differences between Indemnity and Guarantee in the Indian Contract
Act.
24

Lee vs jones, (1863) 17 CBNS 482 (Ex Ch)


Harigopal aggarwal vs state bank of india a.i.r. 1956mad 211
26
A.I.R. 1973 raj 347
27
Coutts & co vs browne lecky ,(1947) k.b. 104
25

17

Section 124 of the Indian Contract Act, 1872 defines the "Contract of Indemnity". It is
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. 'A' contracts to
indemnify B against the consequences of any proceedings which C may take against B in
respect of a certain sum of 20000 rupees. This is a contract of indemnity.

A contract of guarantee is defined in Section 126 of the Act. It 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.

In contract of indemnity there are only two parties viz the indemnifier or promisor and
the indemnity holder or promisee. In contract of guarantee there are three parties viz the
creditor, principal debtor and surety.

In indemnity, there is primary and independent liability. In guarantee the surety has
collateral liability.

There is no existing debt generally in the case of contract of indemnity where there is
existing debt in the case of guarantee.

There are two contracts in a contract of indemnity where there are three contracts in the
case of guarantee.

In Indemnity the promisor is discharged by payment. In guarantee the surety is


discharged by payment made by principal debtor.

Indemnifier may have some interest in the transaction where the surety will not have any
connection with the transaction.

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CONCLUSION
Indemnity is a special contract under the Indian Contract Act, 1872. The legislation is a very well
drafted one, but has given a very narrow definition of indemnity, due to which the Indian Courts
have time and again held that certain documents do not come under the purview of the definition
of indemnity contained in the Act. Such decisions have not created a problem, since the courts
covered the liability under other provisions of the same Act, mainly under Section 31of the Act
dealing with contingent contracts. Therefore, it would suffice to say that though the definition of
indemnity under the Indian Contract Act is narrow, the principles regarding indemnities which
have been laid down by common law are definitely addressed by other provisions of the Act.
The main purpose of construction and interpretation of a contract of indemnity is to ascertain and
give effect to the intention of the parties. While interpreting the indemnity clause in a business
contract, care should be taken so as to give the meaning to the terms and phrases according to the
common parlance used in that business rather than resorting to other means of interpretation,
unless such construction leads to absurdity. The extent of liability under a contract of indemnity
depends on the nature and terms of the contract and each case must be governed by its own facts
and circumstances. Interpretation of the contract or clause of indemnity thus plays a crucial role
in fixing the liability.

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BIBLIOGRAPHY
Books referred:

Blacks Law Dictionary.

Bangia, R.K. Contract -2, Allahabad Law Agency, 2004, Faridabad.

Saharay, H.K. Dutt on Contract, Eastern Law House, 2006, Kolkata.

Mitra, S.C. Law of Contract. Vol-2, Orient Publishers, 2005, New Delhi.

Markanda, P.C. Law of Contract. Wadhwa Publishers. 2008. Nagpur.

Singh, Avtar. Law of Contract. Eastern Book Company. 2008. Lucknow.

MULLA, The Indian Contract Act, 13th Edition Reprint 2012, by Anirudh Wadhwa.
Lexis Nexis Butterworths Wadhwa Publication, Nagpur.

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