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INDEMNITY AND GUARANTEE

CONTRACT OF INDEMNITY:

DEFINITION: The term indemnity means to compensate or make good the loss. Section
124 provides that “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.

ESSENTIALS OF CONTRACT OF INDEMNITY:

1- It must contain all the essentials of a valid contract of indemnity.


2- It is a contract between two parties. One person promises to sale the other from
any loss which he may suffer.
3- The loss may be caused by the conduct of the promisor himself or any other
person.
4- The conduct of indemnity may be expressed or implied.

RIGHT OF INDEMNITY HOLDER: (section 125)

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.
CONTRACT OF GUARANTEE:
DEFENITION: section 126 provides that,” 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:
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. (Section 129)

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. (Section 141)

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. (Section 140)

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.
(Section 145)

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 FEATURES:
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. (Section 127)

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. (Section 142)

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. (Section 143)

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. (Section 126)