It is a contract whereby one party promises to save the other party from the loss caused to him by the

conduct of the promisor himself, or by any other person [Section 124]. Losses caused by death, disability, destruction by fire, flood, cyclone, tsunami, etc., are also covered.

Essential Elements of Indemnity

(a) Some loss must be sustained by the promisee. If no loss is sustained, promissor is not liable (b) But, loss caused by the conduct of the promisee himself, is not covered A contract of indemnity may arise: (a)By express agreement e.g. indemnity bond to a bank, to issue duplicate draft or (b)By operation of any law e.g. Principal is bound by law to indemnify his agent; Transferee of shares undertakes to indemnify the transferor

Rights of Indemnity Holder [Section 125]

(a) (b) To recover all damages sustained by him, and To recover all costs of suits, paid to any third party.

However, the indemnifier (indemnifying party), does not enjoy any legal rights, except those of the surety or guarantor (under Section 141), viz. to get title to all the benefits of securities, obtained by creditor from principal debtor, whether he was aware of such securities or not

Commencement of Liabilities of the Indemnifier

Not to wait, until the indemnified party has actually incurred the loss or damages, to be compensated for So that he may meet his obligation under the indemnity, without waiting for actually suffering loss, by way of actual payment, out of his own funds, in a legal case

It is a contract to perform the promise, or to discharge liability of a third person, in case of his (third persons) default Person giving guarantee is Surety Person on whose behalf guarantee is given is Principal Debtor, and Person or party to whom the guarantee is given is Creditor Guarantee could be either written or verbal

Two sets of agreements: (a) Principal contract between principal debtor and creditor, and (b) Secondary contract between the creditor and the guarantor In a contract of guarantee there are three parties, viz. creditor, principal debtor, and guarantor

Contract of Indemnity Vs. Contract of Guarantee

Contract of Indemnity Contract of Guarantee
 In guarantee, A undertakes that If you lend 20 pound sterling to C, and he does not pay you, I will.  In the case of a contract of guarantee there are three parties (creditor, surety and principal debtor).  In a contract of guarantee liability of S Surety is only secondary; i.e. he is liable only after principal debtor refuses or fails to repay.

 In a contract of indemnity,; A tells B If you lend 20 pound sterling to C, I will see that your money comes back.  In a contract of indemnity, there are two parties; (indemnifier and indemnified),  In a contract of indemnity, liability of Promisor is primary and independent.

Contract of Indemnity Vs. Contract of Guarantee

Contract of Indemnity
 In case of an indemnity, indemnifier undertakes to indemnify the promisee, if any loss gets caused, and not otherwise.  In case of indemnity, the indemnifier cannot file suit against the third parties in his own name, unless he is an assignee.

Contract of Guarantee
 In case of a contract of guarantee, there must be an already existing debt/obligation the payment/ fulfillment, whereof is assured (guaranteed) by the surety.  In case of a contract of guarantee, the guarantor (surety), after paying the debt of the principal debtor, automatically enters into the shoes of the creditor.
Accordingly, all securities obtained by creditor, from principal debtor, get transferred in his name. Besides, he can proceed against the principal debtor in his own name for recovery of the balance amount, if any.

Types of Guarantees
(a)Specific Guarantee (i) It t rt i t r t ll . ifi t ti t, ll it i r t i ,

(ii) It i irr l , ft r i (guarant r ) at , i l gal uccessors ay ave to onour t e commitment to t e extent of t e value of inherited roperty.

Types of Guarantees
(b)Contin ing arantee

(i) It pertains to a series of transactions; not just one. (ii) It may be revoked, but regarding only future transactions; not to transactions prior to the revocation. (iii)After the death of the surety, a continuing guarantee gets revoked (unless there is a contract to the contrary), but only in regard to the transactions subsequent to the death, i.e. prior transactions will be satisfied by his legal heirs, to the extent of the inherited property of the deceased surety.

Rights & Duties of Creditors

(a)Rights (i) To demand from surety, the repayment of loan given to principal debtor, immediately after the latter fails or refuses to make repayment when due, even before exhausting all remedies available to him against the principal debtor (ii) Right of general lien on the securities of the surety, but only after default or refusal by the principal debtor. (iii) If surety be declared insolvent, creditor can proceed in the insolvency proceedings for his claims (on pro rata basis)

(b) Duties [Obligations] (i) Not to change term and conditions of the contract with the principal debtor, without specific consent of surety. Otherwise, surety automatically gets discharged of all his future (not earlier) obligations. (ii) Not to release or discharge the principal debtor; which absolves surety of all his future (not earlier) obligations. (iii) Not to compound with, or give time to, or agree not to sue, the principal debtor. (iv) Not to do any act inconsistent with the rights of surety, and which may impair the suretys eventual remedy against the principal debtor.

Rights & Duties of Surety

(a)Rights against Creditor To direct creditor to dismiss the employee, whose honesty he had guaranteed, failing which, the surety is discharged of his liabilities.

Rights & Duties of Surety

(Continued)

(b)Rights against Principal Debtor (i) All rights with creditor against principal debtor get invested in the surety, when he repays latters debt, or when he himself performs the duty guaranteed. (ii) If creditor loses, or parts with any of the securities, without consent of surety; surety is discharged to the extent of the value of such securities. (iii)Surety has right to recover from the principal debtor, the amount he has rightfully paid to the creditor.

Rights & Duties of Surety (c)

(Continued)

Rights against Co-sureties

(i) Right of contribution amongst themselves, i.e. to recover extra amount paid by him, from the remaining co-sureties. (ii) If one co-surety becomes insolvent, remaining cosureties will share the total liability equally amongst them; but, only upto the extent of the specified agreed guaranteed amounts.

Liabiliti Liabilities of Surety

(i) (ii) It is cot i ith that of the principal debtor

ut, it is only a condary or contingent liability, i.e. it begins only after the principal debtor defaults or refused to pay

(iii) Creditor is not required to first file a suit against the principal debtor, and then alone to file a suit against the guarantor(s). Creditor may not file suit against principal debtor but only against guarantor(s); or both as co-accused parties

(iv) Creditor is not required to first exhaust all remedies, before filing suit against guarantor (v) Creditor is not bound to give notice to the guarantor, regarding the default, on the part of the principal debtor

Position of the S rety in the case where the Principal Debtor is a Minor As liability of surety is co-extensive with that of principal debtor, it cannot be more than that of principal debtor. Thus, as liability of minor is nil; the liability of surety, too, is nil. But, surety will be liable for having guaranteed a minor debt, if it has been specifically provided in guarantee document.

Discharge of Surety
(i) By giving prior notice of revocation to the creditor, but pertaining only to the future transactions. But, if one co-surety revokes his guarantee, and the other co-sureties do not do so, they ill be held liable for the repayment of the dues. n death of surety, but pertaining only to future transactions, and only in the absence of any other contract to the contrary.

(ii)

(iii) When creditor changes the terms and conditions of the contract ithout prior specific consent of surety (pertaining to transactions thereafter (and not earlier ones). (i ) When creditor releases or discharges the principal debtor.

Discharge of Surety

(Continued)

(v) When creditor compounds, or gives time to, or agrees not to sue the principal debtor, without suretys consent. But, not so, if creditor enters into an agreement with any third party to give some extension of time to principal debtor. (vi) When the creditors action or omission impairs suretys eventual remedy against the principal debtor. (vii)When creditor loses or parts with any of the securities, without consent of surety, but only to the extent of the value of such securities.