Contracts of Indemnity

and Guarantee

Contracts of Indemnity
Contract of Indemnity Sec. 124
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.
Illustration 1 :
Mr. Yasir purchased demand draft of Rs 50,000
from a bank. The draft was lost in transit. Mr. Yasir
requested the concerned branch to issue a
duplicate demand draft. He had to furnish an
indemnity bond- stating therein that in case of
any claim on the bank, the indemnifier shall be
liable to make good any loss suffered by the bank
(Indemnity holder/ Indemnified)

Contract of Indemnity and

Guarantee
All Contracts of Insurance are contracts of
indemnity except life insurance
In such contracts an insurance company ( insurer)
undertakes to indemnify the respective party
(assured), of the losses if suffered by the assured in
the manner and to the extent agreed in the contract.

Contract of Indemnity and Guarantee

Parties in a contract of Indemnity
Indemnifier (Promisor).
Indemnity Holder/Indemnified ( Promisee).

Contract of Indemnity and Guarantee

Rights of Indemnity Holder When Sued:

Can recover all damages incurred /Paid by him.

Can recover costs incurred.

Can recover sums paid under compromise, if

any.

Contract of Indemnity and Guarantee

Rights of Indemnifier
Settled principle of law :
After compensating the loss to indemnity
holder, indemnifier is entitled to all the
ways and means by which person
indemnified might have protected himself
for the loss.
Time of Commencement of
Indemnifiers Liability:
When indemnity holder incurs an
absolute liability though not actual loss.

Contract of Indemnity and Guarantee

Contract Of Guarantee
Sec.126- 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.

Contract of Indemnity and Guarantee

Contract Of Guarantee
Objects:
--Enabling a person:
To avail loan
-- Mr. Aslam availed a loan of Rs 1 million from
XYZ Bank. The said bank asked the borrower, Mr.
Aslam to furnish a guarantee from a credit worthy
party. Mr. Aslam requested Mr. Akram to furnish
guarantee for the said loan in favor of XYZ bank.

Contract of Indemnity and Guarantee

Contract Of Guarantee
Mr. Akram furnished the guarantee as desired by the
bank. In case of default by the borrower (Mr.
Aslam), the guarantor/ surety ( Mr. Akram) shall be
liable to pay the amount in default.

Contract of Indemnity and Guarantee

Contract Of Guarantee
Objects:
To make credit purchases
M/S AQ brothers make credit supplies to Hilton
enterprises. Under the agreement, M/S Hilton
enterprises furnished guarantee of Mr. Suhail. Mr.
Suhail shall be liable to make payments to M/S AQ
brothers in case of default by Hilton enterprises.
To get employment (furnishing guarantee to employer)

Contract of Indemnity and Guarantee

Contract Of Guarantee
Furnishing Guarantee to employer for seeking employment

M/S XYZ bank hired the services of Mr. Salman as

cashier and asked him to furnish a guarantee of a
third party for a sum of Rs 100,000. Mr. Salman
furnished guarantee of Mr. Kamal. In case of any
loss suffered by the said bank on account of
neglect/act committed by Mr. Salman, he shall be
liable to make payment to the bank. However, in
case of default by Mr. Salman, guarantor shall be
liable.

Contract of Indemnity and Guarantee

Guarantee may be:
o ORAL or
o WRITTEN
Parties in a contract of guarantee

Surety /Guarantor
--the person who gives guarantee

Creditor.
--the person in whose favor guarantee is given

Principal Debtor.
--the person who primarily incurs liability/ debt

Contract of Indemnity and Guarantee

Nature of a Contract of Guarantee
Primary Contract.
Primary contract between Principal Debtor and
Creditor.
Secondary Contracts.
The Contract between surety and creditor and
Contract between surety and principal debtor

Contract of Indemnity and Guarantee

Kinds Of Guarantee.
Specific Guarantee
--this guarantee is restricted to a specific
transaction or engagement. For example
availing a loan from a bank.

Contract of Indemnity and Guarantee

Kinds Of Guarantee.
Continuing Guarantee:
--Such guarantee covers a series of transactions.
For example guarantee furnished to a supplier
for making supplies to the extent of rupees one
million during the next one year.

Contract of Indemnity and Guarantee

Distinction Between Indemnity & Guarantee.
Guarantee.
Indemnity.
1) Number Of Parties,
Two
Three Parties.
a) Indemnifier.
a) Creditor
b) Indemnity holder.
b) Principal Debtor.
2) Number Of
c) Surety.
Contracts.
Three Contracts:
One Contract.
a) P.D & Creditor
b) P.D & Surety

Distinction Between Indemnity & Guarantee

3) Liability of indemnifier: is
primary and independent
from Principal debtor.
4) Request
Indemnifier gives
indemnity at his own not
on the request of third
party.
5) Purpose.
Reimbursement of loss.

3) Liability of surety:
is secondary, it accrues
when principal debtor fails
to perform his obligations
4) Guarantor.
Surety furnishes/ gives
guarantee on the request of
principal debtor
5) Purpose.
To Secure performance of a
contract (debt etc) by
principal debtor.

Distinction Between Indemnity & Guarantee

6) Existence of Liability. 6) Liability stipulated

performance is
Liability of
guaranteed by the
indemnifier arises
surety e-g, loan
only on the
already exists
happening of a
Guarantor promises
contingency/liability.
performance of
repayment of loan if
P.D defaults.

Distinction Between Indemnity & Guarantee

7) Filing of Suit.
Indemnifier cannot
sue (in his name)
except when there is
an assignment of
claim in his favor.

7) Surety after
discharging his
obligations can sue
principal debtor.

Contracts of Bailment,
Pledge & Agency

Bailment
Bailment DefinedA bailment is the delivery of goods by one
person to another for some purpose, upon a
contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of
according to the directions of the person delivering
them. The person delivering the goods is called the
bailor. The person to whom these are delivered
is called the bailee

Bailment
Essentials of Bailment:
Contract

--there is an underlying contract between the bailor

and bailee, there may be an explicit contract or it
may be an implied contract.
Specific purpose
--the bailment of goods is always for some specific
purpose.

Delivery of goods.
--there must be delivery of movable goods in a
contract of bailment.

Bailment
Essentials of Bailment:

No change of ownership
--in a contract of bailment, only the possession of
goods is transferred from bailor to the bailee,
whereas the bailor has all ownership rights over the
goods delivered.

Bailment
Duties of Bailee
To take care of goods delivered by bailor sec 151
Bailee not to make un-authorized use of the goods
delivered to him. Sec 154
Bailee to return the goods delivered to him for some
purpose. Sec 160.
Bailee to return an increase or profit in lieu of goods
delivered. Sec 163

Pledge
According to section 172 of the Contract Act:

Pledge is the bailment of goods as security

for payment of a debt or performance of a
promise.

Pledge
The pledgee has actual control of pledged
stocks/Goods.
Pledgee can sell pledged stocks by giving
reasonable notice to the borrower, in case of
default by pledgor.
Before disposal pledgee should publish the
notice through news papers etc.

Contract of Agency

Contract of Agency
In general terms, Agency refers to the relationship
which exists between two legal persons, the
Principal and the Agent in which the Agent has to
perform different duties/ functions as per
instructions of the principal and also enters into
contract with the third party on behalf of the
principal.

Contract of Agency
The relationship of agency plays an important
role in business and commercial dealings. This
relationship is created by virtue of
agreement between Principal and Agent

Contract of Agency
Definition of Agent and Principal :Sec 182
Agent is a person employed to do any act for
another or to represent another in dealing with a
third person. The person for whom such act is done,
or who is so represented, is called the Principal.

Contract of Agency
Duties of the Agent:
Duties of agent are contained in sec 211 to 218 of
the Contract Act. Some of the important duties are
given below:
i. To follow principals instructions
ii. To show required skill and diligence
iii. Agent to render proper accounts
iv. Agent to pass on any benefits derived by him

Contract of Agency
Duties of Principal
i. Payment of remuneration to the agent
ii. not to prevent his agent from performing the
duties/ acts assigned to him under the contract and
for which remuneration is payable.
iii. Any legitimate expenses which have been incurred
by the agent in the course of performance of his
duties are to be indemnified by the principal.