Contract of Indemnity and

Guarantee
Sections 124 to 147 of
Indian Contract Act
Contract of Indemnity (Section
124)
 A Contract by which
 one party promises to another
 to save him from loss caused to him
 by the conduct of the promisor himself or by the conduct of any
other person
 is called a Contract of Indemnity
Parties to the Contract of
Indemnity
 The person who promises to protect another: INDEMNIFIER
 The person who is so protected is: INDEMNITY-
HOLDER/INDEMNIFIED
 Indemnity is protection against loss.
Loss caused either:
by the conduct of the promisor himself or
by the conduct of any other person

 The loss caused by human agency.

 It does not deal with any case where the indemnity arises from
loss caused by events or accidents which do not or may not
depend upon the conduct of the indemnifier
 Or by reason of liability incurred by something done by the
indemnified at the request of the indemnifier.
Example

 A lost his share certificates. He applied to the company for the

issue of duplicate certificate. The company asked A to furnish an
‘indemnity bond’ to protect the company against any claim that
may be made by any person on the original certificates. Here, A is
the indemnifier and B is the indemnity holder.
Example

 The receipt pertaining to certain goods is lost by B while

traveling through Indian Railways. Now, A claims the goods from
Railway company. The Railway Co. asked A to give an
‘indemnity bond’. A gets the goods. Here A is indemnifier and
Railway Co is the indemnity holder. Later, B the real owner sues
the Railway Co.. Now, the co. can claim indemnity from A, for
the loss caused by his conduct.
 Must contain all the essentials of a valid contract.(Sec.10)
 Contract may be expressed or implied.
 It is a contingent agreement to make good the loss.
 It is enforceable only when the loss occurs.
 Promisee must have actually suffered a loss according to the
terms & conditions of the contract.
 Indemnifier is liable only for the loss.
Essentials Features of Contracts of
Indemnity
 Essentials of a Valid Contract
 Contract may be expressed or implied
 It is a Contingent Contract by nature
 Liability of indemnifier commences when the indemnified suffers
some loss according to the terms and conditions of the contract
 All Contracts of Insurance are Contracts of Indemnity except life
Insurance
 2 parties i.e. indemnifier and indemnity holder.
 Is for re-imbursement for loss
 1 contract btw indemnifier and indemnity holder
 The liability of indemnifier is primary
 The liability of indemnifier arises only on the
happening of contingency
 The indemnifier act independently without any
request of the debtor or third party.
Scope of sec 124
 Sec.124 is somewhat narrow in its scope.
 It refers to the promises which cover situations where the loss to the
promisee may be caused by the behavior of the promisor or by that
of a third person.
 This definition in itself will not include a contract of insurance since
the insurance contracts relate to losses caused by accidents.
 It is clear, that the actual scope of contracts of indemnity is much
wider than the definition of Section 124
 Every contract of insurance, other than life insurance, is a contract
of indemnity. The definition is restricted to cases where loss has
been caused by some human agency. [Gajanan Moreshwar v
Moreshwar Madan]
 English law

 Under English Law, the word ‘indemnity’ carries a much wider

meaning than given to it under the Indian Contract Act.
 It includes a contract to save the promisee from a loss, whether it
be caused by human agency or any other event like an accident or
fire.
 Under English Law, a contract of insurance (other than life
insurance) is a contract of indemnity.
Rights of Indemnity Holder when
sued( Section 125 )

  All damages which he may be compelled to pay

in any suit in respect of any matter to which
the promise to indemnify applies.
 All cost which he may be compelled to pay in
defending such suit.
 All sum which he may have paid upon
compromise of such suit provided the
compromise was not contrary to the order of
the indemnifier and was authorized by the
indemnifier.
# Gajanan Moreshwar v. Moreshwar Madan

 Chagla J : 124 and 125 are not exhaustive of the

law of indemnity and the courts to apply the
same equitable principle that the courts in
England do
Contract of Guarantee (Sec. 126)

  “A contract of guarantee is a contract to perform the promise or

discharge the liability of a third person in case of his default.”
 Eg- A advances a loan of Rs 5000 to B and C promises to A that if
B doesn’t repay the loan, C will do so. This is a contract of
guarantee.
 Eg- A sells and delivers goods to B. C afterwards requests A to
forbear to sue B for the debt for a year and promises that if he
does so, C will pay for them in default of payment by B. A agrees
to forbear as requested. This is a sufficient consideration for C’s
promise
Parties to the Contract of
Guarantee
 The person who gives the guarantee is known as the ‘Surety’,
 the person in respect of whom the guarantee is given is known as
the ‘Principal Debtor’, and
 the person to whom the guarantee is given is called the
‘Creditor’.
 Essential Features of Guarantee 

 Three Contracts: The Contracts connecting each-

other as contract between:
 the Principal Debtor and Creditor,
 the Creditor and Surety, and
 the Surety and Principal Debtor
 The primary liability is of the principal debtor and
only secondary liability is of the surety.
 There should be a principal debt.
 Essentials continue..
 Essentials of Valid Contract i.e. free consent,
consideration, lawful object, competency of the parties
etc.
 In respect of consideration, no direct consideration in
the contract between the surety and creditor.
Consideration for principal debtor is considered to be
adequate for the surety. (sec 127)
 Either oral or written (sec 126)
 Under English law: written and signed by the party
 This is invalid where guarantee has been obtained by
means of misrepresentation/ concealment made by
creditor (Sec 142 & 143)
Difference
Indemnity Guarantee

2 parties i.e. indemnifier 3 parties  i.e. creditor,

and indemnity holder. principal debtor and
surety

Is for re-imbursement for Is surety of debt

loss
1 contract btw indemnifier 3 contracts one btw
and indemnity holder principal debtor and
creditor, second btw
creditor and surety and
third between surety and
principal debtor
 Indemnity Guarantee

The liability of The liability of the surety

indemnifier is primary is secondary and arises
only if the principal
debtors fails to perform
his obligations.
The liability of The liability for Surety
indemnifier arises only on arises when the principal
the happening of debtor defaults. 
contingency
The indemnifier act It is not necessary that
independently without any the P.D. must expressly be
request of the debtor or a party. P.D may be a
third party. party to the contract by
implication.
 Nature & Extent of Surety’s
Liability
 In General circumstances, the liability of
surety arises only in case of default of
Principal Debtor so his liability is secondary.
 Liability of Surety is co-extensive with that of
Principal Debtor-if liability of Principal Debtor
reduces then surety’s liability also reduces e.g.
when Creditor recovers a part of his loan from
property of principal debtor. (sec 128)
 146: Co-sureties liable to contribute equally
 Where two or more persons are co-sureties for the same debt
or duty, either jointly or severally, and whether under the
same or different contracts; and whether with or without the
knowledge of each other, the co-sureties, in the absence of
any contract to the contrary, are liable, as between
themselves, to pay each an equal share of the whole debt, or
of that part of it which remains unpaid by the principal
debtor 
 (a) A, B and C are sureties to D for the sum of 3,000 rupees lent to E.E
makes default in payment. A, B and C are liable, as between themselves,
to pay 1,000 rupees each.

(b) A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and
there is a contract between A, B and C that A is to be responsible to the
extent of one-quarter, B to the extent of one-quarter, and C to the extent
of one-half. E makes default in payment. As between the sureties, A is
liable to pay 250 rupees, B 250 rupees, and C 500 rupees.
 147: Liability of Co-sureties
bound in different sums
 Liability of co-sureties bound in different sums.—Co-sureties who are bound
in different sums are liable to pay equally as far as the limits of their respective
obligations permit. 

 A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees,
C in that of 40,000 rupees, conditioned for D’s duly accounting to E. D makes
default to the extent of 30,000 rupees. A, B and C are liable to pay 10,000
rupees. 
 A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees,
C in that of 40,000 rupees, conditioned for D’s duly accounting to E. D makes
default to the extent of 40,000 rupees. A is liable to pay 10,000 rupees, and B
and C 15,000 rupees each. 
 A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees,
C in that of 40,000 rupees, conditioned for D’s duly accounting to E. D makes
default to the extent of 70,000 rupees. A, B and C have to pay the full penalty
of his bond.
 Types of Guarantee
 2 types
 Specific Guarantee: When a guarantee extends to
a single transaction or debt, it is known as a
Specific or Simple Guarantee

 Continuing Guarantee: When a guarantee extends

to a series of transactions, it is called Continuing
Guarantee (sec 129)
 Discharge of surety from liability

 Notice of Revocation (sec 130)

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

 Death of Surety (sec 131)

 The death of the surety operates, in the absence of any contract
to the contrary, as a revocation of continuing guarantee, so far
as regards future transactions.
variation of Contract (sec 133)

Any variance made without the surety's consent, in the

terms of the contract between the principal [debtor] and
the creditor, discharges the surety as to transactions
subsequent to the variance.
 Release/ discharge of Principal Debtor (sec
134)
 The surety is discharged by any contract between the
creditor and the principal debtor,
 which the principal debtor is released, or
 by any act or omission of the creditor, the legal
consequence of which is the discharge of the
principal debtor.
 By Composition with the Principal
Debtor (sec 135)
 A contract between the creditor and the principal
debtor, by which the creditor make a composition
with, or promises to give time, or not to sue, the
principal debtor, discharges the surety, unless the
surety assents to such contract.
 Loss of Security or Creditor’s act or commission
impairing surety’s eventual remedy. (sec 139)
 If the creditor does any act which is inconsistent
with the right of the surety, or omits to do any act
which his duty to the surety requires him to do, and
the eventual remedy of the surety himself against
the principal debtor is thereby impaired, the surety
is discharged.
 State of M.P. v. Kaluram (1967, SC), the surety was
discharged by the loss of security by the creditor.

 A puts M as apprentice to B, and gives a guarantee to B for

M's fidelity.
 B promises on his part that he will, at least once a month, see
that M make up the cash.
 B omits to see this done as promised, and M embezzles.
 A is not liable to B on his guarantee's act or omission
impairing surety's eventual remedy
 Continue..
 If due to some reasons the Principal Debtor cannot be held liable, still surety
can be held liable in following situations-
 If Principal Debtor is a minor
 If Principal Debtor is declared insolvent.
 If liability of Principal Debtor has become time-barred.
 When surety is not discharged

 Agreement made by creditor to third person to give time to principal debtor

(sec 136)
 Creditor’s forbearance to sue (sec 137)
 Release of one of the co-surety (sec 138)
 Rights of Surety against Principal Debtor

 Right of Subrogation (sec 140)

 The surety steps into the shoes of the creditor
 Surety is conferred with the same rights which the creditor had against the
principal debtor.
 Where a guaranteed debt has become due, or default of the principal debtor to
perform a guaranteed duty has taken place, the surety upon payment or
performance of all that he is liable for, is invested with all the rights which the
creditor had against the principal debtor.
 Right to claim Indemnity (sec 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, but no sums which he has paid wrongfully.
 B is indebted to C, and A is surety for the debt.
 C demands payment from A, and on his refusal sues him for the
amount.
 A defends the suit, having reasonable grounds for doing so, but he is
compelled to pay the amount of debt with costs.
 He can recover from B the amount paid by him for costs, as well as the
principal debt.
#C. K. Aboobacker v. K.P. Ayishu (2000)
A guarantor is liable for any payment or performance
of any obligation only to the extent the principal
Debtor has defaulted.
According to section 145, after the surety has paid the
amount , the principal Debtor should indemnify the
surety for everything the surety has rightfully paid
under the contract of guarantee.
 Right of Surety against the
Creditor
 Sec 141: Surety’s right to benefit of Creditor’s securities
 A surety is entitled to the benefit of every security which the creditor has against the principal
debtor at the time when the contract of suretyship is entered into,
 whether the surety knows of the existence of such security or not;
 and, if the creditor loses, or, without the consent of the surety, parts with such security,
 the surety is discharged to the extent of the value of the security.
 State of M.P. v. Kaluram (1967, SC), the surety was discharged by the loss of security by the
creditor.
 C advances to B, his tenant, 2,000 rupees on the
guarantee of A.
 C has also a further security for the 2,000 rupees by a
mortgage of B's furniture.
 C cancels the mortgage.
 B becomes insolvent, and C sues A on his guarantee.
 A is discharged from liability to the amount of the
value of the furniture.
 Right against Co-surety
 Two or more persons are co-sureties for the same debt or duty either jointly or
severally, whether under the same or different contracts, with or without knowledge
of each other are:
 Liable to pay equally when contributing equally. (sec 146)
 Liable to pay equally as far as limits of their respective obligations permit when the
co-surety’s have agreed to guarantee diff. sums (sec 147)
# Bank of Bihar v. Damodar Prasad
( 1969, SC)
 The plaintiff bank lent money to Damodar Prasad, on the guarantee of
Paras Nath Sinha.
 The bank filed a suit against both.
 Decree passed in favour of Bank but with condition that the plaintiff
bank shall be at liberty to enforce its dues against the surety only after
having exhausted its remedies against the principal debtor.
 Appeal before the SC
 Liability of surety Co-extensive with liability of Principal Debtor
 No clause in guarantee deed which provided contrary to contract.
 SC: Appellant bank was at liberty to recover loan amount jointly and
severally from all the defendants.