The slides discuss in detail the concept of Indemnity and Guarantee under the Indian Contract Act, 1878. Useful for Law Students and professionals.

1. INDEMNITY
AND
GUARANTEE
-SHIVANI SHARMA
-ASSISTANT PROFESSOR
-SARDAR PATEL SUBHARTI INSTITUTE OF LAW

2. INTRODUCTION
‘Indemnity and Guarantee are two sides of the same coin’.
It means that indemnity and guarantee differ on a lot of issues while
being similar on the issue that they are both modes of compensation and
that they are similar on certain principles like unjust enrichment and
matters of good faith.
In spite of their basic similarities, contracts of indemnity are inherently
different from contracts of guarantee.
First we will go about explaining what indemnity and guarantee means.
Then we will go into the differences and the similarities between
guarantee and indemnity.

3. INDEMNITY

4. DEFINITION
Section 124 of the Indian Contract Act 1872, defines Indemnity as:
“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.”
TO BE SAVED BY PROMISOR
PROMISEE

5. CONT…
According to HALSBURY, as indemnity is a
contract, express or implied to keep a person,
who has entered into or who is about to enter
into, a contract or incur any other liability,
indemnified against loss, independently of the
question whether a third person makes a default.
CHITTY says the term, indemnity, is used in the
law in several different times and cases. In its
widest sense, it means recompense for any loss
or liability which one person has incurred,
whether the duty to indemnify comes from an
agreement or not.

6. Illustration:
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.
C promises to deliver certain goods to B for Rs. 2,000 every month. A comes in and
promises to indemnify B’s losses if C fails to so deliver the goods. This is how B and A
will enter into contractual obligations of indemnity.
INDEMNIFIER
• The person who
promises to
indemnify for a loss
INDEMNITY HOLDER
• the person whose
losses the
indemnifier promises
to make good

7. NATURE
An indemnity contract may be either express or implied.
In other words, parties may expressly create such a
contract as per their own terms.
The nature of circumstances may also create indemnity
obligations impliedly.
For example, A does an act at the request of B. If B suffers
some losses and A offers to compensate him, they
impliedly create an indemnity contract.

8. RIGHTS OF INDEMNITY HOLDER
SECTION-125- The Promisee (INDEMNITY HOLDER) in a contract of
indemnity, acting within the scope of his authority, is entitled to recover
from the Promisor (INDEMNIFIER)—
(1) all damages which he may be compelled to pay in any suit in respect of
any matter to which the promise to indemnify applies;
(2) all costs which he may be compelled to pay in any such suit if, in
bringing or defending it, he did not contravene the orders of the promisor,
and acted as it would have been prudent for him to act in the absence of
any contract of indemnity, or if the promisor authorized him to bring or
defend the suit;

9. CONT…
(3) all sums which he may have paid under the terms of any compromise of any
such suit, if the compromise was not contrary to the orders of the promisor, and
was one which it would have been prudent for the promisee to make in the
absence of any contract of indemnity, or if the promisor authorized him to
compromise the suit.
OR
1) The indemnifier will have to pay damages which the indemnity holder will
claim in a suit.
2) The indemnity holder can even compel the indemnifier to pay the costs he
incurs in litigating the suit.
3) If the parties agree to legally compromise the suit, the indemnifier has to pay
the compromise amount.

10. RIGHTS OF INDEMNIFIER
After compensation of the indemnity holder, indemnifier
reserves the right to all the ways and means by which the
indemnifier could have safeguarded himself from the loss.
It was held in Adamson vs. Jarvis, that Adamson has to
indemnify Jarvis as Jarvis was asked to follow the orders of
Adamson, and if anything went amiss Jarvis would be
indemnified. The indemnity holder can call upon the
indemnifier to save him from loss even before the actual
loss is incurred.

11. ARE INSURANCE CONTRACTS
INDEMNITY CONTACTS IN INDIA?
A contract of insurance is very similar to
indemnity contracts.
Here, the insurer promises to compensate the
insured for his losses.
In return, he receives consideration in the
form of premium.
However, the Contract Act does not strictly
govern these kinds of transactions.
This is because the Insurance Act and other
such laws contain specific provisions for
insurance contracts.

12. CONT…
It has been noted above that section-124 recognizes only such contract as a
contract of indemnity where there is a promise to save another person from loss
which may be caused by the conduct of the promisor himself or by conduct of
any other person.
It does not cover a promise to compensate for loss not arising due to human
agency. Therefore, a contract of insurance is not covered by the definition of
section-124.
Thus, if under a contract of insurance, an insurer promises to pay compensation
in the event of loss by fire, such a contract does not come within the purview of
section-124.
Such contracts are valid contracts, as being contingent contracts as defined in
section-31.

13. CONT…
WHAT IS INSURANCE –
In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a
contingent, uncertain loss.
Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange
for payment.
An insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying
the insurance policy.
The insurance rate is a factor used to determine the amount to be charged for a certain amount of
insurance coverage, called the premium.
The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of
payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the
case of a loss.

14. CONT…
In United India Insurance Co. vs. M/s. Aman Singh Munshilal –
The cover note stipulated delivery to the consigner.
Moreover, on its way to the destination the goods were to be
stored in a godown and thereafter to be carried to the
destination.
While the goods were in the godown, the goods were
destroyed by fire.
It was held that the goods were destroyed during transit, and
the insurer was liable as per the insurance contract.

15. Gajanan Moreshwar v. Moreshwar Madan
•Plaintiff (P) got a plot of land on lease from municipal corp. of Mumbai.
•P allowed Defendant (D) to erect building on that land. D, in this course,
incurred debt of Rs.5ooo from building material supplier (K), twice.
•On both the occasion, P mortgaged part of the land to K.
•P, on D’s request transferred the land to D, on the consideration that he
(P) would be discharged of all the liabilities arising out of that land.
•D failed to adhere to his consideration.
•P filed a suit for discharge of liabilities on him, alleging D to be
indemnifier.

16. CONT…
ISSUE: Whether the suit for indemnity was premature as P had not yet
incurred any loss as such?
CONTENTIONS (Defendant):
1. As per s. 124, the promisor promises to safeguard the other from the
damage that is caused to him, not the damage which may be caused to
him. Since there is no damage to the plaintiff as yet, P is not entitled to
sue the indemnifier. (Shankar Nimbaji vs. Laxman Supdu, Chand Bibi vs.
Santoshkumar Pal )
2. The liability of the plaintiff is not absolute but contingent. There is
nothing to show that if the mortgagee was to sue to enforce his
mortgage and the property was sold, there would be any deficit for
which the plaintiff would be liable.

17. CONT…
HELD (High Court):
Justice Chagla
(w.r.t 1st contention of D) ICA is both an amending and a consolidating
Act, and it is not exhaustive of the law of contract. Section 124 deals only
with one particular kind of indemnity in which the loss is caused by the
conduct of the indemnifier himself or of other person, but does not cover
the cases outside this or cases when liability arises because of something
done by the indemnified at the request of the indemnifier. S. 124 talks
about subsequent conduct but here the liabilities were past, i.e. prior to
the date when the contract was actually entered into force. Earlier to this
contract, all the acts were done merely on request and without any
consideration and hence, were not binding. Therefore s.124 is inapplicable
here.

18. CONT…
(w.r.t 2nd contention of D) Under both the mortgage and the
further charge there is a personal covenant by the plaintiff to
pay the amount due, and it would be open to the mortgagee to
sue the plaintiff on the personal covenant reserving his rights
under the security. Therefore, the liability of the plaintiff under
the personal covenant is absolute and unconditional.
Principles of equity (as applied in English Courts) can be applied
here to relieve P from all the liabilities (as ICA is not exhaustive
of the law of indemnity).

20. GUARANTEE

21. DEFINITION
SECTION-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. The person who gives the
guarantee is called the ‘surety’; the person in respect
of whose default the guarantee is given is called the
‘principal debtor’, and the person to whom the
guarantee is given is called the ‘creditor’. A guarantee
may be either oral or written.”

22. PARTIES
TO CONTRACT OF GUARANTEE
PRINCIPAL
DEBTOR
• the person in
respect of whose
default the
guarantee is given
CREDITOR
• the person to
whom the
guarantee is
given
SURETY
• The person
who gives the
guarantee
MONEY GURANTEE

24. ESSENTIALS
1. Tripartite Agreement:
A contract of guarantee entails three parties,
principal creditor, creditor and surety. In a
successful contract of guarantee, there must be
three separate contracts between the three
parties and each and every contract must be
consenting.

25. CONT…
2. Liability: Here the main liability lies with the
principal debtor. Secondary liability lies with the surety
which can only be invoked once the principal debtor
defaults on its payment.
3. Essentials of a Valid Contract: Like any other general
contract, it maintains free consent, consideration,
lawful object and competency of contracting parties as
the essentials of a valid contract.
4. Medium of Contract: The Indian Contract Act, 1872,
does not strictly mention the need for any written form
of contract of guarantee. Both oral and written form
will suffice.

26. REQUISITES:
Principal Debt
Consideration
Misrepresentation and Concealment
(Section-142,143)

28. CONSIDERATIONS
CREDITOR
SURETYPR. DEBTOR
GUARANTEE
LIABILITY TO PAY
Section-127

29. CONTINUING GUARANTEE
SECTION-129 - A guarantee which extends to a series of transaction, is
called, a "continuing guarantee".
Illustrations
(a) A, in consideration that B will employ C in collecting the rents of B's
zamindari, promises B to be responsible, to the amount of 5,000 rupees, for
the due collection and payment by C of those rent. This is a continuing
guarantee.
(b) A guarantees payment to B, a tea-dealer, to the amount of £ 100, for any
tea he may from time to time supply to C. B supplies C with tea to above the
value of £ 100, and C pays B for it. Afterwards, B supplies C with tea to the
value of £ 200. C fails to pay. The guarantee given by A was a continuing
guarantee, and he is accordingly liable to B to the extent of £ 100.

30. CO-SURETIES
SECTION – 144 - Guarantee on contract that creditor shall not act on it until co-surety
joins.—Where a person gives a guarantee upon a contract that the creditor shall not act
upon it until another person has joined in it as co-surety, the guarantee is not valid if
that other person does not join.
SECTION - 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.
Illustrations
(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.
D

31. LIABILITY OF SURETY
SECTION-128 –
“The liability of the surety is co-extensive with that of the
principal debtor, unless it is otherwise provided by the contract."
Illustration
A guarantees to B the payment of a bill of exchange by C, the
acceptor. 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.

32. RIGHTS OF SURETY
AGAINST CREDITOR
As per section 141, a surety is eligible to the benefit of
every security which the creditor has against the principal
debtor. This holds true even if at the time of entering into
the contract of guarantee the surety was unaware of the
existence of such a security.
Also, when the creditor losses or parts with such security
without the consent of the surety, this discharges the
surety to the extent of the value of such security.

33. RIGHTS OF SURETY
AGAINST PRINCIPAL DEBTOR
RIGHT OF SUBROGATION - Once the surety discharges
the debt, he obtains the rights of a creditor against the
principal debtor. He can now sue the principal debtor for
the amount of debt paid by him to the creditor due to the
default of the principal debtor.
In a case where the principal debtor on discovering that
the debt has become due, starts disposing of his
properties in order to prevent seizure by the surety, the
surety can compel the debtor to pay the debt and
discharge him from his liability to pay.

34. RIGHTS OF SURETY
AGAINST CO-SURETIES
SECTION-146 - RIGHT TO CONTRIBUTION - When a surety pays
more than his share to the creditor, he has a right
of contribution from the co-sureties, who are equally liable to
pay.
For example, Anthony, Barkha, and Chaya are the co-sureties to
David for a sum of ₹30000 lent to Erwin who made default in
payment.Thus, Anthony, Barkha, and Chaya are liable to pay
₹10000 each as between them. So, in this case, if anyone of
them pays more than ₹10000, he can claim the excess from the
other two co-sureties so as to reduce his payment to ₹10000
only. However, if one of the co-sureties becomes insolvent, the
other co-sureties shall contribute his share equally.

35. DISCHARGE OF SURETY
SECTION- 130 - Notice of revocation as regards future transactions in
case of a continuing guarantee.
For example, Anu gives a guarantee to Bela to the extent of ₹50000,
that Freida will pay all the bills that Bela will draw upon her. Bela
draws bills on Freida and she accepts the bill. Anu gives notice of
revocation. Freida dishonours the bill at maturity. Anu is liable as it
was a transaction before the notice of revocation.
SECTION- 131 - The death of a surety as regards future transactions
in case of a continuing guarantee in the absence of a contract to the
contrary.

36. CONT…
Sec. 133 – The creditor ought not fluctuate terms of the agreement
between the creditor and the principal debtor without the surety’s assent.
Any such fluctuation releases the surety as to transactions ensuing to the
difference. However in the event that the change is for the profit of the
surety or does not prefer him or is of an irrelevant character, it might not
have the impact of releasing the surety.
Sec. 134 – The creditor ought not discharge the principal debtor from his
liability under the agreement. The impact of the release of the principal
debtor is to release the surety too. Any enactment or exclusion from the
creditor which in law has the impact of releasing the principal debtor puts
a close to the liability of the surety.

37. CONT…
Sec. 135 -In the event that an agreement is made between
the Creditor and Principal debtor for intensifying the last’s
liability or making a guarantee to him growth of time for
doing the commitments or swearing up and down to not
to beyond any doubt, releases the surety unless he
consents to such an agreement.
Sec. 139 – the surety is released if the creditor debilitates
the surety’s possible remedy against the principal debtor.

38. CONT…
As per section 141, a surety is eligible to the benefit of
every security which the creditor has against the principal
debtor. This holds true even if at the time of entering into
the contract of guarantee the surety was unaware of the
existence of such a security.
Also, when the creditor losses or parts with such security
without the consent of the surety, this discharges the
surety to the extent of the value of such security.

39. Punjab National Bank Ltd. v. Bikram
Cotton Mills and Anr
•The first respondent company (R1) opened a cash-credit
account with the appellant bank (A) and to secure repayment of
the balance due at the foot of the account R1 executed three
documents through its managing agents i.e. a promissory note,
a deed of hypothecation and a letter assuring A that R1 would
remain solely responsible for all loss, damage or deterioration of
the stocks hypothecated with the bank.
•On the same day R, a Director of the managing agents, executed
a bond called “agreement of guarantee’ agreeing to pay on
demand all monies which may be due as the “ultimate balance”
from R1.

40. •When R1 was closed the stocks pledged were disposed of by the
bank and the amount realized was credited in the R1’s account.
•A balance of amount remained due at the foot of the account.
Creditors of R1 filed a petition for winding up the company.
•A scheme of composition was settled by these creditors, which was
sanctioned by the HC.
•The bank then filed a suit against R1 and R for the amount due.
•The bank, being a secured creditor, wanted preference above the
unsecured creditors and proceeded under Contract Law as opposed
to Company Law.

41. •The bank was entitled to claim at any time the money due
from R1 as well as from R under the promissory note and
the bond. The suit could not therefore be said to be
premature.
•The binding obligation created under the composition
between the company and its creditors does not affect the
liability of the surety unless the contract of surety-ship
otherwise provides.
•R would be liable for payment of ‘the ultimate balance’ and
decree should be in favour of the Bank.

42. DIFFERENCE BETWEEN
INDEMNITY
AND
GUARANTEE

43. DIFFERENCE
INDEMNITY
a contract of indemnity has two parties, the
indemnifier and the indemnity holder
In a contract of indemnity, the indemnifier
assumes primary liability
In indemnity, the contingency present is that
of the possibility or risk of suffering loss to
which the indemnifier agrees to indemnify
In case of indemnity contract, indemnifier’s
interest lies in earning a commission and a
premium
GUARANTEE
A contract of guarantee always has three
parties; they are, the creditor, the principal
debtor and the surety;
In a contract of guarantee, the debtor is
primarily liable and the surety assumes
secondary liability.
in guarantee, there is an existing debt or duty
whose performance is guaranteed by the surety.
in a contract of guarantee, the only interest is
guarantee itself

44. DIFFERENCE
INDEMNITY
In a contract of indemnity,
the indemnifier cannot
sue a third party.
In a contract of indemnity,
there is a single promise
or contract; a promise to
pay if there is a loss.
GUARANTEE
A Surety is entitled to file a suit
against the principal debtor in his
own name if only he has paid the
debt.
In a contract of guarantee, by
contrast, there are multiple
promises, including the original
promise to pay or perform and the
guarantor’s promise to pay or
perform in the event of default.

45. Case Study between,
Punjab National Bank Ltd. v. Bikram Cotton Mills and Anr and
Gajan Moreshwar vs. Moreshwar Madan
In a case study between, Punjab National Bank Ltd. v. Bikram Cotton
Mills and Anr and Gajan Moreshwar vs. Moreshwar Madan, the
difference between guarantee and indemnity is clearly visible. There
are three parties here, in the Punjab National Bank case where as
only two parties in Gajan Moreshwar. Here Moreshwar Madan was
the indemnifier and hence he was the only one liable to make good
of the money, whereas in the Punjab National Bank case, the debtor,
which is the first respondent company, is the primary liability holder
and the secondary liability belongs to the surety which is the
respondent.

46. CONT…
The Privy Council in Gajan Moreshwar case held that the indemnity holder
has rights other than those mentioned in the sections mentioned. If the
indemnity holder has incurred any liability, he can ask the indemnifier to
do well of the liability and Moreshwar Madan was directed by the Privy
Council to do well of the indemnity holder, Gajan Moreshwar’s, liability. In
Punjab National Bank case, there was no risk involved, but there is an
existing duty to pay off debts as mentioned in the sections governing
guarantee. Hence irrespective of the presence of risk, the principal debtor
and surety has to do well of the debts of the creditor. In Gajan Moreshwar
case, Gajan Moreshwar can’t sue K.D. Mohan, as it is a contract of
indemnity. He can only sue Moreshwar Madan. But in Punjab National
Bank case, along with the principal debtor, the surety can also be sued.