I.
II.
Introduction
Contract of INDEMNITY
Definition and Nature along with essentials.
Provisions in U.K.
i.
Oriental fire and general insurance co. v Savoy Solvent Oil
ii.
Extractions Ltd.
Richardson Re, ex parte The Governors of St. Thomas
Hospital.
Provisions in India.
i.
Gajanan Moreshwar v Morehwar Madan
ii.
Osman Jamal And Sons Ltd. vs Gopal Purshottam
Validity of contract of indemnity
Right of indemnity holder when sued
III.
Contract of GURANTEE
Definition
Essentials of contract of guarantee
Provision in U.K
i.
Swan v Bank Of Scotland
ii.
Coults Company v Brownlecky Company.
Provision in India.
i.
Kashiba v Shreepath
Extent of Suretys Liability
Discharge of Surety From Liability
Rights of the Surety
i.
Against the Principal Debtor:
ii.
Against the Creditor:
iii. Against Co sureties
IV.
V.
VI.
I. INTRODUCTION
This project is an effort and research to explore the Different provisions in different countries
of India, U.K which share a common law background, and also to find out the differences
between the contract of Indemnity and Guarantee.
Guarantees and indemnities are a common way in which creditors protect themselves from
the risk of debt default. Lenders will often seek a guarantee and indemnity if they have
doubts about a borrower's ability to fulfil its obligations under a loan agreement. Guarantors
and indemnifiers take on a serious financial risk in entering into such transactions, and it is
important that they are aware of all the implications.
Parties rarely stop to consider whether they should be seeking a guarantee or a guarantee and
indemnity, or even realise there is a distinction between the two.
plaintiff having acted on the request of the defendant was entitled to assume that, if, what he
did turned out to be wrongful, he would be indemnified by the defendant.
Thus Indemnity in English Law means a promise to save a person harmless from the
consequences of an act. The promise may be express or it may be implied from the
circumstances of the case.3
Whereas Section 124 of the Contract Act, 1872 defines a contract of Indemnity as "a contract
by which one party promises to save the other from loss caused to him by the contract of the
promisor himself, or by the conduct of any other person." In simple words, an indemnity is a
promise to compensate for another's loss.
Provisions in U.K.
Provisions of the common law on the contract of indemnity are different as to the provisions
in the Indian law. Earlier there was a maxim used in English law for the contract of indemnity
i.e. YOU MUST BE DAMNIFIED BEFORE YOU CAN CLAIM TO BE INDEMNIFIED.
The original English rule was that indemnity was payable only after the indemnity-holder has
suffered actual loss by paying off the claims. I.e. no action could be brought against the
indemnifier until the indemnity-holder had suffered actual loss. Only after a loss has been
suffered by the indemnity holder by acting on the instructions of the promisor or indemnifier
and all damages beard by him in defending the suit or to prevent it or while compromising on
it are paid, then only afterward he can sue the indemnifier for the payments of all the costs
beard by him. These were the earlier provisions. This situation created a great hardship in
those cases where the indemnity-holder was not in a position to meet the claim out of his
pocket. Relief was provided to indemnity-holder in such cases by the Court of Equity.
According to the rules evolved by the Court of Equity, it was no more necessary for the
indemnity-holder to be damnified before he could be indemnified. In other words, the
indemnity-holder can now compel the indemnifier to save him from the loss in respect of
liability against which indemnity has been promised, in the case of:
Richardson Re, ex parte The Governors of St. Thomas Hospital.4
3 Avtar singh pg 571
4 (1911)2KB 705, 715 (CA)
Life insurance contract is, however not a contract of indemnity because in such a contract
different considerations apply. A contract of life insurance, for instance, may provide the
payment of a certain sum of money either on the death of a person, or on the expiry of a
stipulated period of time (even if the assured is still alive). In such a case, the question of
amount of loss suffered by the assured, or indemnity for the same does not arise. Moreover,
even if a certain sum is payable in the event of death, since, unlike property, the life of a
person cannot be valued, the whole of the amount assured becomes payable. For that reason
also, it is not a contract of indemnity.
Provision in INDIA
As such the scope of Indemnity, as a concept developed under the common law, is much
wider in its scope and application than the scope of Indemnity as defined under Section 124
of the Indian Contract Act 1872 (Act).
includes losses caused by events or accidents which may not depend on the conduct of any
person and therefore includes losses due to accident or events which have not been caused by
5 Supra at p.715
6 (1914) 2 Ch 617, 638: (1914-1915) All ER Rep 1158 (CA)
the indemnifier or any other person. Section 124 of the Act, in contrast, limits itself to losses
caused by the indemnifier or any other person. It does not, within its scope, include indemnity
to losses arising out of any natural event or any accident not caused by any person.
Thus the very process of definition is restricted to cases where there is a promise to
indemnify against loss caused by (i) by the promiser himself, or (ii) by any other person, so
the definition excludes from its purview cases of loss arising from acidents like fire or perils
of the sea. i.e. the loss must be covered by some Human Agency.
In the case of Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri:7
Section 124 of the Act, deals only with one particular kind of indemnity which arises from a
promise made by the indemnifier to save the indemnified from the loss caused to him by the
conduct of the indemnifier himself or by the conduct of any other person, but does not deal
with those classes of cases 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 any other
person, or by reason of liability incurred by something done by the indemnified at the request
of the indemnifier. Section 125 of the Act, deals only with the rights of the indemnity-holder
in the event of his being sued. It is by no means exhaustive of the rights of the indemnityholder, who has other rights besides those mentioned in the section. It was further discussed
that an indemnity might be worth very little indeed if the indemnified could not enforce his
indemnity till he had actually paid the loss. If a suit was filed against him, he had actually to
wait till a judgment was pronounced, and it was only after he had satisfied the judgment that
he could sue on his indemnity. It is clear that this might under certain circumstances throw an
intolerable burden upon the indemnity-holder. He might not be in a position to satisfy the
judgment and yet he could not avail himself of his indemnity till he had done so. Therefore
the Court of equity stepped in and mitigated the rigor of the common law and held that where
the indemnified has incurred a liability and that liability is absolute, he is entitled to call upon
the indemnifier to save him from that liability and to pay it off.
In the case of The New India Assurance Company Ltd. vs. The State Trading Corporation of
India Ltd. and Anr.8
7
8
The Gujarat High Court relied upon the view taken in Gajanan Moreshwar Parelkar vs.
Moreshwar Madan Mantri and held that in view of Section 124 of the Contract Act, where the
defendants promise to indemnify is an absolute one; a suit can be filed immediately upon
failure of performance, irrespective of actual loss. In this judgment the Law Commission of
India accepted the view that, to indemnify does not mean to reimburse in respect of the
money paid, but, in accordance with its derivation, to save from loss in respect of the liability
against which the indemnity has been given.
The Law Commission of India in its 13th Report, 1958, has expressed the opinion that the
view expressed by Chagla J., is correct and should be adopted by the legislature. The Law
Commission recommended that as in English Law, the right of the indemnity-holder should
be more fully defined and the remedies of an indemnity-holder should be indicated even in
cases where he has not been sued.
Indian Contract Act does not specifically provide that there can be an implied contract of
indemnity. The Privy Council has, however, recognized an implied contract of indemnity
also.9 The Law Commission of India in its 13th Report, 1958 on the Indian Contract Act,
1872, has recommended the amendment of Section 124. According to its recommendation,
The definition of the Contract of Indemnity in Section 124 he expanded to include cases of
loss caused by events which may or may not depend upon the conduct of any person. It
should also provide clearly that the promise may also be implied.
Osman Jamal And Sons Ltd. vs Gopal Purshottam10
Plaintiff Company agreed to act as commission agent for the defendant firm for purchase and
sale of Hessian and Gunnies and charge commission on all such purchases and the
defendant firm agreed to indemnify the plaintiff against all losses in respect of such
transactions. The plaintiff company purchased certain Hessian from one Maliram Ramjidas.
The defendant firm failed to pay for or take delivery of the Hessian. Then Maliram Ramjidas
resoled it at lesser price and claimed the difference as damages from the plaintiff company.
The plaintiff company went into liquidation and the liquidator filed a suit to recover the
amount claimed by Maliram from the defendant firm under the indemnity. The defendant
argued that in as much as the plaintiff had not yet paid any amount to Maliram in respect of
9 Secretary of State v. The Bank of India Ltd. AIR 1938 P.C 191
10
their liability they were not entitled to maintain the suit under indemnity. It was held negative
and decided in plaintiffs favour with a direction that the amount when recovered from the
defendant firm should be paid to Maliram Ramjidas.
Thus we find out that the basic difference between the indemnity in English law and Indian
law is that, the English law is wide enough to cover the losses by fire and sea peril whereas
the Indian law doesnt approve this. Moreover in the Indian law the loss should be caused by
some human agency i.e. the promisor himself or by the conduct of any other person. Whereas
in English law loss caused by a natural calamity and the promisor are considered but not by
any third party
compensation
must not be against the directions of the indemnifier. It must be prudent and authorized by the
indemnifier.
4. Right to sue for specific performance he is entitled to sue for specific performance if he
has incurred absolute liability and the contract covers such liability. The promisee in a
contract of indemnity, acting within the scope of his authority, is entitled to recover from the
promisor(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;
(3) All sums which he may have paid under the terms of any compromise of any such suit, if
the compromise was not
A contract of guarantee is a special kind of contract. As such, it must have all the essential
elements of a valid contract such as consideration, free consent, competence of the parties,
legality of object and consideration. As regards the consideration and capacity of the parties,
a contract of guarantee has special features, which are discussed in the following two
essentials:
2. The contract of guarantee must be supported by consideration:
It is, however, not necessary that there should be direct consideration between the surety and
creditor. The law presumes that the consideration received by the principal debtor is the
sufficient consideration for the surety. Thus, something done for the benefit of the principal
debtor is the sufficient consideration for a contract of guarantee. And it is not necessary that
the surety himself must he benefited (Section 127).
3. The contract of guarantee must be made by the parties competent to contract:
We know that the competency of the parties is an important requirement of a valid contract.
As such, the parties to a contract of guarantee must also be competent to contract. However,
the incapacity of the principal debtor does not affect the validity of a contract of guarantee.
Thus, the requirement is that the creditor and the surety must be competent to enter into a
valid contract. A principal debtor may he a minor. In such cases, the surety is regarded as
principal debtor and is personally liable to pay the debt, though the principal debtor is not
liable. In such cases, the contract between the creditor and surety is treated as a primary and
independent, and not collateral. The surety is also liable if the guarantee is given knowing the
minority of the debtor.
4. There must be someone primarily liable:
it is an essential requirement of a contract of guarantee that there must be someone primarily
liable (i.e., liable as principal debtor) other than the surety. As a matter of fact, a contract of
guarantee presupposes the existence of a liability enforceable by law. If there is no such
primary liability, there can be no valid contract of guarantee. However, as slated above, the
guarantee given for minors debt is enforceable.
5. The promise to pay must be conditional:
Provision in U.K
i.
The purpose of a guarantee being to secure the repayment of a debt, the existence of a
recoverable debt is necessary. It is of the essence of a guarantee that there should be someone
liable as a principal debtor and the surety undertakes to be liable on his default. If there is no
principal debt, there can be no valid guarantee. This was so held by the House of Lords in the
Scottish case of Swan v. Bank of Scotland {(1836) 10 Bligh NS 627} decided as early as
1836. The payment of the overdraft of a bankers customer was guaranteed by the defendant.
The overdrafts were contrary to a statute, which not only imposed penalty upon the parties to
such drafts but also made them void. The customer having defaulted, the surety was sued for
the loss.
But he was held not liable. The court said that If there is nothing due, no balance, the
obligation to make that nothing good amounts itself to nothing. If no debt is due, if the banker
is forbidden from having any claim against his customer, there is no liability incurred by the
co-obligors.
the statutory requisites of a guarantee are, in England, prescribed by (1) the statute of frauds,
which provides that "no action shall be brought whereby to charge the defendant upon any
special promise to answer for the debt, default or miscarriages of another person, unless the
agreement upon which such action shall be brought, or some memorandum or note thereof,
shall be in writing and signed by the party to be charged therewith, or some other person
thereunto by him lawfully authorized,"11
ii.
Coutts Company v Browne Lecky Company.12, the second and third defendants had
guaranteed the amount of an overdraft granted by the plaintiff bankers to the first
defendant, an infant. The second and third defendants contended that the plaintiffs
could not recover from them because under section 1 of the Infants Relief Act, 1874,'
they could not have recovered from the first defendant. All the parties knew
throughout that the first defendant was an infant. Oliver, J., held that the plaintiffs
could not recover. Under section 1 of the Infants Relief Act the loan to the first
guarantee was a contract to make good a debt, default or miscarriage of another
person. But in this case there was no debt, because the statute says so; there was no
default, because the first defendant was entitled to refrain from paying; for the same
reason there was no miscarriage. On principle there was therefore no liability on the
part of the second and third defendants. In Swan v. Bank of Scotland the House of
Lords held that under Scottish law a guarantee of a transaction that was void on the
ground of illegality was also void. The only difference between those facts and the
facts before me ', said Mr Justice Oliver, ' is that there is no illegality about the present
transaction. Save for the difference the facts in this case appear to me to be identical
in principle13
Provision in India.
ii.
Kashiba v Shreepath
One Lakshmi Bai entered into a bond to secure payment to the plaintiff of Rs. 1000 and
interest. At the time of the execution of the bond, she was a minor and her father joined in the
bond. The material terms of the contract by the father were: Should she (i.e., Lakshmi Bai)
fail to pay, I will pay the above-mentioned amount personally without pleading her excuse
and take back this bond. If it is not so paid, you should get it paid off from my income. The
question was whether the father was liable on this guarantee in view of Lakshmi Bai herself
not being liable because of her minority. In that case, the contract of the so called surety is not
a collateral, but a principal, contract. It is a conditional promise founded upon valuable
consideration. It is like the case of a person, who to-appease the anger of a child, requests
another to lend a guinea to the child to play with, and promises if the child loses or does not
give back the coin, to make it good to the lender. The promise in such, circumstances is
clearly that of a principal, and not of surety, and the situation is not altered by its being called
a guarantee.On this reasoning, the learned Judge held that the surety and those claiming under
him were liable to the promisee of the bond.
In P.J Rajappan v Associate Industries (P) Ltd, 14 it was held by the kerla High Court that
since an oral guarantee is also valid, a person who otherwise appeared to be a guarantor was
held liable though his signature did not appeared on the guarantee papers.
In Punjab National Bank Limited vs Bikram Cotton Mills & Anr it was held that though, the
bond, it is true, did not expressly recite that the Company was the principal debtor; it is also
14 (1990) 1 KLJ 77
true and the Company did not execute the bond. But a contract of guarantee may be wholly
written, may be wholly oral, or may be partly written and partly oral 15
Thus we find out that the basic difference is that in English law a minor may not be held
liable as the contract is void ab initio even though at the time of contract the person may have
known him to be a minor, but in Indian law where a minor has been knowingly guaranteed,
the surety should be held liable as a principle debtor. Moreover a in U.K the contract of
guarantee has to be written as defined in frauds act, whereas in Indian law it can be oral as
well as written.
Where, however, the Principal Debtor is discharged by operation of insolvency laws or, in
case of a company, by the process of liquidation that does not absolve the surety of his
liability.
Act or Omission:
Example: Act of creditor in terminating the agreement of Hire-Purchase by taking possession
of goods, discharges the surety. There is a contract for the construction of a building, which is
guaranteed by the surety, and the creditor has to supply the building material. An omission on
the part of the creditor to supply the material would discharge the contractor and so would the
surety be discharged.
Compromise, extension of time and promise not to sue:
A contract between the creditor and the principal debtor, by which the creditor makes a
composition with, or promises to give time to, or not to sue the principal debtor, discharges
the surety, unless the surety assents to such contract.
(Mere forbearance to sue does not discharge the surety)
By Impairing suretys remedy:
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.
M R Chakrapani Iyengar V Canara Bank (1997)
The principal debtor disposed of the hypothecated property, the surety submitted all the
particulars to the creditor but the latter took no steps to seize the property or to issue criminal
process against the debtor, the surety became discharged.
Union Bank of India V M P Sreedharan Kartha (1993)
A hypothecation, being not a possessory security, not much duty can be expected from the
creditor towards the care of the security. Accordingly, where the contents of a hypothecated
godown are lost and the banker was not aware of any such loss otherwise than in the ordinary
course of business, the guarantor was held to be not discharged to the extent of the value of
the security.
IV.
Guarantee
Indemnified)
loss
indemnifier is primary
occurrence of a loss
name.
debtor
V. CONCLUSION
we can see here that though the concept of indemnity and guarantee prevalent in India was
introduced by the government of the crown, when India was a colony under the British
empire then also significant differences between the two concepts of indemnity and
guarantee in common law of U.K vis-a-vis India can be seen, through various case laws and
the judgements held by the courts so far. Thus in the end the basic difference that I found in
the provisions, as to contract of indemnity were: that the indemnity in English law and Indian
law is that, the English law is wide enough to cover the losses by fire and sea peril whereas
the Indian law doesnt approve this. Moreover in the Indian law the loss should be caused by
some human agency i.e. the promisor himself or by the conduct of any other person. Whereas
in English law loss caused by a natural calamity and the promisor are considered but not by
any third party. And the provisions, as to contract of guarantee are : that in English law a
minor may not be held liable as the contract is void ab initio even though at the time of
contract the person may have known him to be a minor, but in Indian law where a minor has
been knowingly guaranteed, the surety should be held liable as a principle debtor. Moreover
a in U.K the contract of guarantee has to be written as defined in frauds act, whereas in
Indian law it can be oral as well as written.