Introduction

You might be aware of the basic rule that whoever harms or causes injury to another
person has to pay the damages or costs to the injured person. The kings in a primitive society
ruled on this principle. Whenever they had to deal with such cases where one party caused
damage to the other, they made him liable to pay costs or damages. The contract of indemnity
works on the same principle. Have you ever thought about what would happen if someone under a
contract promised to do something but failed? Similarly, if a person suffers a loss as a result of the
actions of another, is he entitled to compensation?

All these questions are dealt with under the concept of indemnity. Indemnity is a kind of
compensation that protects you from any potential losses. In its broadest sense, indemnity refers
to the payment of money to a person who has lost money, goods, or other property due to the
error of a third party. This concept of indemnity is also incorporated in English law and is
considered a commitment to protect a person from losses due to his actions, which might be
directly or indirectly caused. The article explains the concept of indemnity and also provides its
position in England and India. It further gives the rights and liabilities of the two parties involved
in the contract of indemnity according to the Indian Contract Act, 1872. It also differentiates
indemnity from the guarantee.

Contract of indemnity : an overview

The word indemnity has been derived from the Latin term “indemnis” which means unhurt or free
from loss. As we all know, the fundamental idea behind an indemnity or indemnification is to
transfer some or all of the liability from one party to another. This means that one party to the
contract, referred to as the “indemnifier” or “indemnifying party”, promises to protect another
party, referred to as the “indemnity holder” or “indemnified party”, from not only loss, cost,
expense, and damage but also from any legal consequences resulting from an act or omission by
either the indemnifier or a third party or any other event. Section 124 of the Indian Contract Act,
1872.

As per the Oxford dictionary, “Security from damage, loss, or penalty.” The definition of the word
“indemnify” is to compensate someone for harm, loss, or damage. Indemnity contracts and
contracts for insurance are extremely similar. In an insurance contract, the insurer pledges or
promises to make up in the form of compensation for the insured’s losses. In return, he receives
consideration in the form of a premium. These kinds of transactions are not governed by the
Contract Act. This is so because legislation like the Insurance Act has provisions specifically for
insurance contracts.

As per Section 124 of the Indian Contract Act, an agreement by which one party promises to save
the other from loss caused to him by the conduct of the promisor himself or by the lead of
someone else is classified as “Contract of Indemnity”.

The term (Indemnity) means to make good the loss or to compensate for the losses.

To protect the promisee from unanticipated losses, parties enter into the contract of Indemnity.

It is a promise to save a person without any harm from the consequences of an act.

There are two parties involved in the Contract of Indemnity. The two parties are:
 1. Indemnifier: Someone who protects against or compensates for the loss of the damage
received.

2.
Indemnified/Indemnity-holder: The other party who is compensated against the loss
suffered.
Example- A contracts to indemnify B against the consequences of any proceedings which C may
take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

In the case of Mangladha Ram v. Ganda Mal, the vendor’s promise to the vendee to be liable if title
to the land was disturbed was held to be one of indemnity.

Insurance Indemnity

All insurances except and personal accident insurance come in the scope of Indemnity. It is an
absolute promise to indemnify the insured. Upon the failure of performance, a suit can be filed
immediately, irrespective of the actual loss. If the liability is incurred by the Indemnity holder and
is absolute, he/she would be entitled to call upon the indemnifier to save him from that
responsibility by taking care of it. An insurance policy that compensates a party for any accidental
damages or losses up to a certain limit—usually the value of the loss of itself —is known as
indemnity insurance.

Meaning of Indemnity

According to the definition given by Halsbury, the term “indemnity” is a contract that expressly or
impliedly protects a person who entered into a contract or is about to enter from any losses,
irrespective of the fact that those losses were due to the actions of a third party. As mentioned
above, the word indemnity is derived from the Latin word “indemnis”, which means freedom from
loss. According to Longman’s dictionary, it is protection against any kind of loss, expense, etc., in
the form of a promise to pay for those losses.

Illustrations

 X contracts to indemnify Y against the consequences of any legal proceedings that Q

may bring against Y for a certain sum of money. This contract or promise is known as a
contract of indemnity.

 A promises to indemnify B if his car is damaged in an accident. B met with a minor

accident in which he did not suffer any injury, but his car was damaged completely.
Here, A is obliged to indemnify B for the damage.

 A asks B to invest money in C’s business and contract to indemnify him if he suffers
any loss. B suffered a loss of Rs 1,00,000/-. According to the contract of indemnity
entered into by A and B, A must indemnify the damages and other costs to B.

Parties to a contract of indemnity

In a contract of indemnity, there are two parties:

 Indemnifier: A person who promises to indemnify or pay for the losses is known as an
indemnifier.
  Indemnified: A person for whom such a promise is made is known as an indemnified
or indemnity holder.

Illustration

A and B have a contract in which B promises to deliver goods to A for Rs. 10,000 per month. C
promises B that he will pay for the loss that will be suffered by him due to A. Here, C and B are in
a contract of indemnity, where B is the indemnity holder and C is the indemnifier.

Essentials to a contract of indemnity

For the purpose of a contract of indemnity, the following conditions must be satisfied:

 There must be two parties.

 One of the parties must promise the other to pay for the loss incurred.

 The contract may be expressed or implied.

 It must satisfy the essentials of a valid contract.

Objective and nature of the contract of indemnity

The purpose of entering into a contract of indemnification is to safeguard the promisee from
unforeseen losses. A contract for indemnity may be expressed or implied. In other words, parties
may directly impose their own conditions in such a contract. The nature of circumstances may also
create indemnity obligations impliedly.

A contract of indemnity has a contingent nature, i.e., it has a conditional structure, and it mainly
provides a safeguard provision for potential risks and uncertainties. A contract of indemnity is just
like any other contract, and it must necessarily follow all the requirements of a valid contract. For
instance, A fulfils B’s request for action. When A pledges to make up for B’s losses, if he incurs
any, they imply the formation of an indemnity contract.

A contract of indemnity is essential because a party may not be able to command all apparent
aspects of the performance of a promise. When the circumstances surrounding the performance
are beyond the authority and control of the party, the party can be sued for the actions of another.
Indemnity is a subset of compensation, and a contract of indemnity is a type of contract. The
obligation to indemnify is a responsibility that the indemnifier willingly and voluntarily accepts.

In most cases, an insurance contract is not considered an indemnity contract in India. Agreements
of marine insurance, fire insurance, or motor insurance, on the other hand, are considered
contracts of indemnity because, unlike life insurance, which provides a specific sum of money upon
the death of the policyholder, when a creditor takes out a policy on the principal debtor, he
becomes entitled to a specific amount of money.

Conditions for the contract of indemnity

Parties to the contract of indemnity

As mentioned above, there must essentially be two parties in a contract of indemnity: the
indemnity holder and the indemnifier. Moreover, no individual can enter into a contract with
themselves, and the minimum requirement for any contract to be legally valid is for two parties.
Additionally, these parties must have the capacity to contract. However, depending on the
circumstances, there may be more than two parties.

The promisor or indemnifier

An indemnifier is a person who promises to compensate for a loss but does not bear the loss.

The promisee or the indemnified or indemnity holder

An indemnity holder is a person whose losses are compensated by an indemnifier.

Illustration

There is a contract between A and B in which A promises to deliver certain goods to B for Rs.
7,000 every month. C comes and makes a promise to indemnify B’s losses if A fails to deliver the
goods.

Here,

 C is the indemnifier or promises as he promises to bear the loss; and

 B is the indemnity-holder or promisee or indemnified as his losses are compensated

for.

Promise to pay losses

Promise

A contract of indemnity is one in which one party promises to protect the other party from harm
brought on by the actions of the other party.

One party must present a condition to another party, and the other party must accept it.
Acceptance occurs when another party accepts the offer on the same terms. After accepting the
offer, it becomes a promise. The party that made the promise is now known as the promisor, and
the person who accepted it is now known as the promisee.

It is an important part of the contract of indemnity that “the promise must be made by the
promisor to pay the losses of the promisee.” A contract of indemnity is one in which one party
promises to protect the other party from harm brought on by the actions of the other party.

Expressed or implied
As stated above, a contract for indemnity may be expressed or implied. In other words, parties
may directly impose their own conditions in such a contract. The nature of circumstances may also
create indemnity obligations impliedly. Express contracts are those that are created orally or in
writing, whereas implied contracts are those that are made as a result of the conduct of the
parties.

There must be a loss incurred

The condition of the contract of indemnity is that “the loss must be incurred by the promisee.” The
promisor is not required to make any payments if the promisee suffers no loss.

Lawful object and consideration

A contract for indemnity can only be executed for a valid purpose and a lawful consideration. A
contract of indemnity cannot be construed as a contract to engage in unlawful behaviour or
conduct that is against public policy.

Legislative and judicial enactments of contract of indemnity under English law

Basically, a contract of indemnity is a more extensive idea in English law when contrasted with
Indian law, in light of the fact that in English law every one of the issues is viewed which are
connected not just due to the demonstrations of some individual yet additionally emerges from
some occasion or mishap if there should arise an occurrence of fire or demonstration of God.

Certain rules under the contract of indemnity under English Law are:

 When the loss will be faced by the Indemnity holder, it will be compensated by
Indemnifier.

 If instructions of the Indemnifier is followed by Indemnity.

 If indemnity holder incurs cost during any suit proceedings and pays the amount by
compromise.
The rule of agreement of indemnity started in English law in the judgment of Adamson v. Jarvis
where Adamson was an offended party and Jarvis was a litigant. The offended party by calling was
a salesperson to whom Jarvis, who was not the proprietor of the dairy steers, gave the cows and
was sold at the deal. The veritable owner of the steers sued Adamson for change, and he was
fruitful in it and Adamson expected to pay the damages for something comparable, thus, Adamson
sued Jarvis to be compensated for the adversity that he caused to pay the harms to the
proprietor.

From the above case, it is examined that there was a guarantee to save the individual from
misfortune yet the guidelines hosted to be trailed by the get-together of the gathering that is
reimbursed to guarantee repayment.

The law was further changed by the case of Dugdale v. Lowering. It showed that the guarantee
may be conveyed and gathered.

For the present circumstance, the K.P. Co and respondent were ensured for explicit trucks which
were in the responsibility for the insulted party. The correspondence was held between the
irritated party and defendant in which the outraged party’s uneasiness for inquisitiveness with
regards to whether they passed on the trucks to the respondent. The prosecutor without outfitting
a reaction and uncovered to him that sent all of the trucks back to him. The K. P Co brought a
case against the irritated party for the change, and the insulted party needs to pay the damages.
Thus, the outraged party sued the respondent for indemnity.

For the present circumstance, the court held that the irritated party is equipped to recover
reimbursement considering the way that there is no objective of the annoyed party to send the
trucks without Indemnity. Hence, for the present circumstance, there is a construed ensure which
is agreed by the respondent when he told that sent all of the trucks back to him, by then it is
normally expected that he agreed for the indemnity.

Another milestone choice, Re Law Guarantee and Accidental case held that a repayment game plan
ought not exclusively to be restricted to repaying the person for any monetary misfortune.

In the United Kingdom, under the point of reference-based law, it is significant for an Indemnity
holder to at first compensate for the misfortunes, injuries or harms and subsequently ensure for
reimbursement.

Position of a contract of indemnity in England and India

England

The word “indemnity” is used in a wider sense under English law. It includes a contract or promise
to save a person from losses caused by humans, agencies, or any other event like accidents that
are not under the control of any person. It also identifies contracts of insurance other than life
insurance as contracts of indemnity. The reason for not recognising life insurance as indemnity is
simple. It is because the conditions are different in both of them. For example, a life insurance
contract may provide payment on the death of a person or after the expiration of a specified
period. But this does not fall under the ambit of indemnity.

On the other hand, in the Indian context, the contract of indemnity does not specifically recognise
a contract of insurance under indemnity. The Privy Council, however, in the case of Secretary of
State v. Bank of India Ltd. (1938), recognised it as an implied contract under indemnity. The 13th
Law Commission Report in India suggested amending Section 124 of the Indian Contract Act,
1872, to include loss caused by events that do not depend on the conduct of any person.

India

As stated above, indemnity in India has been defined under Section 124 of the Indian Contract
Act, 1872. According to the Section, it is a contract in which a party makes a promise to save
others from any kind of loss due to the actions of the promisor himself or any third person. This
definition is only limited to the losses caused by the actions of humans or agencies and does not
include losses that are caused due to events that cannot be controlled or foreseen by any person,
as stated in the case of Gajanan Moreshwar v. Morehswar Madan (1942).

It can be said that the contract of indemnity in India does not include a contract of insurance
within its ambit. So, if a person under an insurance contract promises the other to pay
compensation or damages for losses due to accidents or fires, these are not covered under
indemnity but are contingent contracts given under Section 31 of the Act. In the case of United
India Insurance Company v. M/s. Aman Singh Munshilal (1994), goods were stored in godowns,
from where they had to be carried to their destination after some time. While in storage, the goods
were destroyed by fire. The Court, in this case, held that the goods were destroyed during transit,
and the insurer must pay as the contract of insurance.

Legislative and judicial enactments of contract of indemnity under Indian law

In India, a contract of indemnity started for the situation Osman Jamal and Sons Ltd v/s Gopal
Purshotam in which the offended party is a partnership that goes about as a commission specialist
for the respondent. The litigant firm was occupied with purchasing and selling Hessian and
Gummies, and the offending party firm had consented to repay the respondent firm in case of a
misfortune.

The offended party organization bought Hessian from Maliram Ramjets, yet the litigant
organization can’t pay and get the Hessian. Thus, Maliram Ramjets offered a similar item to others
at a lower cost. Maliram Ramjets sued the offended party for the misfortune, however, the
offended party was currently slowing down and requested that the litigant remunerate them.

However, the defendant declined to pay the damages, claiming that he was unable to do so
because of the complainant.

HELD- The defendant is liable to indemnify the complainant, according to the court, because he
agreed to do so.

The section contemplates indemnity can be expressed or implied. An example of implied indemnity
is the decision of the Privy Council in Secy of State for India in Council v. Bank of India
Ltd. in which, a forged note endorsement was given to a bank which was received in good faith
and for the value. It was later received by the Public Office for renewal in their name. The
compensation was recovered by the true owner of the note from the State and was allowed to
recover from the bank on a promise of indemnity on implied.

One of the case laws and Judgments was the Gajanan Moreshwar vs. Moreshwar Madan Mantri.

In this case, Gajanan Mores was having land in Bombay however at rent for an extensive stretch.
Gajanan Moreshwar was moved to Moreshwar Madan Mantri, however, for a restricted period. M
Madan began the development once again the plot and requested some material from K D
Mohandas, when K D Mohandas requested the installment of the material, M Madan would not
compensate the sum and mentioned G Moreshwar to set up a home loan deed for K D Mohandas.
The loan cost was chosen and G Moreshwar put a charge over his ownership. As indicated by the
deed, a date was chosen for the arrival of the chief sum. In any case, M Madan concludes that he
will pay the chief sum alongside the interest to deliver from a home loan deed, and chooses a
specific date for something very similar.

In this case, the court held that if an indemnity holder has raised a liability that is absolute in
nature, the indemnity holder may order the indemnifier to fulfil the responsibility or pay the sum.
It is not necessary for a commitment to compensate for a loss.

The court made the right decision, in my opinion, because the indemnifier is able to reimburse the
indemnity holder if any liability occurs, so the indemnifier can pay the debt directly.

And if the indemnity holder does anything that causes the liability to occur, he must pay the
liability because indemnifiers promise to return the indemnity holder to his original condition.
In India, all issues are viewed where misfortunes are brought about because of the promisor
himself or some other outsider while in England every one of the issues is viewed were a
misfortune causes by any individual just as from any mishap.

Essentials and rights in the contract of indemnity

For the contract of indemnity to take place, the essentials must be that there must be two parties
and an arrangement between them in which the promisor agrees to protect the promisee against
any loss. This is the most important aspect of the indemnity contract. The loss may have occurred
as a result of the promisor’s or some other third party’s behaviour. The Act’s rules limit the loss to
a degree that it is limited to the human agency only, and an act of God is not protected by the
indemnity contract. Contracts of indemnity include things like marine insurance, fire insurance,
and so on.

There can be express and implied indemnity contracts. An implied indemnity contract is out of the
purview of the definition of indemnity given under Section 124.

Rights incurred by an indemnity holder

Section 125 of the Act describes the right of an indemnity holder:

 Any fee he was forced to pay in a matter or a suit to which the indemnifier’s guarantee
extends will be recoverable by the indemnity holder. For example, A and B will agree
that if C sues B in a specific matter, A will indemnify B. For example, A and B will agree
that if C sues B in a specific matter, A will indemnify B.

 C has now filed a lawsuit against B, and B has been forced to make a settlement.
According to the contract, A would be responsible for all payments made by B to C in
connection with that matter.

 Any costs that the indemnity holder may have to pay to a third party are also
recoverable. However, the indemnity holder should have behaved prudently and in
accordance with the indemnifier’s instructions.

 Any amounts charged under any suit or compromise, as long as it was not against the
indemnifier’s orders, are also recoverable by the indemnity holder.

Rights of an indemnifier

Despite the fact that the Act mentions the indemnity privileges, the Indian Contract Act of 1872
excluded indemnifier rights.

In Jaswant Singh v. the State, it was concluded that the reimburse advantages are like those of a
guarantee under Section 141, where the person who indemnifies gains the advantage of all
protections held by the loan boss against the vital borrower, regardless of whether the foremost
account holder was worried about them.

On the off chance that an individual chooses to reimburse, he will be named as having prevailed to
the entirety of the structures and means which the individual who was initially reimbursed may
have ensured himself against any misfortune or harms; or haggled for pay for his misfortune or
harms.
When the indemnifier pays for the misfortunes or harms, he at that point moves into the shoes of
the reimburse, giving him the entirety of the advantages that the first indemnifier needed to shield
himself from misfortune or mischief.

Commencement of liability under the contract of indemnity

There is no stable position on the issue of the commencement of liability under the contract of
indemnity. In England, indemnity liability arises only when the indemnity holder suffers a loss. On
the contrary, the Indian Contract Act is silent on this matter. This is further discussed below.

The position of the law with respect to the liability of indemnifiers has always been in question on
the point of whether indemnity holders should be indemnified before or after the loss. Whether the
indemnifier can be asked to indemnify the indemnity holder before he has suffered any loss of
goods or money.

An indemnity holder is entitled to be indemnified only after he has suffered a loss under English
common law; until then, there can be no action from the side of the indemnifier. However, this
created problems and difficulties for those indemnity holders who were not capable of managing
the loss on their own. In such cases, the Court of Equity granted relief to the indemnity holders. It
was also provided that the indemnity holder could compel the indemnifier to protect him against
the loss for which he had promised the indemnity.

However, the position in India is not stable. There were differences in the opinions of the high
courts like the Allahabad High Court, the Calcutta High Court, and the Bombay High Court over the
issue of whether indemnity could be claimed before suffering any loss. Where some courts held
that there could be no indemnity until there was an actual loss, others favoured indemnity holders
in such situations. The Bombay High Court, in the case of Ganajanan Moreshwar v. Moreshwar
Madam, cited the observations of the Court of Equity in England and held that if the liability is
absolute, the indemnity holder can ask the indemnifier to protect him and pay off the liability. This
was also mentioned in the 13th Law Commission Report.

Commencement of liability of indemnifier

The Indian Contract Act, 1872, does not specify when the indemnifier’s liability under the contract
of indemnity begins. However, multiple high courts in India have ruled in this regard:

 He must follow the orders of the promissor;

 He must act as a prudent man would, in case there was no existence of a contract of
indemnity;

 Indemnifier cannot be held liable until any losses are suffered by indemnified;

 Indemnified can compel the indemnifier to compensate his loss although he has not
discharged his liability.

Illustration

A worked for GHI School and was a professional school bus driver. The school administration
instructed all drivers not to drive the bus faster than 40 km/h. A did not follow the instructions
and, as a result, met with an accident. Here, the school administration will no longer be obligated
to indemnify him if he violates their orders.

Duties and liabilities of indemnifier

It is now well established by various case laws that the liability of the indemnifier arises only when
the indemnity holder has suffered some kind of loss and not before. However, whenever his
liability arises, he has to perform the following duties:

Indemnify all damages

The indemnifier has a duty to pay for damages suffered by the indemnity holder due to the loss for
which he promised in the contract. The question of whether the indemnity holder suffered direct or
indirect loss is immaterial in this case. It was held in the case of Nallappa Reddi v. Vridhachala
Reddi and Anr. (1914) that the duty to indemnify arises as and when the decree has been passed
against him, and he must fulfil his duty and the promise made to the indemnity holder.

Indemnify the costs

An indemnity holder can compel the indemnifier to pay for the costs if he did not breach the terms
and conditions of the indemnifier and the contract. In this situation, if the indemnity holder proves
that there was no fault on his end, the indemnifier has a duty to pay for the costs that he incurred
while reducing the claims. The indemnifier must also compensate the indemnity holder for all the
amounts paid by the indemnity holder during any proceedings in a case.

Illustration

X gave his house to Y for auction and promised to pay for any loss or damage suffered during the
auction, and Y was unaware of the fact that X is not the real owner of the property. As soon as Y
realised who the real owner was, he paid him the amount because of which he suffered damages
and sued X. X had to pay all the damages and costs incurred by Y.

Indemnify amount payable in case of compromise

The indemnifier has a duty to pay that amount to the indemnity holder, which he paid as
compensation in a suit, but the condition is that the promisee did not act against the orders of the
promisor. The Madras High Court, in the case of Venkatarangayya Appa Rao v. Varaprasada Rao
Naidu (1920), gave certain conditions that must be fulfilled if an indemnity holder has to be paid in
case of a compromise. Only when these conditions are fulfilled is the indemnifier liable to pay. The
conditions are:

 Compromise must be done in a bonafide manner.

 No collusion in a settlement.

 It must not be an immoral bargain.

Duties and liabilities of indemnity holder

The rights of indemnity holders in a contract of indemnity are not absolute, and he has certain
duties as well. The most important liability is that he must abide by all the conditions of the
contract of indemnity. He/she should not violate the contract. It is the duty of indemnity holders to
foresee and try to avoid the loss, if possible. As discussed above, the liability of the indemnifier
only arises when the indemnity holder has suffered any loss. He/she cannot force the indemnifier
to pay the money before there is any loss.

Illustration

A promises B to pay for losses in his business. B had a godown in which the goods were stored. A
fire occurred in the area where B’s godown was located, but luckily he suffered no loss as the fire
did not burn his goods or godown. Though there was a possibility of his goods being damaged in
the fire, A is not liable to pay the money because there has been no loss to B.

The mere possibility of loss does not entail the indemnifier’s liability. He is only liable when the
indemnity holder has suffered the actual loss.

Types of the contract of indemnity

Broad indemnification

The indemnifier makes a promise to cover all parties’ damages, including those of the third party,
under the broad indemnification. Even though the third party is completely at fault, he promises to
cover the losses. The term “caused in whole or in part” is one of the primary signs of an indemnity
contract in the broad form of indemnification.

Intermediate indemnification

Under the intermediate indemnification, the indemnifier agrees to cover only damages caused by
the promisor’s and promisee’s actions. Unlike broad indemnification, it does not include the losses
sustained as a result of the actions of a third party. Except in cases where that party is completely
at fault, the intermediate form indemnifies a party for its own negligence. The term “caused in
part” is one of the primary signs of an indemnity contract in the intermediate form of
indemnification.

Limited indemnification

The indemnifier promises to cover only losses brought on by his action under the limit of
indemnification. Losses incurred as a result of the promisee and third party’s actions are not
covered by the contract of indemnity. The term “only to the extent” is one of the primary signs of
an indemnity contract in the limited form of indemnification.

Can the clause of force majeure relieve the obligation of indemnity

While reading about a contract of indemnity, a question might occur in your as to ‘Whether the
clause of force majeure is capable of relieving the obligation of the party to indemnify or not?’ This
issue was considered by the New South Wales (NSW) Supreme Court in the case of Woolworths
Group Ltd. v. Twentieth Super Pace Nominees Pty Ltd atf the Byrns Smith Unit Trust t/as SCT
Logistics (2021). In this case, the defendant SCT was engaged in the transportation of goods on
behalf of Woolworths. However, the goods were damaged due to the derailment of the train in
extreme weather conditions. As a result, Woolworths claimed the losses incurred as indemnity
mentioned in their contract. On this, the defendant (SCT) argued that the force majeure clause in
the contract i.e., Clause 7.2, relieves him of his obligation to pay. This is because the goods were
damaged in a force majeure event.

The Supreme Court in this case denied the arguments presented by the defendant and held that
according to clause 13.1 of their contract, SCT is liable to indemnify Woolworths for any loss,
destruction, theft or damage of goods. It was also observed that this liability remains until the
goods have been accepted by Woolworths at the delivery location. Justice Henry further stated
that in order to take advantage of force majeure clauses, a connection between the force majeure
event and the performance of the contract must be established and it must be shown that there
has been a delay in the performance. However, in this case, the defendant was asked to indemnify
Woolworths.

Types of indemnity

Express indemnity

Written indemnity is another term for an express indemnity. The obligations of both parties should
be specified in an express indemnity clause. Where there is an express indemnity, the terms and
conditions defining the indemnification clause are provided in writing. The contract should explicitly
state and explain the terms and conditions of the contract. An indemnity attorney may be required
to assist with the indemnification agreement’s drafting.

Insurance indemnity contracts are among the indemnity contracts that are most frequently used.
Also, such contracts are widely included in construction contracts by businesses that operate in the
construction sector. Another sector that calls for well-written indemnity contracts is agency
contracts.

Implied indemnity

The only distinction between an express indemnity contract and an implied indemnity contract is
that the latter is not in writing. Instead, implied indemnity contracts are those that are made as a
result of the conduct of the concerned parties. In an implied indemnity contract, the extent of the
obligation is determined by the circumstances, conduct, and actions of the parties. For instance, in
a master-servant relationship, the master must pay for any injuries the servant sustains. However,
the servant must have received the injuries as a result of obeying the master’s orders.

The Adamson v. Jarvis decision from 1872 established the standard for implied indemnity. In this
case, the plaintiff, an auctioneer, sold certain items on someone else’s orders. The commodities
turned out not to belong to the person, and the real owner held the auctioneer accountable for the
items. In response, the defendant was sued by the auctioneer for the loss he had incurred as a
result of following his directions. It was decided that because the auctioneer carried out the
defendant’s orders, he had a right to believe that the defendant would indemnify him if his actions
were improper. According to the court’s decision, if a servant is injured while carrying out implied
orders, the master is responsible for compensating the servant.

**********************
Contract of indemnity v. contract of guarantee

At times, people get confused between indemnity and guarantee. Indemnity involves the payment
of damages to a person by another because of his conduct or the conduct of any other person. In
the same way, a person in a guarantee contract promises another person to fulfil obligations on
behalf of another person who fails to perform his obligations. But both of them are not similar to
each other, thus, it is necessary to understand the difference between the two.

Contract of guarantee

The contract of guarantee is defined under Section 126 of the Indian Contract Act, 1872. It is a
contract under which a person discharges liability on behalf of a third party who is at fault. For
example, P takes a loan from a bank and promises to repay it within the stipulated time. R comes
and says that he will pay the loan if P fails to do so. Thus, R is liable to pay the loan back to the
bank on behalf of P in case he fails to discharge his liability.

The person who gives the guarantee or promises to discharge liability on the default of any person
is called the surety. A person in whose default the surety promises to act is the principal debtor,
and a person to whom this guarantee is given is the creditor. Thus, in the above example, P is the
principal debtor, R is the surety, and the bank is the creditor.

The aim of a contract of guarantee is to provide extra security to the creditor that a surety will
fulfil the obligations made by the principal debtor in case he fails to do so. Thus, a guarantee
contract is tripartite in nature as it involves three parties. However, it is not mandatory for the
principal debtor to be a party to an express contract.

Features of a contract of guarantee

The following are the features or essentials of a contract of guarantee:

 The contract of guarantee may either be oral or written. However, it is mandatory that
it fulfils all the conditions of a valid contract.

 There must be a principal debtor who is obliged to discharge the duties promised by
him. If he is unable to do so, a surety is liable on his behalf.

 The consideration in the contract of guarantee needs not to be direct. If the creditor
does something for the benefit of the principal debtor, it is regarded as a sufficient
consideration. For example, A takes a loan from B, and B gives the money. Thus, the
loan given by B to A is a valid consideration for the contract of guarantee.

 Surety must give his consent voluntarily, and it must not be obtained forcefully or by
misrepresentation of facts.

Difference between a contract of indemnity and guarantee

Basis of
Contract of Indemnity Contract of Guarantee
difference

It is given under Section 124 of the

Provisions It is defined under Section 126 of the Act
Indian Contract Act, 1872.
 In a contract of indemnity, there are
two parties, namely, the
Number of indemnifier (who promises to pay
There are three parties. These are: Principal debtor, Surety, Creditor.
parties for the losses) and the indemnity
holder (in whose favour such a
promise is made).

There is only one contract in the
Number of case of indemnity, which is
contracts between the indemnifier and the
indemnity holder.
There are three contracts between the parties: The first contract is between the
principal debtor and the creditor, which makes it obligatory for the principal debtor
to perform his duties. The second contract is between the surety and the creditor,
which binds the surety to act on behalf of the principal debtor. The third contract is
between the principal debtor and surety, by which the principal debtor is bound to
pay the surety the amount that he paid on his behalf.

The aim is to protect a person from This contract aims to provide the creditor with the security that in the absence of the
Aim potential loss by humans or principal debtor or if he fails to perform the obligations, the same will be done by a
agencies. surety.

The indemnifier has primary

The liability of the surety is secondary, as it is the principal debtor who is initially
liability because he promised to pay
Liability responsible for performing the obligations. The surety’s liability arises when the
for the loss incurred by the
principal debtor fails to do so.
indemnity holder.

Recovery of The indemnifier cannot recover the

If surety pays money on behalf of the principal debtor, he/she is liable to recover
money/loss amount that he paid for the loss
from him.
paid from any person.

A promises B that he will pay for C takes out a loan from B and promises to return the money within 3 years. A
Example losses incurred by him due to his promises to be a surety in this case. If C is unable to pay the money within the
actions or those of a third party. stipulated time, it is the duty of A to do so.

In order to understand the topic better, it is crucial that we also skim through the difference
between an indemnity and insurance. Below is a tabular representation of the same.

Difference between an indemnity and an insurance

Basis for
Indemnity Insurance
differentiation

An agreement by which one party promises to save the other from loss Insurance may be thought of as a periodic
Meaning caused to him by the conduct of the promisor himself or by the lead of payment made to protect against any losses
someone else is classified as a “contract of indemnity”. incurred.

Section 31 of the Indian Contract Act, 1872

Section Section 124 of the Indian Contract Act, 1872, mentions indemnity. mentions insurance under a contingent
contract.

The word “insurance” has been derived from

The word indemnity has been derived from the Latin term “indemnis”
Origin the french term “enseurance” which means
which means unhurt, free from loss.
assurance, a guarantee.

Insurance cannot exist without

Role Indemnification can exist without insurance.
indemnification.
 In an indemnity contract, the affected party will get compensation In an insurance policy, regular premium
Nature
after the loss has occurred. payments are made to guard against losses.

Case laws

Recent case laws on the contract of indemnity

State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd. (2007)

Facts of the case

The respondent, a cooperative society, entered into a contract with a company for the installation
of a paper mill. The company gave a bank guarantee or indemnity for the release. 10% of the
retention money from the invoices for materials to be used in the installation reached the location.
However, some disputes arose between them, and the respondent terminated the contract and
invoked a bank guarantee against the company.

Issues involved in the case

 Whether the company is liable for bank guarantee in this case?

 Whether such a claim be honoured by the bank?

Judgment

The Court in this case relied on the contract, which stated that the indemnity holder would be
indemnified against all losses, damages, etc., and made the supplier liable to pay. The Hon’ble
Supreme Court stated that the terms of the contract reveal that it is not a contract of guarantee
but a contract of indemnity. The Court also ordered the Bank not to honour the claim made on the
contract’s termination without any proof or evidence.

Dodika Ltd. and Ors. v. United Luck Group Holdings Ltd. (2020)

Facts of the case

This is a case that was decided by the England and Wales High Court. In this case, there was a
sale and purchase agreement between the parties that related to the disposal of the seller’s share
in a company. Dodika demanded final payment because the tax covenant indemnified the buyer
for undisclosed tax liabilities. Under the agreement, in order to claim money and be indemnified, it
was necessary to serve the notice containing all the necessary details on the other party. This
notice was not served by the buyer, i.e., Dodika, to the seller, i.e., United Luck Group. After
investigation, notice was served.
Issues involved in the case

Whether the notice served by Dodika to United Luck Group was sufficient to attract the claim
according to the agreement?

Judgment of the Court

The Court observed that the notice served by the buyer contained a chronology of events but did
not explain how investigations would be done or what the next steps were. The Court held the
notice insufficient, and no claim could be made under the agreement. It further held that whether
a notice is sufficient enough to claim indemnity under the agreement will be decided on the basis
of the terms and words used therein and the details provided in it.

AXA SA v. Genworth Financial Holdings Inc. and Anor. (2019)

Facts of the case

In this case, a global insurer, i.e., AXA, agreed to take shares from Genworth in the two
companies. The Sale and Purchase Agreement between the two companies had a reimbursement
clause for certain compensation payments, which AXA sought based on mis-selling of payment
protection insurance products by the company in case they were acquired.

Issues involved in the case

Whether the payment or reimbursement clause in the agreement was an indemnity or a covenant
to pay?

Judgment of the court

The Court in this case had to deal with the question of whether the clause in the agreement was
an indemnity clause or an absolute covenant. It was held that the clause was an absolute
covenant. While deciding the case, the Court interpreted the ordinary meaning and nature of the
clause stated in the agreement. It was observed that the clause did not provide any promise to
protect the buyer from the loss suffered by him in the course of business or trade. Furthermore, if
it had been indemnity, it would have given rise to a claim for damages rather than debts.
Therefore, it is not an indemnity but an absolute covenant.

Landmark judgments on the contract of indemnity

Dugdale v. Lovering (1827)

Facts

In this case, the plaintiff was in possession of certain trucks, which were claimed both by the
defendant and K.P. Colliery. The defendant demanded delivery of the trucks. As the plaintiff was
aware that the ownership of the trucks was claimed by both the defendant and K.P. Colliery, the
plaintiff, asked for an indemnity bond from the defendant. A reply was received by the plaintiff,
which only demanded delivery and did not mention an indemnity bond. After which, the plaintiff
delivered the trucks to the defendant. A suit of conversion was filed against the plaintiff by K.P.
Colliery, as per the verdict, for which the plaintiff had to compensate K.P. Colliery. Another suit for
indemnity was filed by the plaintiff against the defendant.

Judgment

It was held that, though there is no express contract of indemnity, there is an implied contract of
indemnity. As per the facts of the case, by demanding the indemnity bond, the plaintiff showed his
intention that he would not deliver the trucks without indemnity. Having knowledge of this fact,
the defendant accepted the delivery of trucks. By accepting, the defendant impliedly promised the
plaintiff indemnification. It was held that the defendant was liable to indemnify the plaintiff as the
indemnity bond led to the creation of an implied promise.

Gajanan Moreshwar v. Moreshwar Madan (1942)

Facts

In this case, the municipal corporation of Bombay leased the plaintiff a piece of property in
Bombay. In response to the defendant’s request, the plaintiff granted him possession of the land
and built a structure on it, thus rendering the plaintiff to mortgage the land twice for Rs. 5,000. In
exchange for the plaintiff being released from all obligations related to the land, the lease of the
plot was also transferred into the defendant’s name. However, the defendant did not release the
plaintiff from the obligations for which the plaintiff had filed a suit. The plaintiff stated that the
defendant shall indemnify him with respect to all liabilities under the mortgage deed.

Judgment

It was held that if the indemnity holder had to wait until he had paid the actual loss, the value of
the indemnification clause would be lost. According to the court’s application of the equity
principle, the indemnifier might be required to pay the court a sufficient amount of money that is
used to build a fund and pay the claim whenever it is made.

United India Insurance Co. v. Ms. Annan Singh Munshilal (1994)

Facts

In this case, the cover note had the consignee’s address. Additionally, before being carried to the
destination, the products had to be dropped off at a godown on the route there. When the
products were in the godown, they were destroyed by fire. The items were seen as having been
lost in transit, and the insurance policy’s provisions held the insurer accountable.

Judgment

It was decided that an indemnification agreement would not apply in the event of a fire or other
disaster. This case held that in cases of fires, etc., it is called a contingent contract and not a
contract of indemnity.
Secretary of State v. Bank of India (1938)

Facts

In this case, a lady was the holder and endorsee of a 5000 rupee government promissory note. An
agent in possession of such a promissory note forged the lady’s signature on the note in his favour
and endorsed it for value to the respondent. In accordance with the Indian Securities Act, 1920,
the respondent applied to the public debt office in good faith. When the woman became aware of
the deception, she filed a conversion lawsuit against the Secretary of State and was awarded
damages. After this, a lawsuit was filed by the appellant against the bank, citing implied
indemnity.

Judgment

It was held that the appropriate amount of the claim should be recovered by the appellant from
the respondent. Additionally, an express indemnity clause is not required for the pre-existing
implied right to indemnity provided by Indian law.

Lala Shanti Swarup v. Munshi Singh (1967)

Facts

In this case, the plaintiff-respondent mortgaged a piece of land to Bansidhar and Khub Chand for
Rs.12,000/- The appellant purchased half of the land from the rightful owner for Rs.16,000/-
Shanti Saran promised to pay the due money, i.e., 13500, to Bansidhar and Khub Chand. Shanti
Saran did not pay, thus Bansidhar and Khub Chand filed a lawsuit. The issue was whether there
existed an indemnity contract.

Judgment

It was held that Shanti Saran failed to discharge the encumbrance, which caused a loss to the
vendor, and the plaintiff-respondent could sue under the contract of indemnity.

Osman Jamal & Sons v. Gopal (1928)

Facts

In this case, the plaintiff is a corporation that acts as a commission agent for the defendant. The
plaintiff’s company entered into an agreement with the defendant’s firm in which the plaintiff’s
company agreed to operate as the defendant’s commission agent for the purchase and sale of
hessian and gunny, charging a commission on all such purchases. The defendant was involved in
the purchasing and selling of hessian and gunnies, and the defendant firm guaranteed the plaintiff
firm that if any loss occurred, the firm would be indemnified. Thereafter, the plaintiff purchased
hessians from Maliram Ramjets; however, the defendant company was unable to pay and take
delivery in certain installments, causing the plaintiff’s company to suffer a loss. As a result,
Maliram Ramjets sold the product to others at a cheaper price.

An order of the court instructed the plaintiff’s company to wind up and appointed the official
liquidator, who filed a suit of recovery claimed by Maliram Ramjets from the defendant firm under
a contract of indemnity. Maliram Ramjets sued the plaintiff for the loss, but the plaintiff was in the
process of winding up his corporation and requested the defendant to indemnify them. However,
the defendant refused to pay the damages and claimed that because of the plaintiff, he was not
able to make the payment. The defendant contended that because the plaintiff made no payment
to Maliram in relation to the liability, they were not allowed to continue a claim under the contract
of indemnity.

Judgment

It was held that the defendant is liable to indemnify the plaintiff because he promised to do the
same. It further stated that indemnity requires that the party to be indemnified never be called
upon to pay.

Chand Bibi v. Santosh Kumar Pal (1933)

Facts

In this case, the defendant’s father, while acquiring specific property, promised to pay off the
plaintiff’s mortgage obligation and indemnify him if they were proven accountable for the debt. The
plaintiff sued the defendant’s father to enforce the agreement when the defendant’s father failed
to pay off the mortgage obligation. The Court took into consideration the fact that the plaintiff had
not yet suffered any loss for which he should be compensated.

Judgment

It was held that the plaintiff had not suffered any losses and that the suit was premature so far as
the cause of action on indemnity was concerned. Moreover, one of the essential conditions of a
contract of indemnity is ‘there must be a loss incurred.’

Conclusion

To summarise, indemnity is an obligation or duty imposed on an individual to bear the losses of

another. An injured party has the right to shift the loss onto the party responsible for the loss. It is
a release from any penalties or liabilities incurred as a result of any conduct. It can also be termed
as security from damage, loss, or penalty. In its simplest terms, indemnity requires one party to
indemnify the other if certain costs specified in the indemnity contract are incurred by another
party.

Further, indemnity is a contract where the promisor is under an obligation to protect the promisee
from losses incurred by him due to the promisor’s default or that of any third party. This loss
covers the loss due to humans or any agency and not any loss due to accidents like fire or those
that are not in control of anyone. The parties are the indemnifier and the indemnity holder, or the
indemnified, and a contract to fall under the ambit of indemnity has to fulfil certain essentials that
are mentioned in the article. Sometimes, we get confused between indemnity and guarantee
because both involve protecting a person from losses. But they both differ from each other in
several aspects that are stated above.

In an indemnity deal, one party is responsible for any harm or loss incurred by the other party as
a result of the promisor’s or other party’s actions. A simple indemnity provision in a contract does
not necessarily resolve liability issues because the law discourages people from attempting to
transfer their own liability onto others or attempting to escape liability. Liability problems will
never be solved by a simple indemnity clause.
The law is not on the side of those who wish to avoid liability or seek a waiver of responsibility for
their conduct. The fundamental reason is that a careless party should not be able to completely
shift all claims and damages made against him to another, non-negligent party.

Frequently Asked Questions (FAQS)

Who is a surety under the contract of guarantee?

Surety is a person who acts on behalf of the principal debtor, who borrowed the money from the
creditor but failed to pay it back. The surety in this case pays the money to the creditor and is
entitled to recover it from the principal debtor.

Is insurance covered under the contract of indemnity in India?

No, the contract of insurance is not covered under the ambit of indemnity in India, unlike England,
where insurance other than life insurance is a kind of contract of indemnity.

What is the main objective of a contract of indemnity?

The purpose of indemnity is to protect the indemnity holder from losses or damages caused by the
conduct of the indemnifier or any other person.

What is the difference between indemnity and warranty?

Under a contract of indemnity, payment is made for the loss incurred, but under a warranty,
damages are paid when the said fact about the quality of the product or its characteristics turns
out to be false.

Can the terms of the contract of indemnity be changed?

Yes, the terms of a contract of indemnity can be changed with the mutual consent of both parties
to the contract.

Can a contract of indemnity be made orally?

Yes, the law does not restrict the oral contract of indemnity. However, it is always advisable to
have a written contract in place.

What is medical indemnity insurance?

Medical indemnity insurance is a type of professional indemnity insurance. It is explicitly referred
to as the medical profession. If the doctor’s carelessness is established in a lawsuit, this indemnity
insurance would reimburse the party that has suffered a loss as a result of the doctor’s negligence.

What is Contract Of Guarantee :-

Introduction
Black laws dictionary defines the term guarantee as the assurance that a legal contract will be duly
enforced. A contract of guarantee is governed by the Indian Contract Act,1872 and includes 3 parties in which
one of the parties acts as the surety in case the defaulting party fails to fulfill his obligations.

Contracts of guarantee are mostly required in cases when a party requires a loan, goods or employment.
The guarantor in such contracts assures the creditor that the person in need may be trusted and in case of any
default, he shall undertake the responsibility to pay. Thus we can say contract of guarantee is invisible security
given to the creditor and shall be discussed further

What is a contract of guarantee?

Section 126 of the Indian contract act defines a contract of guarantee as a contract to perform the promise or
discharge the liability of the defaulting party in case he fails to fulfill his promise.

Thus here we can infer that there the 3 parties to the contract

Principal Debtor – The one who borrows or is liable to pay and on whose default the guarantee is given

Creditor – The party who has given something of value to borrow and stands to receive the payment for such a
thing and to whom the guarantee is given

Surety/Guarantor – The person who gives the guarantee to pay in case of default of the principal debtor

Also, we can understand that a contract of guarantee is a secondary contract that emerges from a primary
contract between the creditor and the principal debtor.

Illustration

Ankita advances a loan of INR 70000 to Pallav. Srishti who is the boss of Pallav promises that in case Pallav
fails to repay the loan, then she will repay the same. In this case of a contract of guarantee, Ankita is the
Creditor, Pallav the principal debtor and Srishti is the Surety.

A contract of guarantee may either be oral or written. It may be express or implied from the conduct of parties.
In P.J. Rajappan v Associated Industries(1983) the guarantor, having not signed the contract of guarantee,
wanted to wriggle out of the situation. He said that he did not stand as a surety for the performance of the
contract. Evidence showed the involvement of the guarantor in the deal and had promised to sign the contract
later. The Kerala High Court held that a contract of guarantee is a tripartite agreement, involving the principal
debtor, surety and the creditor. In a case where there is evidence of the involvement of the guarantor, the mere
failure on his part in not signing the agreement is not sufficient to demolish otherwise acceptable evidence of his
involvement in the transaction leading to the conclusion that he guaranteed the due performance of the contract
by the principal debtor. When a court has to decide whether a person has actually guaranteed the due
performance of the contract by the principal debtor all the circumstances concerning the transactions will have
to be necessarily considered.

Essentials of a Contract of Guarantee

1) Must be made with the agreement of all three parties

All the three parties to the contract i.e the principal debtor, the creditor, and the surety must agree to
make such a contract with the agreement of each other. Here it is important to note that the surety takes his
responsibility to be liable for the debt of the principal debtor only on the request of the principal debtor. Hence
communication either express or implied by the principal debtor to the surety is necessary. The communication
of the surety with the creditor to enter into a contract of guarantee without the knowledge of the principal debtor
will not constitute a contract of guarantee.

Illustration
Sam lends money to Akash. Sam is the creditor and Akash is the principal debtor. Sam approaches Raghav to
act as the surety without any information to Akash. Raghav agrees. This is not valid.

2) Consideration

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.

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.

3) Liability

In a contract of guarantee, the liability of a surety is secondary. This means that since the primary contract was
between the creditor and principal debtor, the liability to fulfill the terms of the contract lies primarily with the
principal debtor. It is only on the default of the principal debtor that the surety is liable to repay.

4) Presupposes the existence of a Debt

The main function of a contract of guarantee is to secure the payment of the debt taken by the principal debtor.
If no such debt exists then there is nothing left for the surety to secure. Hence in cases when the debt is time-
barred or void, no liability of the surety arises. The House of Lords in the Scottish case of Swan vs. Bank of
Scotland (1836) held that if there is no principal debt, no valid guarantee can exist.

5) Must contain all the essentials of a valid contract

Since a contract of guarantee is a type of contract, all the essentials of a valid contract will apply in contracts of
guarantee as well. Thus, all the essential requirements of a valid contract such as free consent, valid
consideration offer, and acceptance, intention to create a legal relationship etc are required to be fulfilled.

To know more about the essentials of a valid contract, please read this

6) No Concealment of Facts

The creditor should disclose to the surety the facts that are likely to affect the surety’s liability. The guarantee
obtained by the concealment of such facts is invalid. Thus, the guarantee is invalid if the creditor obtains it by
the concealment of material facts.

7) No Misrepresentation

The guarantee should not be obtained by misrepresenting the facts to the surety. Though the contract of
guarantee is not a contract of Uberrima fides i.e., of absolute good faith, and thus, does not require complete
disclosure of all the material facts by the principal debtor or creditor to the surety before he enters into a
contract. But the facts, that are likely to affect the extent of surety’s responsibility, must be truly represented

Kinds of guarantee
Contracts of guarantees may be classified into two types: Specific guarantee and continuing guarantee.
When a guarantee is given in respect of a single debt or specific transaction and is to come to an end when the
guaranteed debt is paid or the promise is duly performed, it is called a specific or simple guarantee. However, a
guarantee which extends to a series of transactions is called a continuing guarantee (Section129). The surety’s
liability, in this case, would continue till all the transactions are completed or till the guarantor revokes the
guarantee as to the future transactions.

Illustrations

a) S is a bookseller who supplies a set of books to P, under the contract that if P does not pay for the books, his
friend K would make the payment. This is a contract of specific guarantee and K’s liability would come to an
end, the moment the price of the books is paid to S.

b) On M’s recommendation S, a wealthy landlord employs P as his estate manager. It was the duty of P to
collect rent every month from the tenants of S and remit the same to S before the 15th of each month. M,
guarantee this arrangement and promises to make good any default made by P. This is a contract of continuing
guarantee.
Continuing guarantee
A continuing guarantee is defined under section 129 of the Indian Contract Act,1872. A continuing guarantee is
a type of guarantee which applies to a series of transactions. It applies to all the transactions entered into by the
principal debtor until it is revoked by the surety. Therefore Bankers always prefer to have a continuing
guarantee so that the guarantor’s liability is not limited to the original advances and would also extend to all
subsequent debts.

The most important feature of a continuing guarantee is that it applies to a series of separable, distinct
transactions. Therefore, when a guarantee is given for an entire consideration, it cannot be termed as a
continuing guarantee.

Illustration

K gave his house to S on a lease for ten years on a specified lease rent. P guaranteed that S, would fulfill his
obligations. After seven years S stopped paying the lease rent. ‘K sued him for the payment of rent. P then gave
a notice revoking his guarantee for the remaining three years. P would not be able to revoke the guarantee
because the lease for ten years is an entire indivisible consideration and cannot be classified as a series of
transactions and hence is not a continuing guarantee.

Revocation of Continuing Guarantee

So far as a guarantee given for an existing debt is concerned, it cannot be revoked, as once an offer is accepted it
becomes final. However, a continuing guarantee can be revoked for future transactions. In that case, the surety
shall be liable for those transactions which have already taken place.

A contract of guarantee can be revoked in the following two ways-

1) By giving a notice (Section 130)

Continuing guarantees can be revoked by giving notice to the Creditor but this applies only to future
transactions. Just by giving a notice the surety cannot waive off his responsibility and still remains liable for all
the transactions that have been placed before the notice was given by him. If the contract of guarantee includes a
clause that a notice of a certain period of time is required before the contract can be revoked, then the surety
must comply with the same as said in Offord v Davies (1862).

Illustration

A guarantees to B to the extent of Rs. 10,000, that C shall pay for all the goods bought by him during the next
three months. B sells goods worth Rs. 6,000 to C. A gives notice of revocation, C is liable for Rs. 6,000. If any
goods are sold to C after the notice of revocation, A shall not be, liable for that.

2) By Death of Surety(Section 131)

Unless there is a contract to the contrary, the death of surety operates as a revocation of the continuing guarantee
in respect to the transactions taking place after the death of surety due to the absence of a contract. However, his
legal representatives will continue to be liable for transactions entered into before his death. The estate of
deceased surety is, however, liable for those transactions which had already taken place during the lifetime of
the deceased. Surety’s estate will not be liable for the transactions taking after the death of surety’even if the
creditor had no knowledge of surety’s death.

Period of Limitation
The period of limitation of enforcing a guarantee is 3 years from the date on which the letter of guarantee was
executed. In State Bank Of India vs Nagesh Hariyappa Nayak And Ors, against the advancement of a loan to a
company, the guarantee deed was executed by its directors and subsequently a letter acknowledging the load
was issued by same directors on behalf of the company. It was held that the letter did not have the effect of
extending the period of limitation. Recovery proceedings instituted after three years from the date of the deed of
guarantee were liable to be quashed.

Rights of a Surety
After making a payment and discharging the liability of the principal debtor, the surety gets various rights.
These rights can be studied under three heads:

(i) rights against the, principal debtors.

(ii) rights against the creditor, and
(iii) rights against the co-sureties.

(i) Rights against the Principal Debtor

1) The right of surety on payment of debt or the Right of subrogation(Section 140)

The right of subrogation means that since the surety had given a guarantee to the creditor and the creditor after
getting the payment is out of the scene, the surety will now deal with the debtor as if he is a creditor. Hence the
surety has the right to recover the amount which he has paid to the creditor which may include the principal
amount, costs and the interest.

2) The right of Indemnity(Section 145)

In every contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety, and
the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the
guarantee. This is because the surety has suffered a loss due to the non-fullfillment of promise by the principal
debtor and therefore the surety has a right to be compensated by the debtor

Illustration
Luthra and co has taken a loan from Khaitan and co where Amarchand acts as security on behalf of Luthra.
Khaitan demands payment from Amarchand and on his refusal sues him for the amount, Amarchand defends the
suit having reasonable grounds for doing so, but he is compelled to pay the amount of the debt with costs. He
can recover from Luthra the amount paid by him for costs, as well as the principal debt.
(ii) Rights against the Creditor

1) Right to securities given by the principal debtor(section 141)

On the default of payment by the principal debtor, when the surety pays off the debt of the principal debtor he
becomes entitled to claim all the securities which were given by the principal debtor to the creditor. The Surety
has the right to all securities whether received before or after the creation of the guarantee and it is also
immaterial whether the surety has knowledge of those securities or not.

Illustration
On the guarantee of Priya, Anita lent rs 100000 to Sita. This debt is also secured by security for the debt which
is the lease of Sita’s house. Sita defaults in paying the debt and Priya has to pay the debt. On paying off Sita’s
liabilities Priya is entitled to receive the lease deed in her favor.

2) Right to set off

When the creditor sues the surety for the payment of principal debtor’s liabilities, the surety can claim set off, or
counterclaim if any, which the principal debtor had against the creditor.

(iii) Rights against the Co-sureties

1) Release of one co-surety does not discharge others (Section 138)

When the repayment of debt of the principal debtor is guaranteed by more than one person they are called Co-
sureties and they are liable to contribute as agreed towards the payment of guaranteed debt. The release by the
creditor of one of the co-sureties does not discharge the others, nor does it free the released surety from his
responsibility to the other sureties. Thus when the payment of a debt or performance of duty is guaranteed by
co-sureties and the principal debtor has defaulted in fulfilling his obligation and thus the creditor compels only
one or more of the co-sureties to perform the whole contract, the co-surety sureties performing the contract are
entitled to claim contribution from the remaining co-sureties.

2) Co-sureties to contribute equally (Section 146)

According to Section 146, in the absence of any contract to the contrary, the co-sureties are liable to contribute
equally. This principle will apply even when the liability of co-sureties is joint or several, and whether under the
same or different contracts, and whether with or without the knowledge of each other.

Illustration
A, B, C, and D are co-sureties for a debt of Rs. 2,0000 lent by Z to R. R defaults in repaying the loan. A, B, C,
and D are liable to contribute Rs. 5000 each.

3) Liability of co-sureties bound in different sums(Section 147)

When the co-sureties have agreed to guarantee different sums, they have to contribute equally subject to the
maximum of the amount guaranteed by each one.
Illustration
A, B and C, sureties for D, enter into three separate bonds, each in a different penalty, A for Rs. 10,000, B for
Rs. 20,000 and C for Rs. 40,000. D makes default to the extent of Rs. 30,000. A B and C are liable to pay Rs.
10,000 each. Suppose this default was to the extent of Rs. 40,000. Then A would be liable for Rs. 10,000 and B
and C Rs. 15,000 each.

Discharge of Surety from Liability

Under any of the following circumstances a surety is discharged from his liability:
i) by the revocation of the contract of guarantee,
ii) by the conduct of the creditor, or
iii) by the invalidation of the contract of guarantee

We have already discussed above the first circumstance in which how a surety can be discharged i.e by
Revocation of the Contract of Guarantee. This includes by giving notice or death or the surety.

(ii) Conduct of the Creditor

1) Variance in terms of the contract(Section 133)

When a contract of guarantee has been materially altered through an agreement between the creditor and
principal debtor, the surety is discharged from his liability. This is because a surety is liable only for what he has
undertaken in the guarantee and any alteration made without the surety’s consent will discharge the surety as to
transactions subsequent to the variation.

Illustration

A becomes surety to C for B’s conduct as a manager in C’s bank. Afterward, B and C contract, without A’ s
consent, that B’ s salary shall be raised, and that he shall become liable for one-fourth of the losses on
overdrafts. B allows a customer to over-draw, and the bank loses a sum of money. A is discharged from his
suretyship by the variance made without his consent and is not liable to make good this loss.

2) Release or discharge of the principal debtor(Section 134)

A surety is discharged if the creditor makes a contract with the principal debtor by which the principal debtor is
released, or by any act or omission of the creditor, which results in the discharge of the principal debtor.

Illustration
A supplies goods to B on the guarantee of C. Afterwards B becomes unable to pay and contracts with A to
assign some property to A in consideration of his releasing him from his demands on the goods supplied. Here,
B is released from his debt, and C is also discharged
from his suretyship. But, where the principal debtor is discharged of his debt by operation of law,
say, on insolvency, this will not operate as a discharge of the surety.

3) Arrangement between principal debtor and creditor

According to section 135 when the creditor, without the consent of the surety, makes an arrangement with the
principal debtor for composition, or promise to give him time to, or not to sue him, the surety will be
discharged.
However, when the contract to allow more time to the principal debtor is made between the creditor and a third
party, and not with the principal debtor, the
surety is not discharged (Section 136).

Illustration
C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with M to
give time to B, A is not discharged.

4) Loss of security(Section 141)

If the creditor parts with or loses any security given to him at the time of the guarantee, without the consent of
the surety, the surety is discharged from liability to the extent of the value of the security.

Illustration
A, as surety for B, makes a bond jointly with 3 to C to secure a loan from C to B. Later on, C obtains from B
further security for the same debt. Subsequently, C gives up further security. A is not discharged.

(iii) By Invalidation of the Contract

A contract of guarantee, like any other contract, may be avoided if it becomes void or voidable at the option of
the surety. A surety may be discharged from liability in the following cases:

1) Guarantee obtained by misrepresentation(Section 142)

When a misrepresentation is made by the creditor or with his knowledge or consent, relating to a material fact in
the contract of guarantee, the contract is invalid

2) Guarantee obtained by concealment(Section 143)

When a guarantee is obtained by the creditor by means of keeping silence regarding some material part of
circumstances relating to the contracts, the contract is invalid

3) Failure of co-surety to join a surety(Section 144)

When a contract of guarantee provides that a creditor shall not act on it until another person has joined in it as a
co-surety, the guarantee is not valid if that other person does not join.E

Extent of a surety’s liability

In the absence of a contract to the contrary, the liability of a surety is co-extensive with that of the liability of the
principal debtor. It means that the surety is liable to the same extent to which the principal debtor is liable.
Illustration
A guarantees to B the payment of a bill of exchange by C, the acceptor. On the due date, the bill is dishonored
by C. A is liable, not only for the amount of the bill but also for any interest and charges which may have
become due on it.

Conclusion
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. Every contract of guarantee has
three parties and there exist two types of guarantees i.e specific guarantee and continuing guarantee. The type of
Guarantee used depends on the situation and the terms of the contract. The surety has some rights against the
other parties and liability of the surety is considered to be co-extensive with that of the principal debtor unless it
is otherwise provided by the contract. In case the contracts are entered into by misrepresentation made by the
creditor regarding material circumstances or by concealment of material facts by the creditor, the contract will
be considered invalid.

Rights Of Surety :-

Introduction

An agreement which is enforceable by law is called a contract. A contract is an

agreement where certain terms and conditions are agreed by the parties in exchange of
consideration and a guarantee means an assurance which is being given by a party to
someone in respect to an act. Hence, the contract of guarantee is a contract between
three parties in respect to any default done by a person then another party assures to
recover that loss.

In this article you will further read about the contract of guarantee between the specific
parties of the contract of guarantee. How the contract of guarantee is different from
other forms of contract and provisions under which they are enforced with judicial
interpretations.

What is a contract of guarantee

Section 126 of the Indian Contract Act, 1872 has defined the contract of guarantee. The
word contract of guarantee in simplified form means a contract which is an agreement
forcible in the eye of law and guarantee which means the assurance.

The Contract of Guarantee is a contract where there are 3 people involved. In a sense, a
person lends money who is said to be a creditor to another person who is in need of
money, called the principal debtor along with a person who gives the guarantee that the
money will be repaid to the creditor either by the principal debtor or if he makes a
default in paying then the guarantor or surety will make the payment.
Essentials of a contract of guarantee

Parties to be involved in a contract

In a contract of guarantee there must be a contract between three parties. The three
parties include the creditor, the principal debtor and the surety. In respect to a loan
which is taken by the principal debtor from a creditor having a surety.

Role of surety

The surety is bought in the contract just as a person who gives a guarantee that the
principal debtor will pay the amount but if in any circumstances the principal debtor fails
to pay the amount the creditor may ask the surety to pay the debt amount. The
important point to be noted here is that only if the principal debtor does not pay the debt
then only the creditor can ask the surety to clear his debt.

Consideration involved

It is the established principle of contract law that a contract is valid only when the
contract involves any kind of consideration in it. Section 127 of the Indian Contract Act,
1872 clarified in respect to the consideration as part of surety it says that if any benefit
is being received by the principal debtor the same can be regarded to be for the surety
to give the guarantee.

Essentials for making a contract valid

There are certain points to be kept in mind while making a contract valid. There must be
an offer, with a lawful consideration between the parties to enter into a contract and the
age must be of at least 18 years, giving free consent to enter into a contract.

All the facts must be communicated

All the facts to the surety should be communicated in respect to the contract which is
being executed. The creditor or the principal debtor cannot conceal any facts in relation
to the contract of guarantee.

There must be a debt

It is important that there must be any kind of debt in the contract. If the debt is not
there then there cannot be a contract of guarantee. A promise for the repayment of the
dues must be there on part of the principal debtor or the surety.

Parties to a contract of guarantee

In the contract of guarantee there are three parties involved. The parties in contract of
guarantee are the following :

1. Creditor – The creditor is the person who lends money to the principal debtor
and is entitled to receive the loan back as the specified time period expires.
2. Principal debtor – The principal debtor is the person who receives the loan
from the creditor and it is the primary liability of the principal debtor to return
the money back.
3. Surety – The surety is a person who takes the guarantee that the principal
debtor will return the money back. The surety is also called a guarantor. If the
principal debtor fails to pay the loan amount then the creditor can ask the
surety to repay the loan.

Rights of a surety

Rights against the creditor

i) Right to securities with the creditor

Section 141 of the Indian Contract Act,1872 has mentioned the right of surety to get a
share in the security which has been kept while entering into the contract of guarantee.
The place of surety is the same as the place of the creditor in terms of security. It is a
compulsion on a creditor to share the security with the surety; it is irrelevant whether
the surety was aware of the security or not. If the principal debtor defaults in the
payment and the surety has cleared the dues, it makes the surety entitled for a share.

ii) Loss of securities without creditor’s negligence

Under this circumstance the creditor takes the security of the principal debtor in case of
default of payment. The surety has the right to set-off the claim in respect to the value
of security from the debt of the principal debtor.

Illustration– A being the creditor gave a loan to B of Rs 2,00,000 on the surety of C.

While B has kept his house on security in respect to the loan borrowed from A. B was in
default to pay the loan of A. If A files a case against C for the repayment of the due
amount, then C can claim discharge of the amount from the security which was
recovered.

Rights against the principal debtor

i) Rights of subrogation

Section 140 of the Indian Contract Act, 1872 has stated the right of subrogation. The
right of subrogation means forming a new contract to recover the debt from the parties.
As the surety has paid the amount due in respect to default made by the principal
debtor. Now the surety takes the place of the creditor and the principal debtor is entitled
to pay the repaid loan amount which was paid on behalf of him to the creditor in the
original contract of guarantee.

ii) Rights of indemnity against the principal debtor

Under Section 145 of the Indian Contract Act, 1872 it is mentioned to indemnify the
surety. ‘To indemnify’ means that a party will pay the damages which are caused to the
party in respect of fulfilment of the act of the promisor. Under the Contract of Guarantee
the principal debtor is obliged to indemnify the surety in respect to the default of
payment at the time of discharging the loan amount. It is not compulsory that the
indemnity clauses should be mentioned in the contract; it is an implied duty of the
principal debtor in respect to default of payment.

iii) Securities received by the creditor after the contract of guarantee

Section 141 of the Indian Contract Act, 1872 has mentioned the right of surety in the
security which is mentioned in the contract of guarantee. If the principal debtor makes a
default in payment of the loan amount and the payment is made by surety then in this
case the surety can avail the benefit of security. If the amount is being deducted from
security then in this case the surety can be discharged.

Surety’s rights against the co-sureties

i) Co-sureties right to get release from the contract

Section 138 of the Indian Contract Act, 1872 has stated that if one surety is discharged
from his liability it will not mean that all the sureties are also discharged from his
obligation. Co-sureties here means that when more than one surety gives the guarantee
or takes the obligation to pay the debt of the principal debtor. As per Section 138 when
the principal debtor fails to pay the debt and if the creditor asks only one surety to fulfil
his duty. In this case that surety can ask the other co-sureties to fulfil their
responsibility.

2.Co-sureties are entitled to contribute equally

Section 146 of the Indian Contract Act, 1872 has mentioned that the liabilities of co-
securities are joint. If the contract does not mention the liability of co-securities as joint,
it must be implied that all the co-securities will share equally the debt not paid by the
principal debtor.

3.Co-sureties entitled to pay the amount as promised

As per Section 147 if the co-securities have promised a particular amount to pay in the
sum of debt then they are obligated to pay that sum if the principal debtor causes
default in payment of the loan.
Illustrations: Ram, Shyam and Mohan are co-securities to Ramesh. Ramesh took a loan
of Rs 9,000. If three of them have decided to pay Rs 3,000 each in case of default of
payment of the loan by Ramesh. Then they are entitled to pay Rs 3,000 only

Conditions under which the surety can be discharged from his liability

There are majorly three circumstances when a surety can be discharged from his
liability. The circumstances are :-

1. Revocation of contract of guarantee;

2. Conduct of the creditor; and
3. Invalidating contract of guarantee.

i) Revocation of contract of guarantee

By way of notice

According to Section 130 of the Indian Contract Act, 1872 the surety can revoke the
contract of guarantee by way of notice to the creditor in advance. The surety is
exempted from any responsibility after the surety gives notice to the creditor. It means
that prior to the notice all contracts will be valid.

Death of surety

According to Section 131 of the Indian Contract Act, 1872 the death of the surety will
cause a revocation of the contract of guarantee. But the legal heirs of surety will be
obliged to perform the contract on behalf of surety.

ii) Conduct of the creditor

Terms of contract being changed

According to Section 133 of the Indian Contract Act, 1872 if the creditor makes any
changes in the terms of contract with the consent of the principal debtor without the
knowledge of the surety. The surety will be discharged from the contract of guarantee.
The reason being the surety will be liable for the conduct only which he would have
promised to do and not further.

Performance of contract of guarantee

According to Section 134 of the Indian Contract Act, 1872 the surety will be discharged
from his promise if the principal debtor fulfils his promise or pays the loan and the
contract of guarantee is executed.
Mere compromise

According to Section 135 of Indian Contract Act, 1872 the creditor gives extra time to
the principal debtor for the payment of the loan amount and promises that he may not
sue the debtor for this; in this case the surety is discharged from the contract.

iii) Invalidating the contract of guarantee

Contracts executed through misrepresentation

According to Section 142 of the Indian Contract Act,1872 if the contract is made by a
creditor by concealing material facts from the parties or he has misrepresented the
terms of the contract, then the contract is not valid. It will not be enforced under law.

Contract entered through concealing facts

According to Section 143 of the Indian Contract Act,1872 if the contract was entered
through concealing a material fact from the parties then the contract will not be valid.

Unless co-sureties consent to a contract

According to Section 144 of the Indian Contract Act,1872 the contract will not be
forceable unless the other co-sureties enter into a contract of guarantee.

Surety’s liability

Section 128 of the Indian Contract Act, 1872 has stated the liability of surety. The
liability of surety will be co-extensive which means that the extent to which the principal
debtor is liable is the same as the surety is liable. The surety cannot be made liable to
the extent in which the principal debtor is not. The contract of guarantee is primarily
with the principal debtor and then with the surety.

Case laws with respect to contract of guarantee

State of Madhya Pradesh v. Kaluram 1967 SCR (1) 266 (1966)

Facts of the case

The auction was held by the forest officer in Madhya Pradesh for the sale of felled trees.
The auction was in favour of Jagatram. The contract was executed between Jagtram and
Government of Madhya Pradesh where the payments were decided to be made in
instalments where Nathuram and Kaluram were made the surety if Jagatram made any
default in payment of the dues. After the payment of the first instalment, Jagatram failed
to pay the due amount from the second instalment and cleared all the trees. In respect
to the non-payment of the due amount, the surety was asked to fulfil the promise.

Issue involved in the case

Whether the co-sureties are liable to pay the debt ?

Judgement of the Court

The Hon’ble Supreme Court relied his judgement on Section 141 of Indian Contract Act
the department should not have allowed the Jagatram to clear the forest without the due
payment of loan and it can be seen that the fault was on part of creditor hence, the
surety cannot be made liable to pay the loan amount as this act made him discharge
from his liability.

Rajappan v. Associated Industries Private Ltd. (1990)

Facts of the case

The agreement of guarantee was drafted by the plaintiff on the account of surety given
by the second defendant in respect to a loan of Rs 10,000 to the first defendant. In this
case the plaintiff was the creditor, the principal debtor was the first defendant and the
surety was the second defendant.

The terms were already reciated to both the parties and both of them agreed to the
terms. After relying on the terms the draft was made for the agreement but at the time
of execution of signature, the second defendant contended to the Plaintiff that he was in
hurry and would sign the agreement later due to some urgent work and left the place.
Now when the time came to fulfil the promise of being a guarantor he refused the said
terms and said that he had never signed the agreement, hence he is not entitled to pay
the due amount.

Issue involved in the case

Whether the second defendant is entitled to pay the amount because he promised to be
a guarantor?

Judgement of the Court

The Hon’ble Kerala High Court mentioned there was certain evidence in favour of the
second defendant which was produced by the plaintiff in respect to performance of the
agreement. The Hon’ble Court established that, as the second defendant on just the
basis of not signing the agreement cannot be discharged from his duties. Hence, the
contract of guarantee is an agreement where three parties are involved: the creditor,
principal debtor and the surety. It should not be necessary that only the signature will be
considered as entering into an agreement but implied acts can also be deemed as a
consent.

Radha Kanta Pal v. United Bank of India Ltd. (1954)

Facts of the case

The case was in respect to the agreement. Rajanikant Pal (Deceased) came under a
bond dated 8 August 1944 with Comilia Banking Corporation Limited (at the time of
executing the bond) now known as United Bank of India after amalgamation in respect
to appointing Nishikanta Pal as a cashier in the bank. The consideration of the bond was
Rs 10,000.

When Nishikanta Pal was appointed as a cashier in the bank, the misrepresentation in
cash of the bank was found twice. The bank instead of taking any disciplinary action
against Nishikanata deducted the amount from Rajanikant promissory note without any
prior consent or information given to the parties in view of adjusting their claims.

Judgement of the Court

The Court stated that the creditor was in the employer’s position. He must have checked
in regard to the work being done and he could have taken any action against the
employee. The Hon’ble Court stated that Section 139 of the Indian Contract cannot be
brought in this case.

Ansal Engineering Projects Limited v. Tehri Hydro Development Corporation Limited and Another (1966)

Facts of the case

The petitioner entered into a contract with the respondent dated 30 March, 1991 in
respect to the construction of a residential quarter in Tehri. The residential quarters were
not completed within the time period. The respondent terminated the contract on his
part and went to United Commercial Bank Ltd. (UCO) to collect the amount. As part of
the conflict the plaintiff appointed an arbitrator for the resolution of the said dispute.

Judgement of the Court

The Hon’ble Court stated that the respondent was not entitled to receive the amount
from the bank guarantee. This will be regarded as revocation of contract through illegal
means and will be termed as fraud on the part of the respondent.
Difference between contract of indemnity and contract of guarantee

Basis Contract of Indemnity Contract of Guarantee

Provision under Section 124 of Indian Contract Act Section 126 of Indian Contract Act defines Contract of
Indian Contract Act defines Contract of Indemnity Guarantee

It is a contract of promise to save the

It is a contract of a guarantee that the principal debtor will
Definition person from loss which is caused by
not make a default in payment of due by the surety.
another person.

Parties to a There are two parties involved There are three parties involved in a contract, creditor,
Contract indemnifier and indemnity holder principal debtor and surety

Liability of third In this contract the promisor has In this contract the primary liability will be on the principal
party primary liability in case of default debtor if he is at default then it is the surety.

Number of There is only one contract. That is There are three contracts.Firstly, between Creditor and
agreement between the indemnifier and the Principal Debtor. Secondly with the Principal Debtor and
between parties indemnity holder. Surety. Thirdly, between Creditor and Surety.

Conclusion

The contract of guarantee is different from the other forms of contract. In the contract of
guarantee there are three parties involved instead of two parties and more specifically
this contract is executed to protect the creditor from the default of the principal debtor,
unusual to other contracts. In common forms of contract there must be a consideration
in exchange for fulfilment of the act but here there is no major consideration involved; it
is a promise to recover the loss caused to the creditor by the default of the principal
debtor.