Summary

Chapter Six

Contracts of Indemnity and Guarantee

Learning Objectives:

1. Contract of Indemnity
2 Contract of Guarantee
3 Types of Guarantee
4 Right of Surety and its discharge
5 Comparison between Indemnity and Guarantee

6.1. Contract of Indemnity

A contract of indemnity is a contract by which one party promises to save the other party
from loss caused to him by the conduct of the promissory himself, or by the conduct of
any other person. The contract of indemnity may be express or implied. The person who
promises to indemnify or make good the loss is called the indemnifier and the person
whose loss is made good is called the indemnified or the indemnity holder.
Essentials of contract of Indemnity

a) The number of parties should be two - Indemnifier and Indemnified.

b) The contract of Indemnity has to follow all the rules of contract.
c) The Contract of Indemnity may be express or implied.
d) If and only if the indemnity holder suffers the loss against which the indemnity
holder was promised to be protected, can enforce the contract.
e) Consideration is essential in case of Indemnity contract for compensation.
f) Commencement of indemnifier’s liability has to be established.

6.2 Contracts of Guarantee

A contract of guarantee is a contract to perform the promise, or discharge the liability of a

third person in case of is default. The person who gives the guarantee is called the Surety,
 the person for whom the guarantee is given is called the Principal Debtor; and the person
to whom the guarantee is given is called the Creditor.
Essentials of contract of Guarantee
a) Agreements between three parties.
b) There should be lawful consideration mentioned in the contract.
c) The primary liability should be with the principle debtor.
d) The Contract of Guarantee follows all rules of a valid contract.
e) All of the parties must be competent to make a contract.
f) Concurrence of all parties must be there for a valid contract of guarantee.
g) The promise to pay must be conditional.

6.3 Types of guarantee

Guarantee for an existing debt, guarantee for a future debt, continuing guarantee, specific
guarantee are some of the types. Apart from these, part guarantee, absolute guarantee,
conditional guarantee, limited guarantee, unlimited guarantee etc. Of all these types,
continuing guarantee is most widely in use, which extends to series of transactions.

6.4 Right of surety and its discharge

A surety has certain rights against the creditor, against the principle debtor and rights
against co-sureties. Similarly, the rights of creditor includes to demand due payment, to
claim for legal expenses, to proceed against any one surety in case of co-sureties etc.
A surety may be discharged from liability under the following circumstances:

(a) By notice of revocation in case of continuing guarantee as regards future transaction.

(b) By the death of the surety as regards future transactions, in a continuing guarantee.

(c) A surety will be discharged if the creditor releases the principal debtor.

(d) Where the creditor time or not to sue him, the surety will be discharged (Section 135).

(e) If the creditor does any act against the rights of the surety, the surety is discharged.
(f) If the creditor loses or parts with any security which at the time of the contract the
debtor had given in favor of the creditor, the surety is discharged to the extent of the
value of the security.
6.5 Comparison between indemnity and guarantee
In a contract of indemnity, there are only two parties: the indemnifier and the
indemnified. In a contract of guarantee, these are three parties; the surety, the principal
debtor and the creditor.
In a contract of indemnity, the liability of the indemnifier is primary. In a contract of
guarantee, the liability of the surety is secondary. The surety is liable only if the principal
debtor makes a default, the primary liability being that of the principal debtor.
In the case of a guarantee there is an existing debt or duty, the performance of which is
guaranteed by the surety, whereas in the case of indemnity the possibility of any loss
happening is the only contingency against which the indemnifier undertakes to
indemnify.

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