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UNITEDWORLD SCHOOL OF LAW, KARNAVATI UNIVERSITY,

GANDHINAGAR, GUJARAT

Session: 2018-23
Law of Contracts
Definition of Guarantee: As Distinguished From Indemnity

SUBMITTED BY:
Adeeba Ghani
Enroll no- 20180401006
Section- ‘A’
BBA.LLB(Hons.), Semester III

CERTIFICATE OF DECLARATION
I, Adeeba Ghani hereby declaring, do hereby declare that this dissertation paper
is an original work of mine and is result of my own intellectual efforts. I have
quoted titles of all original sources i.e. Original documents and name of the
authors whose work has helped me in writing this research paper have been
placed at appropriate places. I have not infringed copy rights of any other
author.

Adeeba Ghani

Date- 07th Oct


CONTENTS
TABLE OF CASES
INTRODUCTION
Contract of indemnity and guarantee are two sides of the same coins. In the sense that
Indemnity and guarantee both are the mode of compensation. Contract of Indemnity and
contract of Guarantee are the contingent contracts under the contract law. Guarantees and indemnities
are a common way in which creditors protect themselves from the risk of debt default . Both possess
the different nature and characteristics but they both have some similar principles like unjust
enrichment and matters of good faith. . Lenders will often seek a guarantee and indemnity if
they have doubts about a borrower's ability to fulfil its obligations under a loan agreement.
Guarantors and indemnifiers take on a serious financial risk in entering into such transactions,
and it is important that they are aware of all the implications.

Thus, contracts of indemnity and contracts of guarantee can be termed as an instance of being
objects with same purpose but different features. In their technical differences we can observe
two separate provisions within the same act. However on closer observation they are meant
for the same purpose of ensuring parties are not duped in commercial transactions. Though
the preference of either of the options is very individualistic and depends on the needs and
conditions of the parties. Overall these are provisions of law that help business activities take
place and bring parties to the same level of bargaining power.

Here, in this project we discuss the contract of indemnity and contract of guarantee in detail
and how the indemnity is different from guarantee.
CONTRACT OF GUARANTEE-

Section 126- “ contract of guarantee”, “ surety”, “principal debtor” and “creditor”.- 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 given 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 s
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.

Illustration: If A gives an undertaking stating that if ` 200 are lent to C by B and C does not
pay, A will pay back the money, it will be a contract of guarantee. Here, A is the surety, B is
the principal debtor and C is the creditor.

Prima facie, the surety is not undertaking to perform should the principal debtor fail; the
surety is undertaking to see that the principal debtor does perform his part of the bargain. A
contract of guarantee pre-supposes a principal debt or an obligation that the principal debtor
has to discharge in favour of the creditor.

Anything done, or any promise made, for the benefit of the principal debtor, is deemed
sufficient consideration to the surety for giving the guarantee. It is sufficient inducement that
the person for whom the surety has given guarantee has received a benefit or the creditor has
suffered an inconvenience. While Section 2 (d) of the ICA, 1872 says that past consideration
is good consideration, illustration (c) of Section 127 of the ICA, 1872 seems to negate this
point. Those who favour the validity of past consideration state that law is not supposed to be
guided by illustrations. But there have been conflicting judgments about whether past
consideration is good consideration.
► Illustration: B requests A to sell and deliver to him goods on credit. A agrees to do so,
provided C will guarantee the payment of the price of the goods. C promises to guarantee the
payment in consideration of A’s promise to deliver the goods. This deemed sufficient
consideration for C’s promise.

► Illustration: A sells and delivers goods to B. C afterwards requests A to forbear to sue B


for the debt for a year, and promises that, if he does so, C will pay for them in default of
payment by B. A agrees to forbear as requested. This is a sufficient consideration for C’s
promise.

. Essentials features of Guarantee.

1. Essentials of a valid contract: Since Contract of Guarantee if a species of a contract,


the general principles governing contracts are applicable here. There must be free
consent, a legal objective to the contract, etc. Though all the parties must be capable
of entering into a contract, the principal debtor may be a party incompetent to
contract, i.e., a minor. This scenario is discussed later in this chapter.

2. A principal debt must pre-exist: A contact of guarantee seeks to secure payment of a


debt, thus it is necessary there is a recoverable debt. There cannot be a contract to
guarantee a time barred debt.

3. Consideration received by the principal debtor is sufficient for the surety. Anything
done, or any promise made for the benefit of the principal debtor can be taken as
sufficient consideration to the surety for giving guarantee.

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].
SURETY’S LIABILITY

Section 128 in the Indian Contract Act, 1872 says that ‘the liability of the surety is co-
extensive with that of the principal debtor, unless it is otherwise provided by the contract.’

1. Co-Extensive

The first principle governing the liability of the security is that it co-extensive with the
principal debtor's liability. The term "co-extensive with that of the principal debtor" reflects
the maximum extent of the liability of the surety. He is liable for the whole of the amount for
which the principal debtor is liable and he is liable for no more.1

1
Maharaja of Benaras v Har Narain Singh, ILR (1906-07) 28 All 25.
 Condition precedent

If the liability of the Surety is preceded by a condition, he shall not be liable unless that
condition is first fulfilled. In National Provincial Bank of England v Brackenbury 2 , the
defendant signed a guarantee which on the face of it was intended to be a joint and several
guarantee of three other persons with him. One of them did not sign. There being no
agreement between the bank and the co-guarantors to dispense with his signature, the
defendant was held not liable.

 Liability of Principal Debtor reduced by enactment

As liability of Surety is co-extensive, if the liability of principal debtor is reduced by


enactment (law), surety is also only liable for the reduced amount.

In the case of Naraya Singh v Chhattar Singh3, the liability of principal debtor was reduced
under The Rajasthan Relief of Agricultural Indebtness Act, 1957. The default was omitted by
principal debtor and he was imp leaded by the banker. Banker brought an action against
surety and said that relief is only granted to principal debtor and not surety. However,
Rajasthan HC confirmed Section 128 and held that liability is co-extensive in this case.
Reduction of liability of principal debtor is also applicable on surety.

 Proceeding against Surety without exhausting remedies against Principal


Debtor.

Where the liability is otherwise unconditional, the court cannot of its own introduce a
condition into it.

The Allahabad High Court in UP Financial Corpn v Garlon Polyyfeb Industries4 has also
taken a similar view although without reference to the SC ruling. The loans of a company
were guaranteed. The guarantee stipulated that the liability of the surety would arise on
demand. There was no condition that the financial corporation should first proceed to recover
the amount from the hypothecated property. The .corporation could straightaway proceed
against the surety without first proceeding against the company. The order directing the
corporation to first proceed against the company was held to be not proper.
2
(1906) 22 TLR 797.
3
1973 Raj HC
4
AIR 2001 All 286
 Action against Principal Debtor Alone.

The liability of the Surety is several as well as joint. Dismissal of the suit against the principal
debtor does not of itself absolve the surety of his liability under the contract of guarantee.5

In the case of Union of India v Noor Dairy Farms6, it was held that ‘The creditor can proceed
against the principal debtor alone. His suit cannot be rejected on the ground that he has not
joined the guarantor as a defendant to the suit.

 Action against Surety alone.

Action against surety alone does not give the right to surety to say that he is exempted from
liability. In the case of Kailash Chand Jain v UP Financial Corpn7, it was observed that a
contract of guarantee was made enforceable by its terms against the guarantors severally and
jointly with that of the principal debtor company. The creditor had the option to sue the
company along with guarantor’s co-defendants and guarantors alone.

A suit against the surety without even impleading the principal debtor has been held to be
maintainable. In this case, the creditor in his affidavit had shown sufficient reasons for not
proceeding against the principal debtor.8

 Death of Principal Debtor

In the case of Syndicate Bank v AP Manjunath9, a suit was filed against the principal debtor
and surety. The suit against the principal debtor was found to be void ab initio because of his
death even before the institution of the suit. The surety was held to be not discharged. The
suit could proceed against him. It was in the interest of the surety to impaled under Order 1,
rule 10, CPC, and the legal representatives of the deceased principal debtor, because if the

5
Karnataka State Industrial Investment and Development Corpn Ltd v State Bank of India (2004) 4 Kant LJ 266
(DB).
6
(1997) 3 Bom CR 126
7
2002 AIR All 302.
8
N Narasimahaiah v Karnataka State Finanial Corpn 2004 AIR Kant 46.
9
(1992) 2 Kant LJ 362.
suit was decreed against him, the surety could enforce against the legal representatives his
rights under Section 145.

2. Surety’s Right To Limit His Liability Or Make It Conditional

It is open to the surety to place a limit upon his liability. He may expressly declare his
guarantee to be limited to a fixed amount for example that “my liability under this guarantee
shall not at any time exceed the sum of 250” In such a case whatever may be owing from the
principal debtor the liability of the surety cannot go beyond the sum so specified. Thus in a
case before the Andhra Pradesh High Court10 a clause in a contract of surety ship making the
surety liable up to Rs 15000 further declared that he would be liable for any amount that
might be finally decreed. It was held that the clause should be construed as meaning not
exceeding Rs 15000.

A surety can attach any other condition to his liability. Thus where the letter of guarantee
made it a condition precedent to the guarantor’s liability that on default on the part of the
borrower a demand for payment should be made upon the guarantor, it was held that an
independent demand was necessary and the mere service on the guarantor of the carbon
copies of the demand meant for the borrower was not sufficient.11

Liability under Continuing Guarantee

Section 129 of Indian Contracts Act, 1872 defines Continuing Guarantee as a guarantee
which extends to a series of transactions. A guarantee of this kind is intended to cover 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. A guarantee for a single specific
transaction comes to an end as soon as the liability under that transaction ends.

In the old case of Kay v Groves12, the guarantee was in the terms: “I hereby agree to be
answerable to K for the amount of five sacks of flour to be delivered to T, payable in one
month.” Five sacks were actually supplied and T paid for them. Further supplies were made

10
Yarlagadda Bapanna v Devata China Yerkayya AIR 1966 AP 151.
11
Orang Kaya Menteri Paduka Wan Ahmad Isa Shakur v Kwong Yik Bank Berhad Bhd (1989) 3 MLJ 155 (SC Kuala
Lumpur).
12
(1829) 6 Bing 276
during the same month, for which T failed to pay. The Surety was then sued. The court held
that it was not a continuing guarantee and, therefore, there was no liability for parcels
delivered for various subsequent periods.

The essence of a continuing guarantee is that it applies not to a specific number of


transactions, but to any number of them and makes the surety liable for the unpaid balance at
the end of the guarantee.13

DISCHARGE OF SURETY FROM LIABILITY

A surety is said to be discharged from liability when his liability comes to an end, The Act
recognises the following modes of discharge:

By revocation: Ordinarily a guarantee is not revocable when once it is acted upon. But
section 130 provides for revocation of continuing guarantees. It states that a continuing
guarantee may at any time be revoked by the surety, as to the future transactions, by notice to
the creditor. Revocation becomes effective for the future transactions already entered into. 14

In Offord v Davies15, the defendants guaranteed the repayment of bills to be discontinued by


the plaintiff for Davies & co. For twelve months not exceeding £ 600. The defendants evoked
the guarantee before any bill was discounted. But the plaintiffs discounted the bills which
remained unpaid. The question was whether the surety had a right to revoke. The court Said:
“we are of the opinion that they had and consequently they were not liable. In the case of a
simple guarantee for a proposed loan, the right of revocation before the proposal has been
acted on did not appear to be disputed”.

By death of Surety: The death of the surety operates as a revocation of a continuing


guarantee so far as regards future transactions. Section 131 clearly points out revocation of
continuing guarantee by surety’s death. The surety’s heirs can be sued for liability already
incurred. The liability of the deceased surety can be imposed against his legal heirs but only
to the extent of the property inherited by them.

13
Union Bank of India v TK Stephen 1990 AIR Ker 180
14
Indian overseas Bank v Goh Teng Hoon, [1989] 1 CLJ 554 ( HC Singapore)
15
[1862] 6 LT 579: 142 ER 1336.
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 (section 133). A guarantee is not a contract in respect of a primary
transcaction. It s an independent transaction containing independent and reciprocal
obligations. It is created on a principal to principal basis. Therefore, some relief is provided
both to the creditor and the guarantor.16.

M S Anirudhan V Thomco’s Bank Ltd. 17(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.

Illustration

Contracts with B to build a house for B for a fixed price within a stipulated time, B
supplying the necessary timber. C guarantees A’s performance of the contract. B fails to
supply the timber. C is thus discharged from his surety.

Section 134 provides two kinds of discharge from liability

1. Release of Principal debtor

In this case, if the creditor makes any contract with the principal debtor by whom the latter is
released, the surety is discharged. For example, the creditor accepts a compromise and
releases the principal debtor, the surety is likewise released. Any release of the principal
debtor is a release of the surety also.18

16
Industrial Finane Corpn of India Ltd v Cannanore Spg & wug Mills Ltd, (2202) 5 SCC 54: AIR 2002 SC 1841:
(2002) 110 Comp Cas 685
17
1963 AIR SC 746
18
Kahn Singh v tek Chand, 1968 AIR J&K 93
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.

2. Act or Omission

The second ground of discharge is when the creditor does “any act or omission the legal
consequence of which is the discharge of the principal debtor”, the surety would also be
discharged from his liability.

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 [S. 135]:

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.

The section provides for three modes of discharge from liability:

1. Composition;

2. Promise to give time, and

3. Promise not to sue the principal debtor.

(Mere forbearance to sue does not discharge the surety)

By impairing surety’s remedy [S 139]:

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.
RIGHTS OF THE SURETY

 AGAINST THE PRINCIPAL DEBTOR:

Right of subrogation [s. 140]: When the surety has paid all that he is liable for he is
invested with all the rights which the creditor had against the principal debtor. The surety
steps into the shoes of the creditor. The creditor had the right to sue the principal debtor

Right to Indemnity [S. 145]: 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, but no sums which
he pad wrongfully.

 AGAINST THE CREDITOR:

Right to securities [S. 141]:

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(19

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

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

19
[1967] AIR SC 1105
against the creditor. He can clam such a right not only against the creditor, but also against
third parties who have derived their title from the creditor.

 AGAINST CO SURETIES:

Where a debt has been guaranteed by more than one person, they are called co-sureties.
Some of their rights against each other are:

1. Effect of releasing a Surety

2. Right to Contribution

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.

CONTARCT OF INDEMNITY-

Indemnity under the law means protection of the losses or financial burden in the form of
money. It is when one party promises to compensate for the losses that will occur due to the
act of the promisor or the other party.

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.

The concept of contract of Indemnity originated from English law, it is an agreement where
the promisor promises to save the promise from any loss caused by any event or accident
which may not depend upon any person’s conduct or from any liability by the promise at the
request of the promisor.

In common law, the contract of Indemnity was emerged from the case of Adamson v. Jarvis20

20
[1872] 4 Bing 66
The plaintiff, an auctioneer, action on the instruction of the defendant sold certain cattle
which subsequently turned out to belong to someone else other than the defendant. Then the
true owner sued the auctioneer for conversion, the auctioneer in turn sued defendant for
indemnity.

The court held that the plaintiff having acted on the request of the defendant was entitled to
assume that, if it would turn out to be wrongful, he would be indemnified by the defendant.

There are two parties to the contract one the person who gives indemnity which is security is
called the ‘Indemnifier’ and the other party for whose protection is given is called the
‘Indemnity holder’ or ‘indemnified’21

ILLUSTRATION-

A may agree to indemnify B for loss or damage that may occur is if a tree on B’s
neighbouring property blows over. If the tree tan blows over and damages B’S fence, A will
be liable for the cost of fixing the fence.

A B

1. Here A is the indemnity Holder

2. And B is the indemnifier

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.

21
Avtar singh, contract and specific relief ,12th edition, EBC, 2018
Provision of Indemnity under Indian Contract Act

The scope and application of indemnity is much wider than the scope and application of
contract of indemnity given in the Indian contract act 1872. “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.

Section 124 of Indian contract act 182-

A contract by which one party promises to save other party 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.22

Illustration-

Contracts to indemnify B against the consequences of any proceedings which C may take
against B in respect of certain sum of 200 rupees. This is the contract of Indemnity.

The scope of ‘Indemnity’ is by the very process of definition restricted to cases where there
is a promise to indemnify against loss caused by: A) by the promisor himself, or b) by any
other person. The definition excludes from its purview cases of loss arising from accidents
like fire or perils of the sea. In the essence the lost must be covered by some human agency.

The Gujarat High Court relied upon the view taken in Gajanan Moreshwar Parelkar vs.
Moreshwar Madan Mantri 23and 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.

22
Avtar singh, contract and specific relief ,12th edition, EBC, 2018
23
[1942] AIR BOM 302
Osman Jamal and Sons Ltd. vs Gopal Purshottam24

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.

NATURE OF CONTRACT OF INDEMNITY-

1. Express indemnity

This is a written agreement to indemnify, where the terms and conditions by which the
concerned parties must abide are usually indicated. These include insurance indemnity
contracts, construction contracts, agency contracts, etc.

2. Implied indemnity

This is an obligation to indemnify that arises, not from a written agreement, but more from
circumstances or the conduct of parties involved. One practical example is an agent-principal
business relationship. When the principal refuses to accept the goods that the agent supplies

24
[1929] ILR 56 Cal 262
him, the agent can sell them to others; however, if the agent sustains a loss while selling, the
principal is obligated to pay for it.

RIGHTS OF INDEMNITY HOLDER-

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 suit25.

25
Avtar singh, contract and specific relief ,12th edition, EBR, 2018
DIFFERNCE BETWEEN INDEMNITY AND GARAUNTEE-

Indemnity Guarantee

Section 124 of Indian Contract Act: a Section 126 of Indian Contract Act: a
contract by which one party promises contract to perform the promise, or
to save others from loss caused to him discharge the liability of a third
by the conduct of the promisor person in case of his default.
himself, or by the conduct of any
other person

Two parties (Indemnifier and Three parties (Principal Debtor,


Indemnified) Creditor, Surety)

To provide compensation for loss To give assurance to the creditor in


lieu for his money

Indemnifier is the sole person liable. Liability shared between Principal


The liability of indemnifier is primary Debtor (primary liability) and Surety
(secondary liability). I.e. The liability
of the surety is secondary and arises
only if the principal debtors fail to
perform his obligations.

Liability arises only on occurrence of Fixed legal liability


a loss

The indemnifier can’t sue the third Surety after discharging the debt can
party for loss in his own name. sue the principal debtor
CONCLUSION

Indemnity and Guarantee are a type of contingent contracts, which are governed by Contract
Law. Simply put, indemnity implies protection against loss, in terms of money to be paid for
loss. . On the other hand, the guarantee is when a person assures the other party that he/she
will perform the promise or fulfill the obligation of the third party, in case he/she
default. After having a deep discussion on the two, now we can say that these two types of
contract are different in many respects. In indemnity, the promisor cannot sue the third party,
but in the case of guarantee, the promisor can do so because after discharging the creditor’s
debts he gets the position of the creditor.

Thus, contracts of indemnity and contracts of guarantee can be termed as an instance of being
objects with same purpose but different features. In their technical differences we can observe
two separate provisions within the same act. However on closer observation they are meant
for the same purpose of ensuring parties are not duped in commercial transactions. Though
the preference of either of the options is very individualistic and depends on the needs and
conditions of the parties. Overall these are provisions of law that help business activities take
place and bring parties to the same level of bargaining power.
BIBLIOGRAPHY

Statutes-

1. The Indian Contract Act

Books-

1. Contract and Specific Relief Act, by Avtar Singh


2. The Indian Contract Act, by Mulla

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