I.

CONTRACT OF INDEMNITY

 Definition and Nature

“Indemnity” is a widespread expression used not only in a contractual context. It can be defined
as “[a] duty to make good any loss, damage or liability incurred by another,” or alternatively
“[t]he right of an injured party to claim reimbursement for its loss, damage or liability from a
person who has such duty.”

If we see the literal meaning Indemnity means “Security from the loss”. This term was generally
used for insurance contracts. But it may be noted here that Life insurances is not a contract of
indemnity.

Its legal connotation is when one person promises to another to save him from the loss incurring
from his performing any duty.

An agreement of indemnity, as a concept developed under common law, is an agreement wherein

the promisor, promises to save the promisee harmless from loss caused by events or accidents
which do not or may not depend on the conduct of any person or from liability for something
done by the promisee at the request of the promisor.

In common law Indemnity was established in the case of Adamson v Jarvis.

The plaintiff an auctioneer, sold certain cattle on the instruction of the defendant. It subsequently
turned out that the livestock didn’t belong to the defendant, but to another person, who made the
auctioneer liable and the auctioneer in turn sued the defendant for the loss he had thus suffered
by acting on the defendant’s direction. 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.
Whereas Section 124 of the Contract Act, 1872 defines a contract of Indemnity as "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." In simple words, an indemnity is a
promise to compensate for another's loss.

 Provisions in U.K.

Provisions of the common law on the contract of indemnity are different as to the provisions in
the Indian law. Earlier there was a maxim used in English law for the contract of indemnity
i.e.“YOU MUST BE DAMNIFIED BEFORE YOU CAN CLAIM TO BE INDEMNIFIED”.

The original English rule was that indemnity was payable only after the indemnity-holder has
suffered actual loss by paying off the claims. I.e.no action could be brought against the
indemnifier until the indemnity-holder had suffered actual loss.Only after a loss has been
suffered by the indemnity holder by acting on the instructions of the promisor or indemnifier and
all damages beard by him in defending the suit or to prevent it or while compromising on it are
paid, then only afterward he can sue the indemnifier for the payments of all the costs beard by
him. These were the earlier provisions.This 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
provided to 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
damnified before he could be indemnified. In other words, the indemnity-holder can now compel
the indemnifier to save him from the loss in respect of liability against which indemnity has been
promised, in the case of:

Richardson Re, ex parte The Governors of St. Thomas Hospital

Where Buckley LJ observed: “Indemnity is not necessarily given by repayment after payment.
Indemnity requires that the party to be indemnify in the first instanced shall never be call upon to
pay”

In Liverpool Mortgage Insurance Co.’s Re, Kennedy LJ observed “that indemnity does not
merely mean to reimburse in respect of the moneys paid, but to save from the loss in respect of
the liability against which the indemnity has been given because otherwise indemnity may be
worth very little if the indemnity-holder is not able to pay in the first instance”

Under English law, the word ‘indemnity’ carries a much wider connotation than given to it under
the Indian Contract Act. It includes a contract to save the promisee from a loss, whether it be
caused by human agency or any other event like an accident and fire. Under English law, a
contract of insurance (other than life insurance) is a contract of indemnity.

Oriental fire and general insurance co. v Savoy Solvent Oil Extractions Ltd

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 (even if the assured is still alive). 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.

 Provision in INDIA
As such the scope of “Indemnity”, as a concept developed under the common law, is much wider
in its scope and application than the scope of “Indemnity” as defined under Section 124 of the
Indian Contract Act 1872 (“Act”). “Indemnity”, as developed in common law, includes losses
caused by events or accidents which may not depend on the conduct of any person and therefore
includes losses due to accident or events which have not been caused by the indemnifier or any
other person. Section 124 of the Act, in contrast, limits itself to losses caused by the indemnifier
or any other person. It does not, within its scope, include indemnity to losses arising out of any
natural event or any accident not caused by any person.

Thus the very process of definition is restricted to cases where there is a promise to indemnify
against loss caused by (i) by the promiser himself, or (ii) by any other person, so the definition
excludes from its purview cases of loss arising from accidents like fire or perils of the sea. i.e.
the loss must be covered by some Human Agency.

In the case of Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri:

Section 124 of the Act, deals only with one particular kind of indemnity which arises from a
promise made by the indemnifier to save the indemnified from the loss caused to him by the
conduct of the indemnifier himself or by the conduct of any other person, but 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 by reason
of liability incurred by something done by the indemnified at the request of the indemnifier.
Section 125 of the Act, deals only with the rights of the indemnity-holder in the event of his
being sued. It is by no means exhaustive of the rights of the indemnity-holder, who has other
rights besides those mentioned in the section. It was further discussed that an indemnity might be
worth very little indeed if the indemnified could not enforce his indemnity till he had actually
paid the loss. If a suit was filed against him, he had actually to wait till a judgment was
pronounced, and it was only after he had satisfied the judgment that he could sue on his
indemnity. It is clear that this might under certain circumstances throw an intolerable burden
upon the indemnity-holder. He might not be in a position to satisfy the judgment and yet he
could not avail himself of his indemnity till he had done so. Therefore the Court of equity
stepped in and mitigated the rigor of the common law and held that where the indemnified has
incurred a liability and that liability is absolute, he is entitled to call upon the indemnifier to save
him from that liability and to pay it off.

In the case of The New India Assurance Company Ltd. vs. The State Trading Corporation of
India Ltd. and Anr.

The Gujarat High Court relied upon the view taken in Gajanan Moreshwar Parelkar vs.
Moreshwar Madan Mantri and held that in view of Section 124 of the Contract Act, where the
defendants promise to indemnify is an absolute one; a suit can be filed immediately upon failure
of performance, irrespective of actual loss. In this judgment the Law Commission of India
accepted the view that, to indemnify does not mean to reimburse in respect of the money paid,
but, in accordance with its derivation, to save from loss in respect of the liability against which
the indemnity has been given.

The Law Commission of India in its 13th Report, 1958, has expressed the opinion that “the view
expressed by Chagla J., is correct and should be adopted by the legislature.” The Law
Commission recommended that as in English Law, “the right of the indemnity-holder should be
more fully defined and the remedies of an indemnity-holder should be indicated even in cases
where he has not been sued.”

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.
The Law Commission of India in its 13th Report, 1958 on the Indian Contract Act, 1872, has
recommended the amendment of Section 124. According to its recommendation, “The definition
of the ‘Contract of Indemnity’ in Section 124 he expanded to include cases of loss 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.”

Osman Jamal And Sons Ltd. vs Gopal Purshottam

Plaintiff Company agreed to act as commission agent for the defendant firm for purchase and
sale of “Hessian” and “Gunnies” and charge commission on all such purchases and the defendant
firm agreed to indemnify the plaintiff against all losses in respect of such transactions. The
plaintiff company purchased certain Hessian from one Maliram Ramjidas. The defendant firm
failed to pay for or take delivery of the Hessian. Then Maliram Ramjidas resoled it at lesser price
and claimed the difference as damages from the plaintiff company. The plaintiff company went
into liquidation and the liquidator filed a suit to recover the amount claimed by Maliram from the
defendant firm under the indemnity. The defendant argued that in as much as the plaintiff had
not yet paid any amount to Maliram in respect of their liability they were not entitled to maintain
the suit under indemnity. It was held negative and decided in plaintiff’s favour with a direction
that the amount when recovered from the defendant firm should be paid to Maliram Ramjidas.

Thus we find out that the basic difference between the indemnity in English law and Indian law
is that, the English law is wide enough to cover the losses by fire and sea peril whereas the
Indian law doesn’t approve this. Moreover in the Indian law the loss should be caused by some
 human agency i.e. the promisor himself or by the conduct of any other person. Whereas in
English law loss caused by a natural calamity and the promisor are considered but not by any
third party

 VALIDITY OF INDEMNITY AGREEMENT

A contract of indemnity is one of the species of contracts. The principles applicable to contracts
in general are also applicable to such contracts so much so that the rules such as free consent,
legality of object, etc., are equally applicable. Where the consent to an agreement is caused by
coercion, fraud, misrepresentation, the agreement is voidable at the option of the party whose
consent was so caused. As per the requirement of the Contract Act, the object of the agreement
must be lawful. An agreement, the object of which is opposed to the law or against the public
policy, is either unlawful or void depending upon the provision of the law to which it is subject.

 RIGHT OF THE INDEMNITY HOLDER – (SECTION 125)

An indemnity holder (i.e. indemnified) acting within the scope of his authority is entitled to the
following rights –

1. Right to recover damages – he is entitled to recover all damages which he might have been
compelled to pay in any suit in respect of any matter covered by the contract.

2. Right to recover costs – He is entitled to recover all costs incidental to the institution and
defending of the suit.

3. Right to recover sums paid under compromise – he is entitled to recover all amounts which he
had paid under the terms of the compromise of such suit. However, the compensation must not
be against the directions of the indemnifier. It must be prudent and authorized by the
indemnifier.

4. Right to sue for specific performance – he is entitled to sue for specific performance if he has
incurred absolute liability and the contract covers such liability. 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 or 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

II. Contract of GURANTEE

 Definition
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 the guarantee is given is called the " creditor
". A guarantee may be either oral or written.
Economic function of guarantee
The function of a contract of guarantee is to enable a person to get a loan, or goods on
credit or an employment.
‘Guarantees are usually taken to provide a second pocket to pay if the first should be
empty’
Consideration for guarantee.-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.
 Essentials of contract of guarantee

1. The contract of guarantee must satisfy the requirements of a valid contract:

A contract of guarantee is a special kind of contract. As such, it must have all the essential
elements of a valid contract such as consideration, free consent, competence of the parties,
legality of object and consideration. As regards the consideration and capacity of the parties, a
contract of guarantee has special features, which are discussed in the following two essentials:
2. The contract of guarantee must be supported by consideration:
It is, however, not necessary that there should be direct consideration between the surety and
creditor. The law presumes that the consideration received by the principal debtor is the
sufficient consideration for the surety. Thus, something done for the benefit of the principal
debtor is the sufficient consideration for a contract of guarantee. And it is not necessary that the
surety himself must he benefited (Section 127).
3. The contract of guarantee must be made by the parties competent to contract:
We know that the competency of the parties is an important requirement of a valid contract. As
such, the parties to a contract of guarantee must also be competent to contract. However, the
incapacity of the principal debtor does not affect the validity of a contract of guarantee. Thus, the
requirement is that the creditor and the surety must be competent to enter into a valid contract. A
principal debtor may he a minor. In such cases, the surety is regarded as principal debtor and is
personally liable to pay the debt, though the principal debtor is not liable. In such cases, the
contract between the creditor and surety is treated as a primary and independent, and not
collateral. The surety is also liable if the guarantee is given knowing the minority of the debtor.
4. There must be someone primarily liable:
it is an essential requirement of a contract of guarantee that there must be someone primarily
liable (i.e., liable as principal debtor) other than the surety. As a matter of fact, a contract of
guarantee presupposes the existence of a liability enforceable by law. If there is no such primary
liability, there can be no valid contract of guarantee. However, as slated above, the guarantee
given for minor’s debt is enforceable.
5. The promise to pay must be conditional:
It is another important essential element of a contract of guarantee. There must be a conditional
promise to be liable on the default of the principal debtor. In other words, the liability of the
surety should arise only when the principal debtor makes a default. Any liability, which is
incurred independently of the ‘default’ of the principal debtor, is not within the definition of
guarantee.
6. There should be no misrepresentation:
It is also an essential element of a valid guarantee. The guarantee should not he obtained by
misrepresenting the facts to the surety. Though the contract of guarantee is not a contract
uberrimae fides (i.e., of absolute goods faith), and thus, does not require complete disclosure of
all the material facts by the principal debtor or creditor to the surety before .he enters into a
contract. But the facts, which are likely to affect the degree of surety’s responsibility, must be
truly represented to him by the creditor. If the guarantee is obtained by the misrepresentation of
such material facts, it will be invalid. Thus, a guarantee is invalid, if the creditor obtains it by
misrepresentation of material facts. The guarantee will also be invalid, if, with the knowledge
and consent of the creditor, any material part of the transaction between the creditor and his
debtor is misrepresented to the surety (Section 142).
7. There should be no concealment of the facts.
The creditor should disclose to the surety the facts which are likely to affect the surety’s liability.
The guarantee obtained by the concealment of such facts is invalid. Thus, the guarantee is invalid
if it is obtained by the creditor by the concealment of material facts (Section 143).
8. The contract of guarantee may be oral or written.
A contract of guarantee may be either oral or in writing. [Section 126].

 Provision in U.K
i. Swan v Bank Of Scotland

The purpose of a guarantee being to secure the repayment of a debt, the existence of a
recoverable debt is necessary. It is of the essence of a guarantee that there should be someone
liable as a principal debtor and the surety undertakes to be liable on his default. If there is no
principal debt, there can be no valid guarantee. This was so held by the House of Lords in the
Scottish case of Swan v. Bank of Scotland {(1836) 10 Bligh NS 627} decided as early as 1836.
‘The payment of the overdraft of a banker’s customer was guaranteed by the defendant. The
overdrafts were contrary to a statute, which not only imposed penalty upon the parties to such
drafts but also made them void. The customer having defaulted, the surety was sued for the loss.’

But he was held not liable. The court said that “If there is nothing due, no balance, the obligation
to make that nothing good amounts itself to nothing. If no debt is due, if the banker is forbidden
from having any claim against his customer, there is no liability incurred by the co-obligor’s.

the statutory requisites of a guarantee are, in England, prescribed by (1) the statute of frauds,
which provides that "no action shall be brought whereby to charge the defendant upon any
special promise to answer for the debt, default or miscarriages of another person, unless the
agreement upon which such action shall be brought, or some memorandum or note thereof, shall
be in writing and signed by the party to be charged therewith, or some other person thereunto by
him lawfully authorized,"

ii. Coutts Company v Browne Lecky Company., the second and third defendants had
guaranteed the amount of an overdraft granted by the plaintiff bankers to the first
defendant, an infant. The second and third defendants contended that the plaintiffs could
not recover from them because under section 1 of the Infants Relief Act, 1874,' they
could not have recovered from the first defendant. All the parties knew throughout that
the first defendant was an infant. Oliver, J., held that the plaintiffs could not recover.
Under section 1 of the Infants Relief Act the loan to the first guarantee was a contract to
make good a debt, default or miscarriage of another person. But in this case there was no
debt, because the statute says so; there was no default, because the first defendant was
entitled to refrain from paying; for the same reason there was no miscarriage. On
principle there was therefore no liability on the part of the second and third defendants.In
Swan v. Bank of Scotland the House of Lords held that under Scottish law a guarantee of
a transaction that was void on the ground of illegality was also void. ‘The only difference
between those facts and the facts before me ', said Mr Justice Oliver, ' is that there is no
illegality about the present transaction. Save for the difference the facts in this case
appear to me to be identical in principle’1
 Provision in India.
i. Kashiba v Shreepath

One Lakshmi Bai entered into a bond to secure payment to the plaintiff of Rs. 1000 and interest.
At the time of the execution of the bond, she was a minor and her father joined in the bond. The
material terms of the contract by the father were: Should she (i.e., Lakshmi Bai) fail to pay, I will
pay the above-mentioned amount personally without pleading her excuse and take back this
bond. If it is not so paid, you should get it paid off from my income. The question was whether
the father was liable on this guarantee in view of Lakshmi Bai herself not being liable because of
her minority. In that case, the contract of the so called surety is not a collateral, but a principal,
contract. It is a conditional promise founded upon valuable consideration. It is like the case of a
person, who to-appease the anger of a child, requests another to lend a guinea to the child to play
with, and promises if the child loses or does not give back the coin, to make it good to the lender.
The promise in such, circumstances is clearly that of a principal, and not of surety, and the
situation is not altered by its being called a guarantee.On this reasoning, the learned Judge held
that the surety and those claiming under him were liable to the promisee of the bond.

In P.J Rajappan v Associate Industries (P) Ltd, it was held by the kerla High Court that since an
oral guarantee is also valid, a person who otherwise appeared to be a guarantor was held liable
though his signature did not appeared on the guarantee papers.

In Punjab National Bank Limited vs Bikram Cotton Mills & Anrit was held that though, the
bond, it is true, did not expressly recite that the Company was the principal debtor; it is also true
and the Company did not execute the bond. But a contract of guarantee may be wholly written,
may be wholly oral, or may be partly written and partly oral

Thus we find out that the basic difference is that in English law a minor may not be held liable as
the contract is void ab initio even though at the time of contract the person may have known him
to be a minor, but in Indian law where a minor has been knowingly guaranteed, the surety should
be held liable as a principle debtor. Moreover a in U.K the contract of guarantee has to be written
as defined in frauds act, whereas in Indian law it can be oral as well as written.

EXTENT OF SURETY’S LIABILITY

It is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.

When there is a condition precedent to the surety’s liability, he will not be liable unless that
condition is first fulfilled.(when another person has to join as a co-surety)

‘The surety has no right to dictate terms to the creditor and ask him to pursue his remedies
against the principal in the first instance. The surety is a guarantor, and it is his business to see
that the principal pays, and not that of the creditor’ Supreme Court in Bank of Bihar Ltd V
Damodar Prasad (1969)

‘Even if the decree is a composite one against the principal debtor, mortgaged property & the
guarantor, the creditor/decree holder can proceed as he liked i.e. he could proceed against the
guarantor if he so wished’

Continuing Guarantee: Covers a number of transactions over a period of time. The surety
undertakes to be answerable to the creditor for his dealings with the debtor for a certain time.

DISCHARGE OF SURETY FROM LIABILITY

By revocation: Ordinarily a guarantee is not revocable when once it is acted upon.A continuing
guarantee may at any time be revoked by the surety, as to the future transactions, by notice to the
creditor.

By death of Surety: The death of the surety operates as a revocation of a continuing guarantee
so far as regards future transactions. The surety’s heirs can be sued for liability already incurred.

By Variance: Any variance made without the surety’s consent, in the terms of the contract
between the principal debtor and the creditor, discharges the surety as to transactions subsequent
to the variance.

Bonar V Macdonald (1850)Guarantee of good conduct of Bank Manager-afterwards salary

raised-condition that Manager would be liable for 1/4th of losses on discount allowed by him-no
communication of new arrangement to surety-substitution of a new agreement for the former
discharged the surety.

While the general principle is that if the agreement of the surety is altered in a single line, the
surety in entitled to be discharged, but the law now accepts that where it is self evident that the
alteration is unsubstantial or for the benefit of the surety, he is not discharged from his liability.

M S Anirudhan V Thomco’s Bank Ltd. (1963)Supreme court heard the appeal-defendant

guaranteed repayment of loan-guarantee paper showed the loan to be Rs.25,000-bank refused to
accept-principal reduced the amount to Rs.20,000 without intimation to surety gave it to the
bank which was then accepted by bank-principal failed to pay-bank sued surety-question was
whether the alteration had discharged him- held by a majority that the surety was not discharged.

By release or discharge of Principal Debtor:

The surety is discharged by any contract between creditor and the principal debtor, by which the
principal debtor is released, or by any act or omission of the creditor, the legal consequence of
which is the discharge of the principal debtor.

Any release of the Principal Debtor is a release of the surety also.

Where, however, the Principal Debtor is discharged by operation of insolvency laws or, in case
of a company, by the process of liquidation that does not absolve the surety of his liability.

Act or Omission:

Example: Act of creditor in terminating the agreement of Hire-Purchase by taking possession of

goods, discharges the surety. There is a contract for the construction of a building, which is
guaranteed by the surety, and the creditor has to supply the building material. An omission on the
part of the creditor to supply the material would discharge the contractor and so would the surety
be discharged.

Compromise, extension of time and promise not to sue:

A contract between the creditor and the principal debtor, by which the creditor makes a
composition with, or promises to give time to, or not to sue the principal debtor, discharges the
surety, unless the surety assents to such contract.

(Mere forbearance to sue does not discharge the surety)

By Impairing surety’s remedy:

If the creditor does any act which is inconsistent with the right of the surety, or omits to do any
act which his duty to the surety requires him to do, and the eventual remedy of the surety himself
against the principal debtor is thereby impaired, the surety is discharged.

M R Chakrapani Iyengar V Canara Bank (1997)

The principal debtor disposed of the hypothecated property, the surety submitted all the
particulars to the creditor but the latter took no steps to seize the property or to issue criminal
process against the debtor, the surety became discharged.

Union Bank of India V M P Sreedharan Kartha (1993)

A hypothecation, being not a possessory security, not much duty can be expected from the
creditor towards the care of the security. Accordingly, where the contents of a hypothecated
godown are lost and the banker was not aware of any such loss otherwise than in the ordinary
course of business, the guarantor was held to be not discharged to the extent of the value of the
security.

State Bank of Saurashtra v Chitranjan Ranganath Raja (1980)

A pledge, being a possessory security, duty can be expected from the creditor towards the care of
the security. Accordingly, where the creditor was utterly negligent with regard to the safe
keeping & handling of the goods pledged & the security was lost on account of thenegligence of
the bank, the guarantor was held to be discharged to the extent of the value of the security.

RIGHTS OF THE SURETY

 AGAINST THE PRINCIPAL DEBTOR:

Right of subrogation: The surety steps into the shoes of the creditor when he has paid all that he
is liable for, or performed all he is liable for

Right to Indemnity: In every contract of guarantee there is an implied promise by the principal
debtor to indemnify the surety. The right enables the surety to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee.

 AGAINST THE CREDITOR:

Right to securities:

The surety steps into the shoes of the creditor and gets the right to have the securities, if any,
which the creditor has against the principal debtor, irrespective of the fact whether the surety
knows of the existence of such security or not.
If the creditor loses or without the consent of the surety, parts with such security, the surety is
discharged to the extent of the value of the security.

State of M P V Kaluram (1967)

State sold lot of felled timber to a person-price payable in 4 instalments-payment guaranteed by

defendant-if there was default in payment of an instalment, State would prevent further removal
of timber & sell remaining timber for realisation of price-buyer defaulted but even so State
allowed him to remove the timber-Surety was then sued for the price-held not liable-by allowing
goods to be removed by the buyer the security was lost.If the securities are burdened with further
advances it will not affect the rights of the surety

Forbes V Jackson 1882

Mortgage of leasehold premises & insurance policy for loan of £ 200-principal debtor borrows
further sums upon same security from creditor without knowledge of surety-defaults Right of set
off:

If the creditor sues the surety, the surety may have the benefit of the set off, if any, that the
principal debtor had against the creditor. He is entitled to use the defences of the debtor against
the creditor.

 AGAINST CO SURETIES:

Release by the creditor of one of the co sureties does not discharge the others; neither does it free
the surety so released from his responsibility to the other sureties.

The co sureties, in the absence of a contract to the contrary, are liable, as between themselves, to
pay each an equal share of the whole debt, or that part of it which remains unpaid by the
principal debtor.
III. DIFFERENCE BETWEEN CONTRACT OF INDEMNITY
AND GUARANTEE.
Indemnity
Section 124 of Indian Contract Act: a
contract by which one party promises
to save others from loss caused to him
by the conduct of the promisor
himself, or by the conduct of any
other person
Two parties (Indemnifier and
Indemnified)
To provide compensation for loss
Indemnifier is the sole person
liable.The liability of indemnifier is
primary
Liability arises only on occurrence of
a loss
The indemnifier can’t sue the third
party for loss in his own name.
Guarantee
Section 126 of Indian Contract Act: a
contract to perform the promise, or
discharge the liability of a third
person in case of his default.
Three parties (Principal Debtor,
Creditor, Surety)
To give assurance to the creditor in
lieu for his money
Liability shared between Principal
Debtor (primary liability) and Surety
(secondary liability). i.e. The liability
of the surety is secondary and arises
only if the principal debtors fails to
perform his obligations.
Fixed legal liability
Surety after discharging the debt can
sue the principal debtor