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

wouldn’t 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 defendant’s 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 Longman’s 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 (1872) 4 Bing 66: 5 LJ (OS) (CP) 68: 29 RR 503.2 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 'indemnity-

holder' 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. That’s 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 on 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 plaintiff’s godown, were found missing due to act of

embezzlement by the employees of plaintiff Company. Defendant Company had insured to

3 Gajanan Moreshwar v. Moreshwar Madan, A.I.R. 1942 Bom. 302, at p. 3034 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 HOLDERIn 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. 159.6 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.

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 authorized 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 Parker v Lewis, (1873) LR 8 Ch 1035;9 Bepin v Chunder Seekur Mookerjee, 1880 ILR 5 Cal 811;

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 bond-

holder as a result of the contracting party’s 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.2’00’000 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 indemnity-

holder 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

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 10 Cargill International SA v Bangladesh Sugar & Food Industries Corpn, (1996) 4 All ER 563.11 Mohit Kumar Saha v New India Assurance Co Ltd, AIR 1997 Cal 179.

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 co-

operative 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

Guarantee read as “to indemnify and keep indemnified Mula Sahakari Sakhar Karkhana Ltd.

12 Sham Sunder v. Chandu, A.I.R. 1935 Lahore 974.13 Ranganath v. Pachusao, A.I.R. 1935 Nag. 11714 A.I.R. 2007 S.C. 2361

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, who’s 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 who’s 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

liable towards to the creditor if the principal debtor makes a default.16 Thirdly an implied

15 Contract act section 126

16 Ibid1

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 another”20

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

17 Section 145also see NS bank Vs Union of India, AIR 1991 AP 153,at 15818 Mahabir shum sher vs Lloyds bank, air 1969 cal 37119 (1709) 91 ER 27:1 Salk 27.20 S.4, statute of frauds 1677, 29 II. C 321 S.chattantha karayalar vs central bank.

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 surety’s 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 A’s promise to deliver the goods . this is a sufficient consideration for C’s

promise

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

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

22 Mountstephens vs lakeman, 1871 lr 7 QB 196, 2012 Ex, affirmed ,LR 7 HL 17.23 Janak paul vs dhokal mall kidarbux ,(1935) 156 IC 200,

“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

B‘s duly accounting. A does not acquaint C with B’s 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 person’s 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

surety’s 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 employee’s existing and future

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

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

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 surety’s 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 debtor’s 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 debtor’s 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.

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.25 Harigopal aggarwal vs state bank of india a.i.r. 1956mad 21126 A.I.R. 1973 raj 34727 Coutts & co vs browne lecky ,(1947) k.b. 104

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.

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.

BIBLIOGRAPHY

Books referred:-

Black’s 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.