LAW OF CONTRACT (102) UNIT 1
A: CONTRACT OF INDEMNITY &DISTINCTION BETWEEN INDEMNITY AND
GUARANTEE
Indemnity Meaning –
To make good the loss incurred by another person
To compensate the party who has suffered some loss
To protect a party from incurring a loss
‘Contract of Indemnity’ Definition
A contract is called as a ‘contract of indemnity’ if –
One party promises to save the other from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person.
Modes of contract of indemnity
Expressed: When a person expressly promises to compensate the other from loss.
Implied: When the contract is to be inferred from the conduct of the parties or from the
circumstances of the case.
Essential elements of a contract of indemnity
Contract: All the essentials of a valid contract must also be present in the contract of
indemnity
Example:- X asks Y to beat Z and promises to indemnify Y against the consequences. Y
beats Z and is fined Rs.1,000. Y cannot claim this amount from X because the object of the
agreement was unlawful.
Loss to one party: A person can indemnify another person only if such other person incurs
some loss or it has become certain that he will incur some loss.
Indemnity by the Promisor: The purpose of contract of indemnity is to protect the indemnity
holder from any loss that may be caused to the indemnity holder.
Reason for loss: The contract of indemnity must specify that indemnity holder shall be
protected from the loss caused due to –
Action of the promisor himself; or
Action of any other person; or
Any act, event or accident which is not in the control of the parties.
, Distinction between Indemnity and Guarantee
Basis Contract of indemnity Contract of guarantee
Meaning A contract by which one party promises to save the other from loss caused to him is
called as a contract of indemnity. A contract of guarantee is a contract to perform the
promise, or discharge the liability of a third person in case of his default.
Parties There are only two parties, viz, the indemnifier and the indemnity holder. There are
three parties, viz., the principal debtor, creditor and the surety.
Nature of liability The liability of the indemnifier is primary and independent. The liability of
the surety is secondary and conditional.
Number of contract In a contract of indemnity there is only one contract. In the contract of
guarantee, there are three contracts; first between principal debtors and creditor, second
between creditor and surety, and third between surety and principal debtor.
Nature of contract The contract of indemnity is for the reimbursement of the loss. The
contract of guarantee is for the security of the creditor.
Commencement of the indemnifier’s liability Contract of Guarantee
Meaning of ‘contract of guarantee’
A ‘contract of guarantee’ is a contract to –
Perform the promise; or
Discharge the liability, of a third person in case of his default.
Meaning of ‘surety’: The person who gives the guarantee is called as ‘surety’
Meaning of ‘principal debtor’: The person in respect of whose default the guarantee is given
is called as ‘principal debtor’.
Meaning of ‘creditor’: The person to whom the guarantee is given is called as ‘creditor’.
Difference between contract of indemnity and Guarantee Essentials of a valid Contract Of
Guarantee
Must have all the essentials of a valid contract: All the essentials of a valid contract must be
present in the contract of guarantee.
Exceptions:
Consideration received by the principal debtor is a sufficient consideration to the surety for
giving the guarantee.
, Even if principal debtor is incompetent to contract, the guarantee is valid. But, if surety is
incompetent to contract, the guarantee is void.
Primary liability of some person
The principal debtor must be primarily liable. However, even if the principal debtor is
incompetent to contract the guarantee is valid.
The debt must be legally enforceable.
The debt must not be a time barred debt.
The contract must be conditional
The liability of surety is secondary and conditional.
The liability of surety arises only if the principal debtor makes a default.
No misrepresentation
The creditor should disclose all the facts which are likely to affect the surety’s liability.
There must not be any concealment of facts.
Form of contract
A contract of guarantee may be either oral or written. Joining of other co-sureties
The guarantee by a surety is not valid if –
A condition is imposed by a surety that some other person must also join as a co- surety;
but
Such other person does not join as a co-surety.
Nature and Extent of Surety’s Liability
Surety’s liability is coextensive with liability of principal debtor
General rule –
Surety is liable for all the debts payable by the principal debtor to the creditor.Accordingly,
interest, damages, costs etc. may also be recovered from the surety.
Exception:-
The contract of guarantee may provide otherwise.
Commencement of surety’s liability
, The liability of surety arises immediately on default by the principal debtor. The creditor is
not required to –
(a) first sue the principal debtor; or
(b) first give a notice to the principal debtor.
Surety’s liability may be limited
The surety may fix a limit on his liability up to which the guarantee shall remain effective.
Surety’s liability may be continuous
The surety may agree to become liable for a series of transactions of continuous nature.
However, the surety may fix –
– a limit on his liability upto which the guarantee shall remain effective;
– a time period during which the guarantee shall remain effective.
Surety’s liability may be conditional
The surety may impose certain conditions in the contract of guarantee. Until those conditions
are met, the surety shall not be liable.
Continuing Guarantee
Meaning: A guarantee which extends to a series of transactions is called as continuing
guarantee.
Revocation (Sec.130):
Continuing guarantee may be revoked, at anytime, by the surety by giving a notice to the
creditor. However, revocations shall be effective only in respect of future transactions (i.e.
the liability of the surety with regard to previous transactions remains unaffected)
Death of surety (sec. 131): Death of the surety operates as a revocation of a continuing
guarantee as to future transaction.
B:Rights of indemnity holder Right to recover damages
The indemnity holder has the right to recover all the damages which he is compelled to pay in
any suit in respect of any matter covered by the contract of indemnity.
Right to recover costs
The indemnity holder has the right to recover all the costs which he is compelled to pay in
bringing or defending such suit.
Condition: The indemnifier authorised him to bring or defend the suit; or
A: CONTRACT OF INDEMNITY &DISTINCTION BETWEEN INDEMNITY AND
GUARANTEE
Indemnity Meaning –
To make good the loss incurred by another person
To compensate the party who has suffered some loss
To protect a party from incurring a loss
‘Contract of Indemnity’ Definition
A contract is called as a ‘contract of indemnity’ if –
One party promises to save the other from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person.
Modes of contract of indemnity
Expressed: When a person expressly promises to compensate the other from loss.
Implied: When the contract is to be inferred from the conduct of the parties or from the
circumstances of the case.
Essential elements of a contract of indemnity
Contract: All the essentials of a valid contract must also be present in the contract of
indemnity
Example:- X asks Y to beat Z and promises to indemnify Y against the consequences. Y
beats Z and is fined Rs.1,000. Y cannot claim this amount from X because the object of the
agreement was unlawful.
Loss to one party: A person can indemnify another person only if such other person incurs
some loss or it has become certain that he will incur some loss.
Indemnity by the Promisor: The purpose of contract of indemnity is to protect the indemnity
holder from any loss that may be caused to the indemnity holder.
Reason for loss: The contract of indemnity must specify that indemnity holder shall be
protected from the loss caused due to –
Action of the promisor himself; or
Action of any other person; or
Any act, event or accident which is not in the control of the parties.
, Distinction between Indemnity and Guarantee
Basis Contract of indemnity Contract of guarantee
Meaning A contract by which one party promises to save the other from loss caused to him is
called as a contract of indemnity. A contract of guarantee is a contract to perform the
promise, or discharge the liability of a third person in case of his default.
Parties There are only two parties, viz, the indemnifier and the indemnity holder. There are
three parties, viz., the principal debtor, creditor and the surety.
Nature of liability The liability of the indemnifier is primary and independent. The liability of
the surety is secondary and conditional.
Number of contract In a contract of indemnity there is only one contract. In the contract of
guarantee, there are three contracts; first between principal debtors and creditor, second
between creditor and surety, and third between surety and principal debtor.
Nature of contract The contract of indemnity is for the reimbursement of the loss. The
contract of guarantee is for the security of the creditor.
Commencement of the indemnifier’s liability Contract of Guarantee
Meaning of ‘contract of guarantee’
A ‘contract of guarantee’ is a contract to –
Perform the promise; or
Discharge the liability, of a third person in case of his default.
Meaning of ‘surety’: The person who gives the guarantee is called as ‘surety’
Meaning of ‘principal debtor’: The person in respect of whose default the guarantee is given
is called as ‘principal debtor’.
Meaning of ‘creditor’: The person to whom the guarantee is given is called as ‘creditor’.
Difference between contract of indemnity and Guarantee Essentials of a valid Contract Of
Guarantee
Must have all the essentials of a valid contract: All the essentials of a valid contract must be
present in the contract of guarantee.
Exceptions:
Consideration received by the principal debtor is a sufficient consideration to the surety for
giving the guarantee.
, Even if principal debtor is incompetent to contract, the guarantee is valid. But, if surety is
incompetent to contract, the guarantee is void.
Primary liability of some person
The principal debtor must be primarily liable. However, even if the principal debtor is
incompetent to contract the guarantee is valid.
The debt must be legally enforceable.
The debt must not be a time barred debt.
The contract must be conditional
The liability of surety is secondary and conditional.
The liability of surety arises only if the principal debtor makes a default.
No misrepresentation
The creditor should disclose all the facts which are likely to affect the surety’s liability.
There must not be any concealment of facts.
Form of contract
A contract of guarantee may be either oral or written. Joining of other co-sureties
The guarantee by a surety is not valid if –
A condition is imposed by a surety that some other person must also join as a co- surety;
but
Such other person does not join as a co-surety.
Nature and Extent of Surety’s Liability
Surety’s liability is coextensive with liability of principal debtor
General rule –
Surety is liable for all the debts payable by the principal debtor to the creditor.Accordingly,
interest, damages, costs etc. may also be recovered from the surety.
Exception:-
The contract of guarantee may provide otherwise.
Commencement of surety’s liability
, The liability of surety arises immediately on default by the principal debtor. The creditor is
not required to –
(a) first sue the principal debtor; or
(b) first give a notice to the principal debtor.
Surety’s liability may be limited
The surety may fix a limit on his liability up to which the guarantee shall remain effective.
Surety’s liability may be continuous
The surety may agree to become liable for a series of transactions of continuous nature.
However, the surety may fix –
– a limit on his liability upto which the guarantee shall remain effective;
– a time period during which the guarantee shall remain effective.
Surety’s liability may be conditional
The surety may impose certain conditions in the contract of guarantee. Until those conditions
are met, the surety shall not be liable.
Continuing Guarantee
Meaning: A guarantee which extends to a series of transactions is called as continuing
guarantee.
Revocation (Sec.130):
Continuing guarantee may be revoked, at anytime, by the surety by giving a notice to the
creditor. However, revocations shall be effective only in respect of future transactions (i.e.
the liability of the surety with regard to previous transactions remains unaffected)
Death of surety (sec. 131): Death of the surety operates as a revocation of a continuing
guarantee as to future transaction.
B:Rights of indemnity holder Right to recover damages
The indemnity holder has the right to recover all the damages which he is compelled to pay in
any suit in respect of any matter covered by the contract of indemnity.
Right to recover costs
The indemnity holder has the right to recover all the costs which he is compelled to pay in
bringing or defending such suit.
Condition: The indemnifier authorised him to bring or defend the suit; or
