CONTRACT OF INDEMNITY AND GUARANTEE (SECTIONS 124-147)

Introduction

The contract of indemnity and contract of guarantee are specific types of contract. The
specific provisions relating to these contracts are contained in sections 124 to 147 of the Indian
contract act 1872. In addition to these specific provisions, the general principles of contracts are
applicable of such specific contracts.

CONTRACT OF INDEMNITY

Meaning of Indemnity

The term “indemnity “means to make good the loss or to compensate the party who has
suffered some loss.

Meaning of Contract of Indemnity:

A contract, by which 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, is called a “contract of
indemnity”.

Example: A contracts to indemnity B against the consequences of any proceedings

which C may take against B in respect of a certain sum of Rs. 200 This is a contract of
indemnity.

Meaning of Indemnifier:

The person who promises to make good the loss is called the indemnifier.

In the above example, A is indemnifier

Meaning of Indemnity holder

The person whose loss is to be made good is called “indemnity-holder”

In the above example, B is the indemnity-holder.

The definition of contract of indemnity, as given in sec. 124 is not exhaustive. According to the
definition, a contract of indemnity contains

o Only express promises to indemnity &

o Only those cases where the loss arises from the conduct of the promisor or of any
other persons.
The section does not include:

• Implied promises to indemnity

• Cases where loss arises from accients and events not depending on the conduct of the
promisor of any other person

Essentials of a Contract of Indemnity

1. There must be two parties in a contract of indemnity viz., indemnifier and indemnified.

2. A contract of indemnity may be express or implied.

3. This contract being a species of contract is subject to all the rules of contract, such as free
consent, legality of object etc.

4. A contract of indemnity is enforceable only when the promise suffers a loss the
happening of which the indemnity holder was promised to be proctected.

5. Consideration in the case of contract of indemnity is essential to enable the indemnity

holder to make claim to be compensated.

Rights of Indemnity-Holder (Indemnified) or Liabilities of Indemnifier sec.125

The rights of the indemnified shall be the liabilities of the indemnifier. According to
sec.125 of the contract act, an indemnity holder or indemnified has the following rights when
sued, to recover from the indemnifier.

1. Right to claim damages:

All the damages h may be supposed to pay in any suit to which the indemnity
applies.

2. Recovery of cost:

All costs which he may be made to pay in bringing or defending any such suit.

3. Recovery of all the sums paid:

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 All sums which he may have paid under the terms of any compromise of any such
suit. But this right may e exercised where;

i. The indemnified has acted within the scope of his authority given by the
indemnifier.

ii. He acted as a prudent man in defending the action against him.

iii. There has been an express direction by the indemnifier to compromise

iv. The costs incurred have been reasonable in amount

Rights of Indemnifier

1. Right to refuse claim:

The indemnifier has the right to refuse the claim if the indemnified has not acted
as a prudent man in defending the action against him or the loss was due to some
sources outside the proximate cause.

2. Right to sue on behalf of the indemnified:

The indemnifier gets the right to sue the third party in the name and on behalf of
the indemnified after discharging his claim by the indemnifier.

3. Right against the third party:

The right of the indemnifier against third party shall be to the extent of the sum paid
to the indemnified.

4. Right of suborgation :

When he has paid the indemnity claim of the indemnified, he is entitled to

exercise all rights of the indemnified against a third party.

When does the liability of indemnifier commence:

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 The Indian contract act, 1872 is silent of the time of commencement of liability of
indemnifier. On the basis of judicial pronouncement of courts, it can be said that the liability of
an indemnifier commences as soon as the liabilities of the indemnity-holder becomes absolute
and certain. In other words if the indemnity-holder has incurred an absolute liability even though
he has himself paid nothing, he is entitled to ask the indemnifier to indemnity him.

CONTRACT OF GUARANTEE

Meaning of a contract of guarantee (u/s 126)

A contract of guarantee is a contract to perform a promise or discharge the liability of the

third person in case of his default.

Example: X request Y to lend Rs. 10000 to C and guaranteed that if C fails to repay it
within the stated time, he will himself pay to Y. There is a contract of guarantee.

Parties to a contract of guarantee:

There are three parties to a contract of guarantee;

 Principal debtor

 Creditor

 Surety

Meaning of principal debtor:

The person in respect of whose default the guarantee is given is called the principal
debtor.

Meaning of creditor:

The person to whom the guarantee is given is called the creditor.

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Meaning of surety:

The person who gives the guarantee is called the surety.

Essential of Contract of Guarantee

1. Three parties and three contract

There are three parties’ viz., the creditor, principal debtor, and surety.
Similarly there are three separate parties giving rise to triangular
relationship.

• Between the creditor and debtor

• Between the surety and the creditor

• An implied contract between the surety and the debtor

2. Form

A contract of guarantee may be written or oral.

3. Essential of a valid contract

A contract of guarantee must satisfy all the essential elements of a valid

contract but it has two distinct features;

i. Capacity to contract:

The principal debtor may be a minor or a person incapable

of entering into a contract. In such case, the surety shall be
regarded as the principal debtor and will liable to pay

ii. Lawful consideration

Consideration received by the principal debtor is sufficient

for the surety. It is not necessary that the surety himself
must be benefited.

4. Existence of liability

There must be an existing liability or a promise whose performance is

guaranteed. Such liability or promise which is enforceable by law. But

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 there is an exception to this rule. The exception is a guarantee given for
minor’s debt. Though minor’s debt is not enforceable by law, yet the
guarantee given for minor’s debt is valid.

5. Guarantee not to be obtained by misrepresentation (U/s 142)

Any guarantee which has been obtained by means of misrepresentation

made by the creditor, or with his knowledge and assent, concerning a
material part of the transactions is invalid.

6. Guarantee not to be obtained by concealment (U/s143)

Any guarantee which the creditor has obtained by means of keeping

silence as material circumstances s invalid.

KINDS OF GUARANTEE:

o SPECIFIC GUARANTEE

A guarantee which extends to a single debt or specific transaction is called

a specific guarantee. The liability of the surety comes to an end when the
guaranteed debt is duly discharged or the promise is duly performed.

o CONTINUES GUARANTEE

A guarantee which extends to a series of transactions is called a continuing

guarantee. A surety’s liability continues until the revocation of the
guarantee.

Example: A , in consideration that B will employ C in collecting the rent

of B’s complex, promises B to be responsible to an amount of Rs. 3000 for
the due collection and payment by C of those rents. This is a continuing
guarantee.

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