CONTRACT OF INDEMNITY AND GUARANTEE

CONTRACT OF INDEMNITY:

The term indemnity means to compensate or make good the loss. “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 is called a contract of indemnity.”
or
Contract of indemnity" defined.-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, is called a " contract of indemnity".

EXAMPLE:
A parked his cycle at cycle stand. He lost his token given by B. B refuses to return the
cycle. To get the cycle A promises to compensate B against the loss he may suffer if any
person claims the cycle from B.

RIGHT OF INDEMNITY HOLDER:

1- He can recover all damages which he may be compelled to pay in respect of any
suit filed against him.
2- He can recover expenses in respect of any suit filed by him with the authority of
indemnifier.
3- He can recover all expenses which he might have paid as a result of any
compromise which was made with the consent of indemnifier.

RIGHTS OF IMDENIFIER:

There is no provision in law about the rights of indemnifier. However the rights of
indemnifier are the same as the rights of guarantor. It is a principal of law that where one
person has agreed to indemnify, another, his rights will be similar to the rights of
guarantor.

Essential elements of a contract of indemnity are:

The following are the essential elements of a valid contract

1). It must be a valid contract:-

Since the contract of Indemnity is a contract between two parties of Indemnifier &
Indemnity holder it must fulfill all the essential elements of a valid contract .
ii. Parties:-

The two parties in a contract of indemnity are_

a. indemnifier(promisor)
b. Indemnity holder (Promisee).

iii. Loss to Promisee:-

The indemnity holder must have suffered damage or loss before he can hold the promisor
liable. Thus the happening of the loss or damage is a contingency upon which liability of
the indemnifier comes into existence.

iv. Lawful object:-

The object in a contract of indemnity must be one which can be enforceable by law.

v. Express/Implied:-

A contract of indemnity may be expressed or implied. A contract is expressed when it is

in word of mouth (i.e) oral or in written. An implied contract is one which it neither in
oral nor in written but it is presumed from circumstances.
For eg. In a contract of Agency, there is an implied contract by the principle to indemnify
the agent for any loss which is incurred by him towards the third party.

vi. Exceptions (Exclusion):-

A contract of indemnity does not include_

a. Cases where loss arises due to accidents such as fire/marine, or any unforeseen event.
b. Any event not depending on the conduct of the person For e.g. Death.
CONTRACT OF GUARANTEE:

A contract of guarantee is a contract to perform the promise or discharge the liability of a

third person in case of his default.
Every contract of guarantee has three agreements which are_
• An agreement between the Creditor and the Principal Debtor.
• An agreement between the Surety and the Creditor.
• An agreement between the Surely and the Principal debtor.

EXAMPLE:
A requests B to lend Rs. 5 lac to C and guarantees that if C fails to pay, he will pay or B,
there is a contract of guarantee.
KINDS OF GUARANTEE:

1. SIMPLE GUARANTEE:

A guarantee which extends to a single debt or transaction is called ordinary, simple or

specific guarantee. It comes to an end as soon as the liability under the transaction ends.

2. CONTINUING GUARANTEE:

A guarantee, which extends to a series of transactions is called continuing guarantee. In

other words a guarantee which covers a number of transactions over a period of time is
called continuing guarantee. It’s like a standing offer which is accepted by the creditor
every time a subsequent transaction takes place.
A, in consideration that B will employ C in collecting the rent of Bs zamindari, promises
B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by
C of those rents. This is a continuing guarantee
RIGHTS OF SURETY:

1. RIGHTS AGAINST THE CREDITOR:

A. Right to securities:

The security at the time of payment can demand the securities which creditor has
received from principal debtor at the time of creation of contract, whether surety is aware
of such securities or not. If creditor by negligence loses any security held by him, the
surety is discharged to that extent from the payment of guaranteed sum. But if security is
lost due to unavoidable act, the surety would not be discharged.
B. Right to claim Set-off:

If the principal debtor has some claims against the creditor, the debtor can ask for
adjustment of his debts to the extent of his claims. If the creditor sues surety for
repayment, the surety can claim set off, if any which principal debtors had against
creditor.

2. RIGHTS AGAINST THE PRINCIPAL DEBTOR:

A. Right of Subrogation:

When surety has paid the guaranteed debt on default of principal debtor he is entitled to
all the rights, which creditor had against principal debtor. The surety is entitled to all the
remedies which are available to creditor against principal debtor.

B. Right of Indemnity:
In every contract of guarantee there is an implied promise by principal debtor to
indemnify surety. The surety is entitled to recover from principal debtor whatever sum he
has rightfully paid under the guarantee, but no sums which he has paid wrongfully.

3. RIGHTS AGAINST CO-SURETIES:

A. Similar Amount:

Where there are sureties for the same debt and the principal debtor has committed a
default, each party is liable to contribute equally to the extent of the default.

B. Different Amount:

Where there are sureties for the same debt for different sums, they are bound to
contribute equally subject to the limit fixed by their guarantee. They will not contribute
proportionately.

Essential feature of guarantee

1. TRIPARTITE CONTRACT:

It is an agreement between the principal debtor, creditor and surety. The three separates
contracts exist between them. If the promise by principal debtor is not fulfilled, the
liability for the surety arises. In a contract of guarantee the principal debtor is liable and
the surety will be liable on principal debtor’s default. The principal contract exists
between the principal debtor and the creditor and the contract between creditor and surety
is a secondary contract.

2. CONSIDERATION:

A contract guarantee like other contracts must fulfill essentials of a valid contract. It must
be supported by some consideration. It is not necessary that there must be direct
consideration between the surety and the creditor. The consideration received by the
principal debtor is sufficient for the surety.

3. MISREPRESENTATION:

A guarantee obtained by means of misrepresentation made by the creditor or with his

knowledge and assent, concerning a material part of the transaction is in valid. If the
consent of surety will be obtained by misrepresentation, the surety is discharged from his
liability.

4. CONCEALMENT:
Any guarantee which the creditor obtains by means of keeping silence to material
circumstances is invalid. The expression keeping silence means intentional concealment
of the facts. The creditor should disclose to surety the facts which are likely to affect the
surety’s liability.

5. WRITING NOT NECESSARY:

It is not necessary that the contract of guarantee must be in writing. It may be either oral
or written. It may be express of implied from the conduct of parties.

Distinguish between: - Contract of Indemnity and Contract of

Guarantee

CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE

1. It is a contract by which one party
promises to save the other from any
loss caused to him by the conduct of
the promisor himself or any other
person.
1. It is a contract to perform the
promise or discharge the liability of the
third person in case of his default.

2. There are two parties in the contract 2. There are three parties in the contract
of indemnity_ of indemnity_
i. Indemnifier(promisor) i. Creditor ii. Principal debtor
ii. Indemnity holder(promisee) iii. Surety.

3.There is only on e single contract 3. There are three separate contracts

between the indemnifier and the which are as follows_
indemnified. a. Creditor with the Principal debtor.
b. Surety with the Creditor
c. Principal debtor with the Surety.

4. Liability of the Surety is secondary

4. Liability of the Indemnifier is while liability of the Principal debtor is
primary and independent no secondary Primary.
liability.

5. The aim or goal is to reimburse the 5. It provides a surety to the creditor.

loss if any to the indemnified. Thus
the aim is to provide security.

6. Indemnifier acts independently 6. The surety acts at the request of

without any request of the Principal debtor.
indemnified.

7. The liability of the indemnifier 7. There is existing debt or liability.

 comes into existence on the happening The performance of which is
of the contingency namely loss to the guaranteed by the surety.
promisee.

8. Indemnifier cannot sue a third party 8. Surety can sue the principal debtor in
for any loss in his own name. his own name.

Conclusion:-
The essence of the matter is that there is a difference between a promise to pay the
creditor if the debtor defaults on payment as compared to a promise to make payment
irrespective of any default by anybody so long as the recovery of the money is
unsuccessful.

A guarantee involves a default by a third party and indemnity arises on the occurrence of
an event.