1)INTRODUCTION

When we are discussing about the Contracts of Indemnity and Guarantee, the first thing we have
to do is to define the both types of Contracts. Contract of Indemnity means enact to compensate
or protect somebody from the loss or make good to the loss. When one person promises to
another person that in case another person suffers from some loss the first person will
compensate the loss. An indemnity is a sum paid by party A to party B by way of compensation
for a particular loss suffered by B. The indemnitor (A) may or may not be responsible for the
loss suffered by the indemnitee (B). Forms of indemnity include cash payments, repairs,
replacement, and reinstatement. In the same context Contract of Guarantee means an act 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 “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”.

2) Indemnity as per Indian Contract Act, 1872.

Indemnity literally means,

(1) Payment for damage, a guarantee against losses.

(2) A bond protecting the insured against losses caused by others failing to fulfill their
obligations.
(3) The granting of exemption from prosecution.
(4) an option to buy or sell a specific quantity of stock at a stated price within a given period
of time.

It is entered into with the object of protecting the promises against anticipated loss. The
contingency upon which the whole contract of indemnity depends is the happening of loss.

ILLUSTRATIONS: A misplaced his share certificate. He applied to the company for the issue
of a duplicate certificate. The Company asked A to furnish an ‘indemnity bond’ in its favour to
protect it against any claim that may be made by any person on the original certificate. A,
accordingly executed the ‘indemnity bond’. It is a contract of indemnity between A and the
Company. A is the ‘indemnifier’ and the Company is the ‘indemnified’ or ‘indemnity-holder.
A contract of indemnity is one by which a person promises to recover the other from loss
generated to him by the conduct of the promisor himself or of any third person. For example, a
shareholder executes an indemnity bond facilitating the company so that agreeing to indemnify
the company for any loss generated as an effect of his own act. The person who gives the
indemnity is called the 'indemnifier' and the person for whose safeguard it is given is called the
'indemnity-holder' or 'indemnified'. A contract of indemnity is confined to cover the loss caused
by the promisor himself or by a third person. The loss must be generated by some human agency.
Damage rising from accidents like fire or uncertainty of the sea are not secured by a contract of
indemnity.

As per Section 124 of the Indian Contract Act, the contract of indemnity is defined as, “a
contract by which one party promises to save other from loss caused to him by the conduct of the
promisor himself, or by the conduct of any other person.”1

In GAJAN MORESHWAR vs. MORESHWAR MADAN2, it was decided that law relating to
indemnity is by no means exhaustive and thus, the Courts in India shall follow the English Law.
In the same case, English equity law was discussed; whether requiring an indemnity holder to
actually pay and clear the damages before claiming them from the indemnifier places an undue
burden on the indemnity holder. Thus, if the liability of an indemnity holder became absolute, he
was held entitled to get the indemnifier to pay off the claim or to pay the court sufficient amount
of money for making a fund to pay the claim as and when it was made.

Well, this section is not so challenging to perceive when we relate it to sensible house. Suppose
you are employed by a newspaper to write articles for them as a freelancer. Typically, your
contract would have an indemnity clause so that if you write something against a very significant
person and that person files a suit against the newspaper for defamatory material, the newspaper
can show the indemnity clause that you endorsed, assuring them from any form of loss generated
due to your behaviour.

Then, the duty of disputing the defamation suit becomes your burden. That’s not all about the
contract of indemnity as it is assimilated in most contracts, particularly in real estate purchase
and bank loans. A person who promises to bear the loss is known as indemnifier and the person
1
Section 124 of the Indian Contract Act
2
AIR 1942 BOM 302
whose loss is covered is known as indemnified. These types of contracts are mainly constituted
between insurance companies and their customers.

INSURANCE CONTRACT IF CONTRACT OF INDEMNITY

It has been noted above that Section 124 recognizes only such contract as a contract of indemnity
where there is a promise to save another person from loss which may be caused by the conduct
of the promisor himself or by conduct of any other person. It does not cover up a promise to
compensate for loss not arising due to human agency. Therefore, a contract of insurance is not
covered by the definition of Section 124. Thus, if under a contract of insurance, an insurer
promises to pay reimbursement in the event of damage by fire, such a contract does not come
within the reach of Section 124. Such contracts are valid contracts, as being contingent contracts
as defined in Section 31.

In United India Insurance Company v. M/s. Aman Singh Munshilal,3 the cover note stipulated
delivery to consigner. Moreover, on its way to the destination the goods were to be stored in a
godown and thereafter to be carried to the destination. While the goods were in godown, the
goods were destroyed by the fire. It was held that the goods were destroyed during transit, and
the insurer was liable as per the insurance contract.

Where insured bad of fertilizers stored in plaintiff’s godown, were found missing due to act of
embezzlement by the employees of plaintiff Company. Defendant Company had insured to
indemnify plaintiff against any loss sustained by such act. The alleged breach of condition in the
contract notice to be given to the defendant regarding discovery of such act could not be said to
be fundamental breach. Held, that it would not permit the defendant to negate the legitimate
claim of the plaintiff, hence decreeing suit of declaration and recovery of amount with interest by
Trial Court was proper.4

3)RIGHTS OF INDEMNITY HOLDERS

In a suit against the indemnity holder, he may have been compelled to pay damages, and incurred
costs, etc. in his own turn, he can bring an action against the promisor (indemnifier) to recover

3
A.I.R. 1994 P. & H. 206.
4
Oriental Insurance Co. Ltd., Ahmedabad v. Gujarat State Warehousing Corpn. Ahmedabad, A.I.R. 2003 Guj. 159.
damages and costs, etc. paid by him, if the indemnifier has promised an indemnity in such a case.
The provision in this regard is contained in Section 125, which reads as under:

124. Rights of Indemnity holder

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 enforced to pay in any suit take in account of any matter to
which the promise to indemnify applies;

(2) all costs which he may be enforced to pay in any such suit, if in bearing of defending it, he
did not infringe the orders of the promisor, and acted as it would have been cautious for him to
act in the absence of any contract of indemnity, or if the promisor authorised him to bring or
defend the suit;

(3) all sums which he may have paid pinned the terms of any compromise of any such suit, if the
compromise was not contract to the orders of the promisor, and was one which it would have
been cautious for the promise to make in the nonappearance of any contract of indemnity, or if
the promisor certified him to compromise the suit.

The indemnity-holder, acting within the scope of his authority, is entitled to reclaim the
following amounts-

(1) All damages which he may be enforced to pay in any suit in that matter of which the
promise of indemnity applies;

(2) All costs which he may be enforced to pay in such suits if, in presenting or defending it,
he did not in combat with the order of the promisor, and acted as it would have been acceptable
for him to act in the absence of any contract of indemnity, or, if the promisor empower him to
bring or defend the suit;

(3) All sums which he may have paid under the terms of any concede of any such suit, if the
compromise was not contrary to the orders of the promisor, and was one which it would have
been prudent for the obligate to make in the absence of any contract of indemnity, or if the
promisor authorised him to compromise the suit.
A person who encashes an indemnity bond which is in declaration of a bank guarantee can retain
only that part of the amount of the bond which serves the damage or loss suffered by the bond-
holder as a conclusion of the reducing party’s breach. Anything more would be disproportionate
fortune for one party and unfavourable of the other.

Where a motor vehicle (bus) was under indemnity insurance for Rs.3,00,000 and it was stolen
with no chances of restoration, it was held that the proper amount of indemnity was as fixed by
the surveyor at Rs. 2,87,592 and that it was payable with 16% interest for the impediment period.
The resolution of claim at a lesser amount by insurance authorities was inconsistent and
unreasonable under Article 14 of the Constitution.

 In Adamson vs. Jarvis5 Adamson was an auctioneer who was given cattle by Jarvis to be sold
at an auction. Adamson followed the direction and sold the cattle. But Jarvis was not the owner
of the cattle. The real owner of the cattle sued Adams for conversion and was advantageous.

Adamson had to pay damages and he then sued Jarvis to be indemnified for the loss that he
suffered by way of damages to be paid to the real owner.

 It was held that Adamson carried out Jarvis’s instructions and was entitled to presume that if
everything went wrong as per instructions, he would be indemnified. Jarvis was ordered to pay
compensation to Adams.

4) RIGHTS AND DUTIES OF INDEMNIFIER

4.1) Rights of the indemnifier:

The rights of the indemnity-holder are the duties of indemnifier, and duties of the indemnity-
holder are the rights of the indemnifier. There are not prescribed any specific rights of the
indemnifier either in Nepalese law or in Indian law. However, he is not liable for indemnity.

(i) If indemnity-holder acts carelessly.

(ii) If indemnity-holder is acting with the intention of causing any loss or damage.

(iii) If he is acting against the directions of the other party (promisor).

5
[1827] 4 BING 66
4.2) Duties of indemnifier:
The duties of an indemnifier arise in the following chances:

(i) There must be a loss in conformity with the contract to make the indemnifier liable.

(ii) There must be an occurrence of the foreseen event. Without any circumstances of the
prescribed event, there is no indemnity by the indemnifier.

(iii) Where the right of indemnity is used by the indemnity-holder prudently and the instruction
of the indemnifier is not infringed or when there is no breach of contract.

(iv) If the costs claimed by the indemnifier are not caused by neglectfulness.

Definition of Guarantee
Contract of guarantee is defined in section 126 of Indian contract act.

“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 called the surety, the person in respect of whose
default the guarantee is given is called the principal debtor and the person to whom guarantee is
given is called creditor a guarantee may be either oral or written.

For example: A takes a loan from a bank A promises to the bank to repay the loan B also makes
the promise to the bank saying that if A does not repay the loan then I will pay .in this case A is a
principal debtor who undertakes to repay the loan B Is the surety, who’s liability is secondary
because he promises to perform the same duty in case there is default on the on part of A. the
bank in who’s favors the promise has been made is the creditor.

The object of a contract of guarantee is to provide additional security to the creditor in the form
of the promise by the surety to fulfill a certain obligation in case the principal debtor fail to do
that in every contract of guarantee there are three parties the creditor the principal debtor and the
surety there are three contracts in contract of guarantee .firstly the principal debtor himself
makes a promise in favors of creditor to perform a promise, secondly the surety undertakes to be
liable towards to the creditor if the principal debtor makes a default. 6 Thirdly an implied promise

6
Ibid1
by the principal debtor in favor of the surety that in case the surety has to discharge the liability
of the default of the principal debtor, the principal debtor shall indemnify the surety 7. The
contract of guarantee is no doubt tripartite in nature 8 but it is not important or essential that the
principal debtor must precisely be a party to that document. In a contract of guarantee, the
principal debtor may be a party to the contract by assumption. Thus, there is a contingency that a
person may become a surety externally the knowledge and consent of the principal debtor. The
responsibility of contract of guarantee is to enable a person to get a loan, or goods on credit, on
an employment. Some person comes forward and tells the lender, or the supplier or the employer
that he (the person in need) may be credible and in case of any default. for e.g. in old case of
Birkmy vs Darnell9 the court said“if two comes to a shop and one buys, and other to give him
credit, promises the seller, ‘if he does not pay you, I will pay’.

This type of collateral undertaking to be liable for the default of another is called a “contract of
guarantee”. In English law a guarantee is defined as “a promise to answer for the debt, default or
miscarriage of another”10

Essentials of Guarantee
1.The contract may be either oral or in writing

According to sec 126, a guarantee may be either oral or written. On this point, the situation in
India is different from that in England. According to English law, for a valid contract of
guarantee, it is important that it should be in writing and signed by party to be charged therewith.
In English law under the provisions of statutes of fraud a guarantee is not enforceable unless it is
“in writing and signed by the party to be charged’’11

2.There should be a principal debt

A contract of guarantee pre supposes a principal debt or an accountability to be discharged by the

principal debtor. The surety commences to be liable only if the principal debtor fails to discharge
his obligation. If there is no such principal debt, but there is a promise by one party in favour of
another for compensating in a certain situation, and the conduct of this promise is not dependent
7
Section 145also see NS bank Vs Union of India, AIR 1991 AP 153,at 158
8
Mahabir shum sher vs Lloyds bank, air 1969 cal 371
9
(1709) 91 ER 27:1 Salk 27.
10
S.4, statute of frauds 1677, 29 II. C 3
11
Section 126 of Indian Contract Act
upon the default of somebody else, it is a contract of indemnity. The purpose of a guarantee
being to secure a payment of debt, the continuation of a recoverable debt is necessary. The
Supreme Court in the State of Maharashtra v Dr. M.N. Kaul 12 confirmed the view that under the
law a guarantor cannot be made liable for more than he has undertaken; a surety is a favoured
debtor and he can be bound "to the letter of his engagement"

3.Consideration

Like every other contract, a contract of guarantee should also be supported by some
consideration. A guarantee without consideration is void. For surety’s promise, it is not
necessary that there should be a direct consideration between the creditor and surety; it is enough
that the creditor had done something for the benefit of the principal debtor. Benefit to the
principal debtor constitutes a sufficient consideration to the surety for giving the guarantee. This
is clear from sec 127 which read as under

“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.”

Consideration is the legal detriment incurred by the promisee at the promisor’s request and it is
immaterial whether there is or is not any apparent benefit to the promisor.13

Illustrations

(a)Y requests X to sell and deliver to him goods on credit. X agrees to do so, provided Z
promises will guarantee the payment of the prices of the goods. Z promises to guarantee the
payment in consideration of X’s promise to deliver the goods. this is a sufficient consideration
for Z’s promise.

The Supreme Court in Chattanatha Karayalar v Central Bank of India Ltd 14 laid down that if
a transaction is contained in more than one document between the same parties, they must be
read and interpreted together. Although a guarantor may join the principal debtor in executing
the promissory note he will not be a co - obligant where the underlying transaction and the
conduct of the parties show that he is a surety under Section 126 of the Contract Act.
12
AIR 1967 SC 1634
13
Sonarlinga v Pachai Naicken (1913) 38 Mad 680; 22 IC 1
14
AIR 1965 SC 1856
4.Consent of the surety should not have been obtained by misrepresentation or
concealment

The creditor should not obtain guarantee either by any misrepresentation or dissimulation of any
material facts regarding the transaction. If the guarantee has been obtained that way, the
guarantee is invalid. The position is explained by section 142 and 143 which are as under

“142. Guarantee obtained by misrepresentation invalid. -Any guarantee which has been obtained
by means of misrepresentation made by the creditor, or with his knowledge and assent,
concerning a material part of the transaction, is invalid.”15

“143. Guarantee obtained by concealment invalid. - Any guarantee which the creditor has
obtained by means by means of keeping silence as to material circumstances is invalid”16

DIFFERENCE BETWEEN CONTRACT OF INDEMNITY &

GUARANTEE.
There are distinguishing differences between Indemnity and Guarantee in the Indian Contract
Act.

 Section 124 of the Indian Contract Act, 1872 defines the "Contract of Indemnity". It is
contract by which one party promises to save the other from loss caused to him by the
contract of the promisor himself, or by the conduct of any other person. 'A' contract to
indemnify B against the of any proceedings which C may take against B in respect of a
certain sum of 50000 rupees. This is a contract of indemnity.
 In Contracts of Indemnity, indemnifier cannot restore any loss incurred due to the
compensation paid as his liability to indemnity holder but in case of guarantee the surety
has the right to claim compensation from the principal debtor after paying the creditor.17
 A contract of guarantee is defined in Section 126 of the Act. It 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

15
Section 142 of The Indian Contract Act, 1872
16
Section 143 of The Indian Contract Act,1872
17
Radha Kanta Pal V. United bank of India Ltd AIR 1955 Cal 217.
 guarantee is given is called the principal debtor and the person to whom the guarantee is
given is called the creditor.
 Contracts of indemnity consist of original liability not collateral liability which would
make it a contract of guarantee.18
 In contract of indemnity there are only two parties viz the indemnifier or promisor and
the indemnity holder or promisee. In contract of guarantee there are three parties viz the
creditor, principal debtor and surety.
 In indemnity, there is primary and independent liability. In guarantee the surety has
collateral liability.
 A contract of indemnity does not allow any action any action on the person who has
caused loss as indemnity holder is only allowed to sue the promisee. This scope is wider
in the contracts of guarantee.19
 There is no existing debt broadly in the case of contract of indemnity where there is
existing debt in the case of guarantee.
 There are two contracts in a contract of indemnity where there are three contracts in the
case of guarantee.
 In Indemnity the promisor is replaced by payment. In guarantee the surety is replaced by
payment made by principal debtor.
 Indemnifier may have some interest in the transaction where the surety will not have any
connection with the transaction.

CONCLUSION
Indemnity is a special contract under the Indian Contract Act, 1872. The legislation is a very well
drafted one, but has given a very narrow definition of indemnity, due to which the Indian Courts
have time and again held that certain documents do not come under the purview of the definition
of indemnity contained in the Act. Such agreement has not created a problem, since the courts
covered the liability under other provisions of the same Act, mainly under Section 31of the Act
dealing with contingent contracts. Therefore, it would satisfy to say that though the definition of
indemnity under the Indian Contract Act is narrow, the principles with respect to indemnities

18
Mahabir Prasad V. Siri Narayan AIR 1918 Pat 345.
19
K.V.Periyamianna Marakkayar and Sons V. Banians and Co. (1929) 49 Mad 156.
which have been laid down by common law are definitely addressed by other provisions of the
Act.

The main purpose of augmentation and interpretation of a contract of indemnity is to determine

and give effect to the objective of the parties. While interpreting the indemnity clause in a
business contract, care should be taken so as to give the meaning to the terms and phrases
according to the common assertion used in that business rather than resorting to other means of
interpretation, unless such construction leads to irrationality. The extent of liability under a
contract of indemnity depends on the nature and terms of the contract and each case must be
illogicality by its own facts and outlook. Interpretation of the contract or clause of indemnity thus
plays a crucial role in adjusting the susceptibility.