INDEMNITY GUARANTEE
BASIS FOR COMPARISON
Section 124
1.Meaning A contract in which one party
promises to another that he
will compensate him for any
loss suffered by him by the
act of the promisor or the
third party.
2.Defined in Section 124 of Indian
Contract Act, 1872
3.Parties Two, i.e. indemnifier and
indemnified
It is a bipartite agreement
between the indemnifier and
indemnity-holder.
4.Number of Contracts One
There is only one contract in
a contract of indemnity -
between the indemnifier and
the indemnity holder.
5.Degree of liability of the promisor Primary
Liability of the indemnifier is
primary to the contract.
Section 126
A contract to perform the promise, or
discharge the liability, of a third person
in case of his default. it is the contract
of guarantee.
Section 126 of Indian Contract Act,
1872
Three, i.e. creditor, principal debtor
and surety
It is a tripartite agreement between
the Creditor, Principal Debtor, and
Surety.ety
Three
There are three contracts in a contract
of guaratee - an original contract
between Creditor and Principal Debtor,
a contract of guarantee between
creditor and surety, and an implied
contract of indemnity between the
surety and the principal debtor.
Secondary
Liability of the surety is co-extensive
with that of the principal debtor
although it remains in suspended

6.Purpose
7.Maturity of Liability
8.RIGHT OVER THIRD PARTY
9. Liability of third party
10. Initiative of contract
11.Type of contract
To compensate for the loss
The reason for a contract of the reason for a contract of guarantee
indemnity is to make good on is to enable a third person get credit.
a loss if there is any.
The liability of the
indemnifier arises only on
the happening of a
contingency.
Once the indemnifier fulfills
his liability, he does not get
any right over any third party.
He can only sue the
indemnity-holder in his own
name.
An indemnifier cannot sue a
third party for loss in his own
name, because there is no
privity of contract. He can do
so only if there is an
assignment in his favour.
Contract gets formed upon
indemnifier`s interest
Contract between the
indemnifier and the
indemnity holder is express
animation until the principal debtor
defaults. Thus, it is secondary to the
contract and consequenty if the
principal debtor is not liable, the
surety will also not be liable.
To give assurance to the promise
Liability already exists.
There is usually an existing debt or
duty, the performance of which is
guaranteed by the surety.
Once the guarantor fulfills his liabilty by
paying any debt to the creditor, he steps
into the shoes of the creditor and gets
all the rights that the creditor had over
the principal debtor.
A surety, on discharging the debt due by
the principal debtor, steps into the
shoes of the creditor. He can proceed
against the principal debtor in his own
right
Contract gets formed upon principal
debtor`s interest
Contract between surety and principal
debtor is implied and between creditor
and principal debtor is express.
 and specific.

Kinds of Guarantee

There are two categories of guarantees. These are called specific guarantees and continuing
guarantees.

1. Specific Guarantee (simple guarantee)

When a guarantee is given for a single transaction or debt, it is called a specific or simple
guarantee. It comes to an end when the debt is duly discharged or the promise is duly
performed.

Specific guarantee means a guarantee given for one specific transaction. In this case the liability
of the surely extends only to a single transaction.

A specific guarantee pertains to a single debt or a single transaction. It is a simple guarantee or

a specific guarantee when the debt is discharged, then the duty is performed and the contract
of guarantee comes to an end. In a specific guarantee if a new transaction has to be made
between two parties a fresh guarantee will have to be taken as the guarantee on the single debt
is completed. Guarantee can be for an existing debt or for a prospective debt or a future
transaction.

Illustration

Purva guarantees the payment for 5 computers to Ali. The computers are to be delivered to
Khan in March. Ali delivers the computers to Khan and payment is made to him. Purva’s contract
of guarantee ends on the payment. He is not liable for any further contracts because it is a
specific contract pertaining to only five computers. If Khan paid for the computers then Purva
would have been liable to make the payment to Ali.

Example: A guarantee payment to B of the price of 5 sacks of flour to be delivered by B to C and

to be paid in a month. B delivers sacks to C. C pays for them. Afterwards B delivers four sacks to
C, which C does not pay. The guarantee given by A was only a specific guarantee and accordingly
he is not liable for the price of the four sacks.

2. Continuing Guarantee
According to Section 129 a continuing guarantee extends to a series of transactions. It is not
confined to a single transaction.The surety is liable for all the transactions as his guarantee
extends to all of them until the guarantee is removed.

Illustration

Raju was employed as a driver by Mr. Tiwari on the recommendation of Shiv for collection of
credit payments from Delhi. Shiv guaranteed Raju’s honesty and promised to pay in case of any
default in payments collected by him (Raju). This is a contract of continuing guarantee.

Revocation of Continuing Guarantee

When a guarantee is cancelled it is called revocation of a guarantee. If the guarantee is

cancelled then the surety’s liability is discharged. A continuing guarantee can be revoked in the
following way:

(i) By Notice of Revocation: A surety can give a notice of revocation to the creditor. After the
notice is given the surety does not have any future liability but he continues to be liable under
Section 130 for any transactions that have already been entered into by him.

Illustration

Dharam guarantees to Marram an amount of Rs. 50,000 that Moti will pay his debt in 30 days
time. Marram agrees and the contract of guarantee is formed. Before the debt is cleared
Dharam gives a notice of revocation. Moti defaults in making his payment on the due date.
Dharam is liable to pay as it is an existing debt guaranteed by him.

(ii) By Death of Surety: In case of a continuing guarantee if the surety dies the contract is
automatically revoked even if no notice of death of surety is given. But, under Section 131 of
the Act the surety is liable for the existing transactions to which he had given a guarantee
before his death.

Illustration

Mulla guarantees the payment of Rs. 500 to Asraf a book seller for any book that he supplies to
Braj from time to time. Asraf supplies to Braj a book whose price is Rs. 200. After this
transaction Mulla dies. After the death of Mulla, Asraf supplies another book priced at Rs. 100.
Mulla’s representative is liable only for the payment for the book of Rs. 200 to Asraf and not for
the book of Rs. 100 because that book was supplied after his death.
(iii) Other Reasons: A continuing guarantee can also be revoked in the following conditions.

1. When there is a variance in the terms of a contract. (Section 133)

2. When the principal debtor is discharged or released. (Section 134)

3. When there is an agreed arrangement with the principal debtor. (Section 135)

4. When the creditor is responsible for an act or its omission which impairs the
remedy of a surety. (Section 139)

5. When there is a loss of security.

distinction/ Difference between Bailment and Pledge

Sr.
No Bailment Pledge

1 Sections 148 to 171 of the Indian Sections 172 to 181 of the Indian Contract
Contract Act 1872 deals with bailment Act deals with Pledge.

Meaning: The term bailment is derived Meaning: Pledge is a special kind of

2 from the French word ‘Bailor’, which bailment. If the goods are bailed as a
means ‘to deliver. It means possession security for payment of a debt or
voluntarily from one person to another. performance of a promise, it is called
Pledge.

Definition: Delivery of goods by Bailor Definition: The Bailment of goods as

3 to Bailee for a definite purpose on security for payment of a debt or
condition of their return or disposal, performance of a promise is called pledge.
when purpose is accepted. (Section.148, (Section.178, I.C.A)
I.C.A)
 Example: Sam delivers a cloth to John, Example: If a Farmer delivers to bank 50
4 a tailor making a shirt . The contract bags of wheat as security for obtaining a
between Sam and John is bailment loan, it is called pledge.

5
It is made for any purpose It is made for specific purpose

6
The Bailee can use the goods Pledgee cannot use the goods

7 The Bailee has no right to sell the goods The Pledgee / Pawnee has a right to sell
bailed the goods pledged if the pledger could not
redeem them within the stipulated period.

8 Bailee can exercise lien on goods only Pledgee can exercise lien even for
for labour and service nonpayment of interest.

RIGHTS OF BAILEE
1. Right to return goods to one of the joint owners without consent of all:

Where several joint owners of goods bail them, the bailee may deliver them back to, or dispose
them of according to the directions of one joint owner without the consent of all, in the
absence of any agreement to the contrary (Sec. 165).

2. Rights of immunity against delivery of goods to the bailor if he has no title to the goods:

If the bailor has no title to the goods, and the bailee, in good faith, delivers them back to, or
according to the direction of the bailor, the bailee is not responsible to the owner in respect of
such delivery (Sec. 166).

3. Right to seek directions of the Court where a third person claims the goods bailed:

If a person other than the bailor, claims the goods bailed, the bailee may apply to the Court to
stop the delivery of the goods to the bailor and to decide the title of the goods.

4. Right of lien:
Where the bailee expends labour and skill in respect of the goods bailed, he has, in the absence
of a contract to the contrary, a right to retain such goods until he receives the remuneration for
the services rendered in respect of such goods (Sec. 170).

5. Right of action against third parties:

If a third person wrongfully deprives the use or possession of the goods, or injures them, the
bailee is entitled to such remedies as the owner might have used in the like if no bailment had
been made. (Sec. 180).

6. Right to share compensation obtained by such suits:

Any compensation received from such suit shall be shared by the bailor and bailee in
accordance with their interests.

Right of Lien (Section 170-171)

In general, Lien means the right to keep the possession of the property of a person until that
person clear the debts. In case of bailment, the bailee has the right to keep the possession of
the property of the bailor until the bailor pays lawful charges to the bailee. Thus, right of Lien is
probably the most important of rights of a bailee because it gives the bailee the power to get
paid for his services.

Lien is of two kinds - Particular and General.

Particular Lien
This means that the lien holder has a right to keep possession of only that particular property
for which the charges are owed. For example, A gives a horse and a bicycle to B. A agrees to pay
B charges for training the horse and no charges for keeping the bicycle. Now, if A fails to pay
charges for the horse, B is entitled to keep possession only of the horse and not of the bicycle.
He must return the bicycle.
Section 170 gives this right to the bailee. It says that where the bailee has, in accordance with
the purpose of the bailment, rendered any service involving the exercise of labor or skill in
respect of the goods bailed, he has, in absense of a contract to the contrary, a right to retain
such goods until he receives due remuneration for the services he has rendered in respect of
them.

Illustrations - A delivers a rough diamond to B to be cut and polished, which is accordingly done.
B is entitled to keep the diamond until charges for his services are paid.
A gives cloth to B, a tailor, to make into a cloth. B promises to deliver the coat as soon as it is
done and also to give 3 months credit for the price. B is not entitled to keep the coat until he is
paid.

Conditions for Particular Lien -

1. Exercise of labor or skill - This right is subject to the condition that the bailee has
exercised labor or skill in respect of the goods. Further, it has been frequently pointed
out that the labor or skill must be such as improves the goods. This, in Hutton vs Car
Maintenance Co 1915, it was held that a job master has no lien for feeding and keeping
the horse in his stable but a horse trainer does get a lien upon the horse.

2. Labor or skill exercised must be for the purpose of the bailment - Any services
rendered that are beyond the purpose of the bailment do not give a right of lien. For
example, A bails his car to B to repair Engine. But B repairs tires instead. B will not get
the right of lien.

3. Labor or skill exercised must be in respect of the goods - As mentioned before,

the bailee gets a right of lien only upon the goods upon which the service was
performed.

General Lien -
As opposed to Particular Lien, General Lien gives a right to the bailee to keep the possession of
any goods for any amount due in respect of any goods. Section 171 says that, bankers, factors,
wharfingers, attorneys of a High Court, and policy brokers may, in the absence of a contract to
the contrary, retain as a security for a general balance of account, any goods bailed to them; but
no other persons have a right to retain, as a security for such balance, goods bailed to them,
unless there is an express contract to that effect.
Thus, this right is only available to bankers, factors, wharfingers, attorneys of high court, and
policy brokers. However, this right can be given to the bailee by making an express contract
between the bailor and the bailee.

Duties/Responsibilities of a Bailee

1. Duty to take reasonable care

In English law the duties of a gratuitous and non-gratuitous bailee are different. However, in
Indian law, Section 151 treats all kinds of bailees the same with respect to the duty. It says that
in all cases of bailment, the bailee is bound to take as much care of the goods bailed to him as a
man of ordinary prudence would, under similar circumstances take, of his own goods of the
same bulk, quality, and value as the goods bailed. The bailee must treat the goods as his own in
terms of care. However, this does not mean that if the bailor is generally careless about his own
goods, he can be careless about the bailed goods as well. He must take care of the goods as any
person of ordinary prudence would of his things.

In Blount vs War Office 1953, a house belonging to the plaintiff was requisitioned by the War
Office. He was allowed to keep his certain articles in a room of the house, which he locked. The
troops who occupied the house were not well controlled and broke into the room causing
damage and theft of the articles. It was held that War office did not take care of the house as an
owner would and held the War Office liable for the loss.

Bailee, when not liable for loss etc. for thing bailed -
As per section 152, in absence of a special contract, the bailee is not responsible for loss,
destruction, or deterioration of the thing bailed, if he has taken the amount of care as described
in section 151. This means that if the bailee has taken as much care of the goods as any owner
of ordinary prudence would take of his goods, then the bailee will not be liable for the loss,
destruction, or deterioration of the goods. No fixed rule regarding how much care is sufficient
can be laid down and the nature, quality, and bulk of goods will be taken into consideration to
find out if proper care was taken or not. In Gopal Singh vs Punjab National Bank, AIR 1976,
Delhi HC held that on the account of partition of the country, when a bank had to flee along
with mass exodus from Pakistan to India, the bank was not liable for the goods bailed to it in
Pakistan.

If the bailee has taken sufficient care in the security of the goods, then he will not be liable if
they are stolen. However, negligence in security, for example leaving a bicycle unlocked on the
street, would cause the bailee to be liable. In Join & Son vs Comeron 1922, the plaintiff stayed
in a hotel and kept his belonging in his room, which were stolen. The hotel was held liable
because they did not take care of its security as an owner would.

If loss is caused due to the servant of the bailee, the bailee would be liable if the servant's act is
within the scope of his employment.

Special Contract
The extent of this responsibility can be changed by a contract between the bailor and the
bailee. However, it is still debatable whether the responsibility can be reduce or it can be
increased by a contract. Section 152 opens with, "In absence of special contract", which is
interpreted by Punjab and Haryana HC, as the bailee can escape his responsibility by way of a
contract with the bailor. However, in another case Gujarat HC held that the bank was liable for
loss of bales of cotton kept in its custody irrespective of the clause that absolved the bank of all
liability. This seems to be fair because no one can get a license to be negligent and a minimum
standard of care is expected from everybody.

2. Duty not to make unauthorized use (Section 154)

Section 154 says that if the bailee makes any use of the goods bailed which is not according to
the conditions of the bailment, he is liable to make compensation to the bailor for any damage
arising to the goods from or during such use of them.
Illustration - A lends horse to B for his own riding only. B allows C, a member of his family, to
ride the horse. C rides with care but the horse is injured. B is liable to compensate A for the
injury to the horse.
A hires a horse in Calcutta from B expressly to march to Benares. A rides with care but marches
to Cuttack instead. The horse accidentally falls and is injured. A is liable to make compensation
to B.

Thus, we can see that bailee is supposed to use the goods only as per the purpose of the
bailment. If the bailee makes any unauthorized use of the goods, he will be held absolutely
liable for any damages.

3. Duty not to mix (Section 155-157)

The bailee should maintain the separate identity of the bailor's goods. He should not mix his
goods with bailor's good without bailor's consent. If he does so, and if the goods are separable,
he is responsible for separating them and if they are not separable, he will be liable to
compensate the bailor for his loss. For example, A bails 100 bales of cotton with a particular
mark to B. B, without A's consent, mixes them with his own. A is entitled to have his 100 bales
returned and B is bound to bear all expenses for separation. But if A bails a barrel of Cape flour
worth Rs 45 to B and B mixes it with country flour worth Rs 25, B is liable to A for the loss of his
flour.

4. Duty to return (Section 160)

Section 160 - It is the duty of the bailee to return or deliver according to the bailor's directions,
the goods bailed, without demand, as soon as the time for which they were bailed has expired
or the purpose for which they were bailed has been accomplished.

If the bailee keeps the goods after the expiry of the time for which they were bailed or after the
purpose for which they were bailed has been accomplished, it will be at bailee's risk and he will
be responsible for any loss or damage to the goods arising howsoever.
In Shaw & Co vs Symmons & Sons 1971, the plaintiff gave certain books to the defendant to be
bound. The defendant bound them but did not return them within reasonable time.
Subsequently, the books were burnt in an accidental file. The defendants were held liable for
the loss of books.

5. Duty to return increase (Section 163)

As per Section 163, in absence of any contract to the contrary, the bailee is bound to deliver to
the bailor, or according to his directions, any increase of profit which may have accrued from
the goods bailed.
Illustration - A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is
bound to deliver the calf as well as the cow to B.

6. Duty not to set up jus tertii (Section 166)

As per Section 166 if the bailor has no title and the bailee, in good faith returns the goods back
to the bailor or as per the directions of the bailor, he is not responsible to the owner in respect
of such delivery. Thus, once the bailee takes the goods from the bailor, he agrees that the
goods belong to the bailor and he must return them only to the bailor. He cannot deny
redelivery to the bailor on the ground that the bailor is not the owner.

If there is true owner of the goods, he can apply to the court to stop the delivery of the goods
from the bailee to the bailor. This right is given to the true owner in section 167.

Rights of finder of goods

If a person finds something, he does not automatically become the owner of that thing. He, in
fact, becomes a special kind of a baliee in the sense that he has to keep the thing until the
owner is found. He should take care of the thing just like a bailee. Section 168 and 169 describe
the rights of such finder of goods.

Section 168 - The finder of goods has no right to sue the owner for compensation for trouble
and expense voluntarily incurred by him to preserve the goods and to find out the owner; but
he may retain the goods against the owner until he receives such compensation; and where the
owner has offered a specific reward for the return of goods lost, the finder may sue for such
reward, and may retain the goods until he receives it.

Thus, if the finder has incurred expenses in finding the owner and/or in maintaining the goods
voluntarily, he can retain the possession of the goods until the owner pays the expense to him,
though the finder cannot sue the owner for the expense. His only remedy is to keep the goods.
Further, if the owner has promised a reward for the return of the goods, the finder is entitled to
the rewards, and he can even sue the owner for the reward. He can retain the goods as well
until the reward is received.

As per Section 169, the finder of the goods can even sell the goods if they are of common
objects of sale, in the following conditions -

1. the finder of goods was not able to find the owner after good faith efforts.

2. the owner is found but the owner refuses to pay lawful expenses and

1. either the goods are in danger of perishing or of losing greater part of the
value

2. or the lawful charges of the finder amount to two third of the value of the
goods.