CONTRACTS RESEARCH PAPER

NAME: V.SAHITHI

ENROLLMENT NO.: 20211BAL0080

SECTION: 2

NAME OF TOPIC: Contract of indemnity and

guarantee
A comparative study

DATE ALLOTMENT FOR SUBMISSION:

15/12/22

NUMBER OF TOTAL PAGES: 17

USE OF PROOF OF E-RESOURCES

ATTACHED: YES

SUBMITTED TO: Prof. BRAJESH GUPTA

 TABLE OF CONTENTS
ABSTRACT…………………………………………………………..3

INTRODUCTION…………………………………………………....3

SYNOPSIS…………………………………………………………….4

DIFFERENCES……………………………………………………...9

CASE LAWS…………………………………………………………10

BIBLIOGRAPHY……………………………………………………10

CONCLUSION……………………………………………………….11

E-RESOURCES………………………………………………………12
ABSTRACT
The term Indemnity literally means “Security against loss”. In a contract of
indemnity one party – i.e. the indemnifier promise to compensate the other party
i.e. the indemnified against the loss suffered by the other. The law definition of
a contract of indemnity is – “it is a promise to save a person harmless from the
consequences of an act”. Thus it includes within its ambit losses caused not
merely by human agency but also those caused by accident or fire or other
natural calamities.

INTRODUCTION
Contract of guarantee and contract of indemnity perform similar commercial
functions in providing compensation to the creditor for failure of a third party to
perform their obligation. However, there are some major differences between
the two. In this article, the author will talk about the differences between the
contract of indemnity and contract of guarantee along with relevant legal
provisions of the 1Indian Contract Act, 1872.

‘Indemnity and Guarantee are two sides of the same coin’- It means that
indemnity and guarantee differ on a lot of issues while being similar on the
issue that they are both modes of compensation and that they are similar on
certain principles like unjust enrichment and matters of good faith. In spite of
their basic similarities, contracts of indemnity are inherently different from
contracts of guarantee.

Guarantees and indemnities are a common way in which creditors protect

themselves from the risk of debt default. 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.

1
Indian Contract Act, 1872
CONTRACT OF INDEMNITY
DEFINITION OR NATURE

“Indemnity” is a widespread expression used not only in a contractual context. It can be

defined as “a duty to make good any loss, damage or liability incurred by another,” or
alternatively the right of an injured party to claim reimbursement for its loss, damage or
liability from a person who has such duty.

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.

An agreement of indemnity, as a concept developed under common law, is an agreement

wherein the promisor, promises to save the promisee harmless from loss caused by events or
accidents which do not or may not depend on the conduct of any person or from liability for
something done by the promisee at the request of the promisor.

In common law Indemnity was established in the case of 2Adamson v Jarvis.

The plaintiff an auctioneer, sold certain cattle on the instruction of the defendant. It
subsequently turned out that the livestock didn’t belong to the defendant, but to another
person, who made the auctioneer liable and the auctioneer in turn sued the defendant for the
loss he had thus suffered by acting on the defendant’s direction. The court laid down that the
plaintiff having acted on the request of the defendant was entitled to assume that, if, what he
did turned out to be wrongful, he would be indemnified by the defendant.

Thus Indemnity in English Law means a promise to save a person harmless from the
consequences of an act. The promise may be express or it may be implied from the
circumstances of the case.

Whereas 3Section 124 of the Contract Act, 1872 defines a contract of Indemnity as "a 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." In simple words, an indemnity is a
promise to compensate for another's loss.

2
Adamson v Jarvis
3
Section 124 of the Contract Act, 1872
 RIGHT OF THE INDEMNITY HOLDER – (SECTION 125)

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 suit.

I. Contract of GUARANTEE
DEFINITION
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 the guarantee is 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.
Essentials of contract of guarantee

1. The contract of guarantee must satisfy the requirements of a valid contract: 

2. The contract of guarantee must be supported by consideration: 
3. The contract of guarantee must be made by the parties competent to contract: 
4. There must be someone primarily liable: 
5. The promise to pay must be conditional: 
6. There should be no misrepresentation.
7. There should be no concealment of the facts.
8. The contract of guarantee may be oral or written.

EXTENT OF SURETY’S LIABILITY

It is co-extensive with that of the principal debtor, unless it is otherwise provided by the
contract.

When there is a condition precedent to the surety’s liability, he will not be liable unless that
condition is first fulfilled.(when another person has to join as a co-surety)

‘The surety has no right to dictate terms to the creditor and ask him to pursue his remedies
against the principal in the first instance. The surety is a guarantor, and it is his business to
see that the principal pays, and not that of the creditor’ Supreme Court in Bank of Bihar Ltd
V Damodar Prasad (1969)

‘Even if the decree is a composite one against the principal debtor, mortgaged property & the
guarantor, the creditor/decree holder can proceed as he liked i.e. he could proceed against the
guarantor if he so wished’
Continuing Guarantee: Covers 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.

DISCHARGE OF SURETY FROM LIABILITY

By revocation: Ordinarily a guarantee is not revocable when once it is acted upon.A

continuing guarantee may at any time be revoked by the surety, as to the future transactions,
by notice to the creditor.

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

guarantee so far as regards future transactions. The surety’s heirs can be sued for liability
already incurred.

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.

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.

Any release of the Principal Debtor is a release of the surety also.

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.

Act or Omission:

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:

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.

(Mere forbearance to sue does not discharge the surety)

By Impairing surety’s remedy:

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: The surety steps into the shoes of the creditor when he has paid all
that he is liable for, or performed all he is liable for

Right to Indemnity: 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.

AGAINST THE CREDITOR:

Right to securities:

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
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
AGAINST CO SURETIES:

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.

II. DIFFERENCE BETWEEN CONTRACT OF INDEMNITY

AND GUARANTEE.

INDEMNITY
Section 124 of Indian Contract Act: a contract by
which one party promises to save others from loss
caused to him by the conduct of the promisor
himself, or by the conduct of any other person
Two parties (Indemnifier and Indemnified)
GUARANTEE
Section 126 of Indian Contract Act: a contract to
perform the promise, or discharge the liability of a
third person in case of his default.
Three parties (Principal Debtor, Creditor, Surety)

To provide compensation for loss
Indemnifier is the sole person liable. The liability
of indemnifier is primary.
To give assurance to the creditor in lieu for his
money
Liability shared between Principal Debtor (primary
liability) and Surety (secondary liability). i.e. The
liability of the surety is secondary and arises only if
the principal debtors fails to perform his
obligations.

Liability arises only on occurrence of a loss. Fixed legal liability

Surety after discharging the debt can sue the

The indemnifier can’t sue the third party for loss in
his own name. principal debtor
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 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
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 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
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 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
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 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
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 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
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 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
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 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
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 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
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 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.

BIBLIOGRAPHY:

Shekhar, Sudhanshu, Difference

between Contract of Indemnity and
Contract of Guarantee:
Ten Case Analysis (May 05, 2021).
2. Avtar Singh., 2008. Law of
contract (a study of the Contract Act,
1872) and speci 昀椀 c
relief (10th ed.). Lucknow: Eastern
Book Co..
3. Law Commission, Illegal Transac
琀椀 ons: The E 昀昀 ect of Illegality
on Contracts and Trusts (1999)
Law Com 154
4. India. Pollock & Mulla On Indian
Contract and Speci 昀椀 c Relief
Acts with a Commentary, Cri 琀椀
cal
and Explanatory. Bombay :N. M.
Tripathi, 1972
1.  http://judicially-yours.blogspot.in/2010/02/difference-between-
indemnity-and.html
2. http://www.ehow.com/info_8094382_differences-contract-indemnity-
contract-guarantee.html#ixzz2swdShgGT
3.  http://www.lawnotes.in/Contract_of_Guarantee#ixzz2uGPMTPeF
4. http://www.lawnotes.in/Contracts_of_Indemnity#ixzz2sqefMeVf

CONCLUSION :
An indemnity, by contrast, accommodates simultaneous obligation
with the principal although and there is no compelling reason to “look first” at
the principal. Generally it is an agreement that the surety will hold the lender
innocuous against all misfortunes emerging from the agreement between the
principal and the lender. Generally, a guarantee accommodates an obligation
far-reaching with that of the principal. At the end of the day, the guarantor can’t
be at risk for much more than the client. The document will be understood as a
guarantee if, on its actual development, the commitments of the surety are to
“remained behind” the principal and just go to the fore once a commitment has
been broken as between the principal and the lender. The commitment is an
auxiliary one, reflexive in character. An indemnity emerges on event of an
occasion, whereas a guarantee emerges on default by a third party. Hence we
have explained what indemnity and guarantee means and on what grounds they
differ on like the number of parties involved and the nature of risks involved
and we have also worked upon the small but significant differences both in
working and in principal between guarantee and indemnity. Therefore, though
guarantee and indemnity have a few similarities, they are inherently different in
nature.

E-RESOURCES :
References
1. Shekhar, Sudhanshu, Difference between Contract of Indemnity and
Contract of Guarantee:
Ten Case Analysis (May 05, 2021).
2. Avtar Singh., 2008. Law of contract (a study of the Contract Act, 1872) and
speci 昀椀 c
relief (10th ed.). Lucknow: Eastern Book Co..
3. Law Commission, Illegal Transac 琀椀 ons: The E 昀昀 ect of Illegality on
Contracts and Trusts (1999)
Law Com 154
4. India. Pollock & Mulla On Indian Contract and Speci 昀椀 c Relief Acts with
a Commentary, Cri 琀椀 cal
and Explanatory. Bombay :N. M. Tripathi, 1972
References
1. Shekhar, Sudhanshu, Difference between Contract of Indemnity and
Contract of Guarantee:
Ten Case Analysis (May 05, 2021).
2. Avtar Singh., 2008. Law of contract (a study of the Contract Act, 1872) and
speci 昀椀 c
relief (10th ed.). Lucknow: Eastern Book Co..
3. Law Commission, Illegal Transac 琀椀 ons: The E 昀昀 ect of Illegality on
Contracts and Trusts (1999)
Law Com 154
4. India. Pollock & Mulla On Indian Contract and Speci 昀椀 c Relief Acts with
a Commentary, Cri 琀椀 cal
and Explanatory. Bombay :N. M. Tripathi, 1972
THANK YOU