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Topic: Contract consideration with reference to Indemnity law and Guarantee

Submitted by:

Annangi Surya Kartikeya

A053

B.A., LL. B. (First Year)

Submitted To:

Ms. Shovinita Acharjee

School of Law, NMIMS (Deemed to be University)

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INTRODUCTION:

Consideration: “Something which is given and taken. “Section 2 (d) of Contract Act 1872

defines contract as “When at the desire of the promissory, the promise or any other person

has done or abstained from doing or does or abstains from doing or promise to do or abstain

from doing. Something such act or abstinence or promise is called consideration for the

promise.”

Consideration is a benefit which must be bargained for between the parties, and is the

essential reason for a party entering into a contract. Consideration must be of value and is

exchanged for the performance or promise of performance by the other party (such

performance itself is consideration). In a contract, one consideration (thing given) is

exchanged for another consideration. Acts which are illegal or so immoral that they are

against established public policy cannot serve as consideration for enforceable contracts.

Contracts may become unenforceable or rescindable for failure of consideration when the

intended consideration is found to be worth less than expected, is damaged or destroyed, or

performance is not made properly. Acts which are illegal or so immoral that they are against

established public policy cannot serve as consideration for enforceable contracts.

Importance of Consideration:

Consideration is the foundation of every contract. The law insists on the existence of

consideration if a promise is to be enforced as creating legal obligations. A promise without

consideration is null and void.

Types of Consideration:
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1) Executory

2) Executed

3) Past consideration

1) Executed consideration is an act in return for a promise. If, for example A offers a reward

of lost property, his promise becomes binding when B performs the act of returning A’s

property to him, A is not bound to pay anything to anyone until the prescribed act is done.

2) Executory consideration is a promise given for a promise. If, for example, customer orders

goods which shopkeeper undertakes to obtain from the manufacturer, the shopkeeper

promises to supply the goods and the customer promises to accept and pay for them. Neither

has yet done anything but each has given a promise to obtain the promise of the other. It

would be breach of contract if either withdrew without the consent of the other.

3) Past consideration which as general rule is not sufficient to make the promise binding. In

such a case the promisor may by his promise recognize a moral obligation (which is not

consideration), but he is not obtaining anything in exchange for his promise (as he already

has it before the promise is made).

What happens when a contract lacks consideration?

If there is no consideration present in a contract, the contract becomes invalid, and the courts

may refuse to enforce the contract. Sometimes, a contract may lack consideration though it

may seem at the surface that the parties are exchanging something of value.

Essentials of a valid consideration:

1) At the desire of the promisor

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2) Promisee or any other person

3) Consideration may be past, present or future

4) Consideration must be real

CONTRACT OF INDEMNITY:

An indemnity contract is a legal arrangement between two parties in which one party agrees

to pay another party for a loss or harm that meets certain requirements and conditions unless

other circumstances are specified.

In a general sense, indemnity can be characterized as “protection against misfortunes.”

Agreement of indemnity is represented by Section 124 of the Indian Contract Act, 1872,

which falls under Chapter VIII of the act. Under this section, the meaning of an agreement of

compensation is given as an agreement

“By which one party vows to save the other from misfortune caused to him by the agreement

of the promisor himself, or by the lead of some other individual, is known as a “contract of

indemnity.”

In an indemnity contract, there are only two parties:

 The Indemnifier:

The promisor, who agrees to make up the damage caused to the other group, is called the

indemnifier.

 The Indemnified:

The person who is assured of compensation for the damage incurred (if any) is referred to as

the indemnity holder or the indemnified.

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Rights of the indemnity holder:

Section 125, defines the rights of an indemnity holder. These are as follows - The Promisee

(Indemnity holder) in a contract of indemnity, acting within the scope of his authority, is

entitled to recover from the promisor (Indemnifier). These are:

1. Right of recovering damages

2. Right of recovering costs

3. Right of recovering sums

Rights of Indemnifier:

After compensating the indemnity holder, indemnifier is entitled to all the ways and means

by which the indemnifier might have protected himself from the loss. Relevant Case Laws.

Consideration in Contract of Indemnity:

Our Indian law on contract, as given under the Indian Contract Act, 1872, makes a fruitful

endeavor to give the “sense” of the articulation “consideration form promise “. Section 2(d)

of the Indian Contract Act, 1872 states the “sense” of the word consideration as: “When, at

the longing of the promisor, the Promisee or some other individual has done or went without

doing, or does or swears off doing, or vows to do or to avoid doing, something, such

demonstration or restraint or guarantee is known as a consideration for the promise.”

The sense of “consideration” as given in Section 2(d) of the Indian Contract Act, 1872,

neither “defines” the expression “consideration” nor is it “substantive” in nature. The very

nature of the “sense” of the term “consideration for promise” as provided under the said

section is “procedural”.
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According to Section 25 of the Indian Contract Act, 1872, there can’t be any arrangement

without thought; it makes it abundantly clear that any arrangement without thought is void. In

this way, one can’t fathom or imagine an agreement (even exceptional agreements) without

thought.

CONTRACT OF GUARANTEE:

A Contract to perform the promise, or discharge the liability, of a third person in case of his

default is called Contract of Guarantee. A guarantee may be either oral or written.

 The person who gives the guarantee is called the Surety.

 The person on whose default the guarantee is given is called the Principal Debtor.

 The person to whom the guarantee is given is called the Creditor.

Under Indian Contract Act 1872 it is defines as:

Section 126: "A contract of guarantee is a contract to perform the promise, or to discharge

the liabilities 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 Principal

Debtor, and the person to whom the guarantee is given is called Creditor. A Guarantee may

be either oral or written."

A guarantee can be many things. It can be assurance of a particular outcome or that

something will be performed in a specified manner. A guarantee is a way of assuming

responsibility for paying another’s debts or fulfilling another’s responsibilities. It can be a

promise for the execution, completion, or existence of something. A guarantee can also be a

promise or an assurance attesting to the quality or durability of a product or service. The

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English law defines a ‘guarantee’ as a ‘promise to answer for the debt, default or miscarriage

of another’.

A guarantee contract consists 3 contracts:

 First, the principal debtor himself makes a commitment to fulfill a contract in favor of

the creditor.

 Second, if the principal debtor makes a default, the surety undertakes to be liable to

the creditor.

 Thirdly, the principal debtor's implicit promise in support of the assurance that, in the

event that the protection is obliged to discharge the responsibility of the principal

debtor's default, the principal debtor shall indemnify the protection for it.

Main features of contract of guarantee:

1. The contract can be either oral or in writing. Nevertheless, the assurance contract can

only be in writing in English law.

2. The guarantee contract presumes a principal liability or a discharge duty on the part of

the principal debtor. Even if there is no such principal liability, one party agrees to

pay another under such situations, and the enforcement of this obligation is not

contingent on anyone else's default, it is an indemnity contract.

3. Sufficient consideration is to support the principal debtor. It is not necessary to have

clear consideration between the creditor and the assurance that it is appropriate that

the creditor has done anything for the good of the principal debtor.

4. Assurance consent cannot be obtained by misrepresentation or cover of any material

information relating to the transaction.

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Consideration in Contract of Guarantee:

According to section 127 of the act, anything is done or any promise made for the benefit of

the principal debtor is sufficient consideration to the surety for giving the guarantee. The

consideration must be a fresh consideration given by the creditor and not a past consideration.

It is not necessary that the guarantor must receive any consideration and sometimes even

tolerance on the part of the creditor in case of default is also enough consideration.

Illustrations:

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 is sufficient consideration for C’s

promise.

In State Bank of India v Premco Saw Mill (1983), the State Bank gave notice to the debtor-

defendant and also threatened legal action against her, but her husband agreed to become

surety and undertook to pay the liability and also executed a promissory note in favor of the

State Bank and the Bank refrained from threatened action. It was held that such patience and

acceptance on the bank’s part constituted good consideration for the surety.

Important Case Laws

Osman Jamal and Sons Ltd. Vs Gopal Purshottam:

For this situation, the offended party’s organization was in the process of liquidation and was

being addressed by the authority’s outlet. The offended party’s organization was going about

as the commission specialist for the litigant firm for the purchase offer of a specific

merchandise. Further the respondent firm was to repay the offended party organization

against all misfortune and loss in regard to such transaction. The respondent firm neglected to
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get the conveyance due to which the products were exchanged by the seller at not exactly the

agreement cost. The offended party, therefore, sued for the recuperation of the whole. The

appointed authority chose in the courtesy of the offended party.

Lala Shanti Swarup vs Munshi Singh and Others:

The offended party offered a burdened land to the Respondent, who vowed to make required

instalment against a home loan to the mortgagee; however, neglected to do so as a result of

which the offended party brought about misfortune as 3/4th of their property being sold. The

offended party sued under an implied contract of guarantee.

Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri:

The plaintiff executed two mortgages in favor of Mohandas at the command of the defendant.

Defendant promised to indemnify the plaintiff against any suits by the mortgagee, along with

executing a third mortgage in place of the previous two (by the means of a letter). Plaintiff

requested to release of liability. The issues raised were whether the indemnified could ask for

performance of the contract of indemnity without suffering any actual loss and whether the

obligation of the plaintiff was absolute. It was held that the sections 124 and 125 do not

apply, as said sections do not cover the transaction.

Conclusion:

All things considered, we have found in this current venture simply put, Indemnity

necessitates that one party indemnify the other if certain costs talked about in the contract of

indemnity are caused by him. For instance, vehicle rental organizations specify that the

individual employing will be answerable for harm to the rental vehicle brought about by his

wild driving and should indemnify the rental organization.

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The contract of guarantee is a specific contract for which the Indian Contract Acy has laid

some rules. As we have discussed, the basic function of a contract of guarantee is to protect

the creditor from loss and to give him confidence that the contract will be enforced with the

promise of the surety.

References:

Indemnity contracts, guarantee and consideration, available at:

https://blog.ipleaders.in/indemnity-contracts-guarantee-and-consideration/

Contract of Indemnity and Guarantee, available at:

https://www.legalserviceindia.com/legal/article-4039-contract-of-indemnity-and-

guarantee.html#:~:text=There%20are%20two%20parties%20in,of%20guarantee%20has

%20three%20parties.&text=The%20liability%20of%20the%20indemnifier%20in%20the

%20contract%20of%20indemnity,liability%20is%20of%20the%20debtor.

The Indian Contract Act 1872 (Act No. 9 of 1872)

The Indian Contract Act 1872 (Act No. 9 of 1872), ssss. 124, 125, 126, 127

The Indian Contract Act 1872 (Act No. 9 of 1872), s. 2(d)

The Indian Contract Act 1872 (Act No. 9 of 1872), s. 25

Osman Jamal and Sons Ltd. Vs Gopal Purshottam, AIR 1929 Cal 208

Lala Shanti Swarup vs Munshi Singh and Others, 1967 AIR 1315

Gajanan Moreshwar Parelkar vs Moreshwar Madan Mantri, (1942) 44 BOMLR 703

State Bank of India v Premco Saw Mill (1983), AIR 1984 Guj 93
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