CONTRACT OF INDEMNITY 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 The person who promises to make good the loss is called the Indemnifier , and the person whose loss is to be made is called the Indemnified or Indemnity holder Contract of indemnity is really a part of Contingent contracts. E.g. Contract of Insurance.

Examples of indemnity
A shareholder has lost his share certificate and is applying to the company for the duplicate. The company has the risk that there may be similar claims made by other persons also. Then the company can ask the shareholder to execute the indemnity bond that he shareholder will make good any loss the company incase any other person claims the certificate.

Essentials of the contract of indemnity

There must be two parties in a contract of indemnity that is indemnifier and indemnified. The contract may be express or implied. Is subject to all the rules of valid contract like free consent, legality of objects etc., The contract of indemnity is enforceable only when the promisee suffers a loss the happening of which is unknown. The indemnifier will make good of such loss of the indemnified in case the latter suffers a loss. Consideration incase of indemnity is essential to enable the indemnity holder to make claim to be

Contract of Guarantee:

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. This contract entered into with the object of enabling a person to get a loan or goods on credit or an employment. The person who gives guarantee is called the Surety; the person in respect of whose default the guarantee is given is called Principal debtor; and the person to whom the guarantee is given is called Creditor

Examples of contract of guarantee

1. A advances a loan of Rs.5000 to B and C promises to A that if B does not repay the loan C will do so. Here
a) A is the creditor. b) B is the principal debtor c) C is the surety or guarantor.

2. On request of X, Y promises the employer of X that if X makes a defaults he shall make good the same to him.

What is the consideration for guarantee?

Sec 127 provides that anything done, or any promise made for the benefit of the principal debtor may be sufficient consideration to the surety for giving the guarantee". Thus there need not be direct consideration between surety and the creditor.

Essentials of the contract of guarantee

Tripartite agreement: every contract involves three agreements.
Creditor and principal debtor Surety and the creditors The surety and the principal debtor.

Secondary liability: In the contract of guarantee, the principal liability lies with the debtor and the surety has only secondary liability that is only in case of default. The liability of the surety is conditional. The principal debtor, surety and creditor must be competent to contract.

Difference between indemnity and guarantee.

No. of parties. (two and three) Number of contracts (one and three) Form (oral or written VS written) Continuing risk Vs absolute risk Nature of liability (primary and secondary) Purpose (reimbursement of loss Vs security of a debt or action)

What is a continuing guarantee?

This a guarantee which extends to a series of transactions.
E.g., S guarantees to C for D credit purchases with a running balance not exceeding Rs.5000.

It can be revoked by notice or death of the surety.

Who are co-sureties

When two or more persons guarantee the same debt jointly or severally, they are known as co-sureties. Since the cosureties share liabilities, they have right to share the amount recovered.
E.g., S1 and S2 jointly promises C , that in case of default of D to whom C has lent money, they shall jointly pay the amount to C.

Rights of surety
Against creditor Against principal debtor Against co-sureties

Right To securities

To Claim Set off

Right to subrogation

To indemnity

To claim contribution

Rights of surety against the creditor

He may ask the creditor to sue the debtor for the amount due. He can also require the creditor to terminate the debtors services. If any set off claim is available from the debtor, he may claim when called upon to pay.

Right of surety against principal debtor

Right of subrogation: when the surety pays off the debt of the principal debtors, he steps into the shoes of the creditor and is entitled to all the remedies which the creditor could have enforced against the debtor. He may also claim indemnity of the rightful amount.

Right of creditor against Co- surety

If they are liable in equal amounts the surety can demand the amount from the co sureties. If any one of the co-sureties has to pay the amount, he has right to call upon his cosureties to pay their contributions.

Rights of the creditor against surety

The creditor can demand payment, even when the debt with the principal debtor is time-barred or the debtor has become insolvent. If the surety becomes insolvent, the creditor has the right to recover the dues from the estate of insolvent surely. In case of co-sureties the creditor is at liberty to proceed against any one of the sureties for the whole debt.

When surety will be discharged from his obligations?

Payment by debtor. Revocation of the contract. Death Release of debtor by creditor Guarantee obtained by misrepresentation Guarantee obtained by concealment of facts. If there is any variance of the contract without the knowledge of the surety.

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