A Project Report on Features and Distinctiveness of Contracts

of Indemnity and Guarantee: An Analysis

LAW OF CONTRACTS-II

Submitted by:-

Aaditya Vasu

2013001

SEMESTER 3rd

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

VISAKHAPATNAM

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 Acknowledgement

Writing a project is one of the most significant academic challenges I have ever faced. Though this
project has been presented by me but there are many people who remained in veil, who gave their
all support and helped me to complete this project.

First of all I am very grateful to my subject teacher Miss Parvathy SS, without the kind support of
whom and help the completion of the project was a herculean task for me. She donated her valuable
time from her busy schedule to help me to complete this project and suggested me from where and
how to collect data.

I am very thankful to the librarian who provided me several books on this topic which proved
beneficial in completing this project.

I acknowledge my friends who gave their valuable and meticulous advice which was very useful
and could not be ignored in writing the project. I also owe special thanks to my parents for their
selfless help which was very useful in preparing the project & without whose support this project
wouldnt have been prepared.

Aaditya Vasu
3rd Semester
2013001

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 Index
1. Introduction_______________________________________________________(4)
2. Research Methodology______________________________________________ (4)
3. Objectives________________________________________________________ (4)
4. Contract of Indemnity under English Law_______________________________ (5)
5. Indemnity as per Indian Contract Act, 1872______________________________(5)
6. Insurance Contract of Contract of Indemnity_____________________________ (8)
6.1 India__________________________________________________________(8)
6.2 England_______________________________________________________ (9)
7. Rights of Indemnity holder___________________________________________ (9)
8. Rights and duties of Indemnifier_______________________________________(11)
8.1 Rights of Indemnifier_____________________________________________(11)
8.2 Duties of Indemnifier_____________________________________________(11)
9. Commencement of Liability__________________________________________ (11)
10. Definition of Guarantee______________________________________________(13)
11. Essential of Guarantee_______________________________________________(14)
12. Liability of Surety__________________________________________________(16)
13. Difference between Contract of Indemnity & Guarantee____________________(17)
14. Conclusion________________________________________________________(19)
15. Bibliography_______________________________________________________(20)

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 INTRODUCTION
When we are discussing about the Contracts of Indemnity and Guarantee, the first thing we have
to do is to define the both types of Contracts. Contract of Indemnity means enact to compensate
or protect somebody from the loss or make good to the loss. When one person promises to another
person that in case another person suffers from some loss the first person will compensate the loss.
An indemnity is a sum paid by party A to party B by way of compensation for a particular loss
suffered by B. The indemnitor (A) may or may not be responsible for the loss suffered by the
indemnitee (B). Forms of indemnity include cash payments, repairs, replacement, and
reinstatement. In the same context Contract of Guarantee means an act 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 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.

RESEARCH METHODOLOGY

This topic FEATURES AND DISTINCTVENESS OF CONTRACT OF INDEMNITY AND

GUARANTEE-AN ANALYSIS, a comparative study is not a very vast topic but is a type of
liability commonly found in the Law of Contracts. It can be studied along with the comparison
with English Law. My observations and conclusions are based upon the secondary materials. The
methodology adopted by me to draw conclusion about the topic is basically depended upon non-
doctrinal research. I took the help of various research papers having focus upon the study of
Contract, Indemnity, rights of indemnity holders, how the liability will be discharged under
guarantee, Consideration for Contract of Guarantee. I also took help from text books, magazines,
public opinion but to a very limited scope which was basically a feedback from my friends and the
most non exhaustive resource that is the Internet. The books I referred to were mine as well as
from the library of Damodaram Sanjivayya National Law University.

OBJECTIVES

1. What is the main features of Contract o Indemnity and Guarantee?

2. What is the main distinctiveness between Contract of Indemnity and Guarantee?
3. Scope of the Study of Contract of Indemnity and Guarantee.

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 Contract of Indemnity under English Law

An illustration in English Law of the meaning and effect of a contract of indemnity is to be found
in the facts of Adamson v. Jarvis:1

The plaintiff, an auctioneer, sold certain cattle on the instruction of the defendant. It subsequently
turned out that the livestock did not belong to the defendant, but to another person, who made the
auctioneer liable and the auctioneer in his turn sued the defendant for indemnity for the loss he had
thus suffered by acting on defendants directions.

The Court laid down that the 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.

The English definition of indemnity is wide enough to include a promise of indemnity against loss
arising from any cause whatsoever, e.g., loss caused by fire or by some other accident. Indeed,
every contract of insurance, other than life assurance, is a contract of indemnity.

According to Longmans Dictionary of Contemporary English, indemnity is protection against

loss, especially in the form of a promise to pay, or payment for loss of money, goods, etc.

It is a security against, or compensation for loss, etc.2 an expressed or implied contract to

compensate an individual for loss or damage.

Indemnity as per Indian Contract Act, 1872.

Indemnity literally means,

(1) Payment for damage, a guarantee against losses.

(2) A bond protecting the insured against losses caused by others failing to fulfill their obligations.

(3) The granting of exemption from prosecution.

1
(1872) 4 Bing 66: 5 LJ (OS) (CP) 68: 29 RR 503.
2
Chambers New English Dictionary.

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(4) an option to buy or sell a specific quantity of stock at a stated price within a given period of
time

It is entered into with the object of protecting the promises against anticipated loss. The
contingency upon which the whole contract of indemnity depends is the happening of loss.

ILLUSTRATIONS: (b) A lost his share certificate. He applied to the company for the issue of a
duplicate certificate. The Company asked A to furnish an indemnity bond in its favour to protect
it against any claim that may be made by any person on the original certificate. A, accordingly
executed the indemnity bond. It is a contract of indemnity between A and the Company. A is the
indemnifier and the Company is the indemnified or indemnity-holder.

A contract of indemnity is one whereby a person promises to save the other from loss caused to
him by the conduct of the promisor himself or of any third person. For example, a shareholder
executes an indemnity bond favouring the company thereby agreeing to indemnify the company
for any loss caused as a consequence of his own act. The person who gives the indemnity is called
the 'indemnifier' and the person for whose protection it is given is called the 'indemnity-holder' or
'indemnified'. A contract of indemnity is restricted to cover the loss caused by the promisor himself
or by a third person. The loss must be caused by some human agency. Loss arising from accidents
like fire or perils of the sea are not covered by a contract of indemnity.

As per Section 124 of the Indian Contract Act, the contract of indemnity is defined as, a contract
by which one party promises to save other from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person.

Well, this section is not so difficult to understand when you relate it to practical house. Suppose
you are hired by a newspaper to write articles for them as a freelancer. Typically, your contract
would have an indemnity clause so that if you write something against a very important person
and that person files a suit against the newspaper for defamatory material, the newspaper can show
the indemnity clause that you signed, protecting them from any form of loss caused due to your
conduct.

Then, the onus of fighting the defamation suit becomes your responsibility. Thats not all about
the contract of indemnity as it is incorporated in most contracts, particularly in real estate purchase

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and bank loans. A person who promises to bear the loss is known as indemnifier and the person
whose loss is covered is known as indemnified. These types of contracts are mainly formed
between insurance companies and their customers.

124. "Contract of indemnity" defined

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, is called a "contract of indemnity".

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.

The only illustration appended to the section says that if a person promises to save another from
the consequences of a proceeding which may be commenced against him it is a contract of
indemnity. The person who gives the indemnity is called the indemnifier and the person for
whose protection it is given is called the indemnity-holder or indemnified.

According to Section 124 of the Indian Contract Act, 1872, a contract of indemnity means 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. This provision incorporates a contract
where one party promises to save the other from loss which may be caused, either

i. By the conduct of the promisor himself, or

ii. By the conduct of any other person.

This definition covers indemnity for loss caused by human agency only. It 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 y the reason of
liability incurred by something done by the indemnified at the request of the indemnifier.3

3
Gajanan Moreshwar v. Moreshwar Madan, A.I.R. 1942 Bom. 302, at p. 303

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The definition excludes from its purview cases of loss arising from accidents like fire or perils of
the sea. Loss must be caused by some human agency. Contracts of insurance against loss are
covered by the chapter on Contingent Contracts.

INSURANCE CONTRACT IF CONTRACT OF INDEMNITY

India:

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 o 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.

In United India Insurance Company v. M/s. Aman Singh Munshilal,4 the cover note
stipulated delivery to consigner. Moreover, on its way to the destination the goods were to be
stored in a godown and thereafter to be carried o the destination. While the goods were in godown,
the goods were destroyed by the fire. It was held that the goods were destroyed during transit, and
the insurer was liable as per the insurance contract.

Liability of insurer and breach of fidelity insurance contract

Where insured bad of fertilizers stored in plaintiffs godown, were found missing due to act of
embezzlement by the employees of plaintiff Company. Defendant Company had insured to
indemnify plaintiff against any loss sustained by such act. The alleged breach of condition in the
contract notice to be given to the defendant regarding discovery of such act could not be said to be
fundamental breach. Held, that it would not permit the defendant to negate the legitimate claim of
the plaintiff, hence decreeing suit of declaration and recovery of amount with interest by Trial
Court was proper.5

4
A.I.R. 1994 P. & H. 206.
5
Oriental Insurance Co. Ltd., Ahmedabad v. Gujarat State Warehousing Corpn. Ahmedabad, A.I.R. 2003 Guj. 159.

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England:

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 promise from a loss, whether it be caused by
human agency or any other event like an accident and fire. Under the English law, a contract of
insurance (other than life insurance) is contract of indemnity.

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. 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.

The 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. 6

The Law Commission of India in its Report7 has recommended the amendment of Section 124.
According to its recommendation, the definition of the Contract of Indemnity in Section 124 be
expanded to include cases of los 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.

RIGHTS OF INDEMNITY HOLDER

In a suit against the indemnity holder, he may have been compelled to pay damages, and incurred
costs, etc. in his own turn, he can bring an action against the promisor (indemnifier) to recover
damages and costs, etc. paid by him, if the indemnifier has promised an indemnity in such a case.
The provision in this regard is contained in Section 125, which reads as under:

124. Rights of Indemnity holder

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to
recover from the promisor:-

6
Secretary of State V. The Bank of India Ltd., A.I.R. 1938 P.C. 191.
7
13th Report, 1958, on the Indian Contract Act, 1872.

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(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 of 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 authorised 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 contract to the orders of the promisor, and was one which it would have been
prudent for the promise to make in the absence of any contract of indemnity, or if the promisor
authorised him to compromise the suit.

The indemnity-holder, acting within the scope of his authority, is entitled to recover the following
amounts-

(1) All damages which he may be compelled to pay in any suit in respect of any matter to
which the promise of indemnity applies;8
(2) All costs which he may be compelled to pay in such suits if, in bringing or defending it, he
did not contravene the order 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 authorised him
to bring or defend the suit;9
(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 promise to make in the absence of any contract of indemnity, or
if the promisor authorised him to compromise the suit.

A person who encashes an indemnity bond which is in nature of a bank guarantee can retain only
that part of the amount of the bond which represents the damage or loss suffered by the bond-
holder as a result of the contracting partys breach. Anything more would be undeserved windfall
for one party and penalty of the other.10

8
Parker v Lewis, (1873) LR 8 Ch 1035;
9
Bepin v Chunder Seekur Mookerjee, 1880 ILR 5 Cal 811;
10
Cargill International SA v Bangladesh Sugar & Food Industries Corpn, (1996) 4 All ER 563.
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Where a motor vehicle (truck) was under indemnity insurance for Rs.200000 and it was stolen
with no chances of recovery, it was held that the proper amount of indemnity was as fixed by the
surveyor at Rs. 1,87,492 and that it was payable with 18% interest for the delay period. The
settlement of claim at a lesser amount by insurance authorities was arbitrary and unfair under
Article 14 of the Constitution.11

RIGHTS AND DUTIES OF INDEMNIFIER

Rights of the indemnifier:

The rights of the indemnity-holder are the duties of indemnifier, and duties of the indemnity-
holder are the rights of the indemnifier. There are not prescribed any specific rights of the
indemnifier either in Nepalese law or in Indian law. However, he is not liable for indemnity.
(i) If indemnity-holder acts negligently.
(ii) If indemnity-holder is acting with the intention of causing any loss or damage.
(iii) If he is acting against the instructions of the other party (promisor).
Duties of indemnifier:
The duties of an indemnifier arise in the following circumstances:
(i) There must be a loss in accordance with the contract to make the indemnifier liable.
(ii) There must be an occurrence of the anticipated event. Without any occurrence of the
prescribed event, there is no indemnity by the indemnifier.
(iii) Where the right of indemnity is used by the indemnity-holder prudently and
the instruction of the indemnifier is not contravened or when there is no breach of contract.
(iv) If the costs demanded by the indemnifier are not caused by negligence, haphazard behavior.

COMMENCEMENT OF LIABILITY

When can indemnifier be made liable? Can he claim to be indemnified before he is demnified
?There has been a controversy regarding the point, as to whether the indemnifier can be asked to
be indemnify before the indemnity-holder has actually suffered the loss, or his liability arises only
after the loss has been suffered by thee indemnity-holder.

According to English Common Law, no action could be brought against the indemnifier
until the indemnity-holder had suffered actual loss. The situation created a great hardship in those

11
Mohit Kumar Saha v New India Assurance Co Ltd, AIR 1997 Cal 179.

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cases where the indemnity-holder was not in a position to meet the claim out of his pocket. Relief
was not provided to the 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
demnified before he could be indemnified. In other words, the indemnity-holder can compel the
indemnifier to save him from the loss in respect of liability against which indemnity has been
promised.

There has been a difference in opinion between various High Courts in India as to whether the
indemnity-holder can claim indemnity before he has actually suffered the loss.

According to the view expressed by Lahore12 and Nagpur13 High Courts, a person must be
demnified before he can be indemnified, i.e., no indemnity can be claimed until the indemnity-
holder has already actually suffered the loss.

The High Courts of Bombay, Calcutta, Madras, Patna, and Allahabad have expressed a
different view, and they are in favour of the application of law similar to the one recognized in
England by the Court of Equity. According to the decisions of the courts, an indemnity-holder can
compel the indemnifier to indemnify even before the indemnity-holder has actually suffered the
loss.

In State Bank of India v. Mula Sahakari Sakhar Karkhana Ltd.,14 the respondent, a co-
operative society, having a sugar factory, entered into a contract with one M/s. Pentagon
Engineering Pvt. Ltd. for the installation of a paper plant. As per the agreement the Pentagon
furnished a Bank Guarantee/Indemnity for the release. The retention money of 10% from the
Proforma Invoices of the material reached at the site. The operative portion of the Bank Guarantee
read as to indemnify and keep indemnified Mula Sahakari Sakhar Karkhana Ltd. against all
losses, claims damages actions and cost in respect of such sums which the supplier shall become
liable to pay as the terms of the said order.

Disputes and differences arose between the parties and as a result, the respondent terminated the
contract and invoked the Bank guarantee against the Pentagon. Holding that the document

12
Sham Sunder v. Chandu, A.I.R. 1935 Lahore 974.
13
Ranganath v. Pachusao, A.I.R. 1935 Nag. 117
14
A.I.R. 2007 S.C. 2361
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indemnifying the respondent was a contract of indemnity and not guarantee, the Apex Court said
that the claim made by the assured on termination of contract need not be honoured by the Bank
without the proof of loss.
Definition of Guarantee

Contract of guarantee is defined in section 126 of Indian contract act.

Contract of guarantee , surety, principal debtor and creditor 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 guarantee is given
is called creditor a guarantee may be either oral or written.15

For example: A takes a loan from a bank A promises to the bank to repay the loan B also makes
the promise to the bank saying that if A does not repay the loan then I will pay .in this case A is a
principal debtor who undertakes to repay the loan B Is the surety, whos liability is secondary
because he promises to perform the same duty in case there is default on the on part of A. the bank
in whos favors the promise has been made is the creditor.

The object of a contract of guarantee is to provide additional security to the creditor in the form of
the promise by the surety to fulfill a certain obligation in case the principal debtor fail to do that in
every contract of guarantee there are three parties the creditor the principal debtor and the surety
there are three contracts in contract of guarantee .firstly the principal debtor himself makes a
promise in favors of creditor to perform a promise, secondly the surety undertakes to be liable
towards to the creditor if the principal debtor makes a default.16 Thirdly an implied promise by the
principal debtor in favor of the surety that in case the surety has to discharge the liability of the
default of the principal debtor, the principal debtor shall indemnify the surety 17. The contract of
guarantee is no doubt tripartite in nature18 but it is not necessary or essential that the principal

15
Contract act section 126
16
Ibid1
17
Section 145also see NS bank Vs Union of India, AIR 1991 AP 153,at 158
18
Mahabir shum sher vs Lloyds bank, air 1969 cal 371
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 debtor must expressly be a party to that document. In a contract of guarantee, the principal debtor
may be a party to the contract by implication. Thus, there is a possibility that a person may become
a surety without the knowledge and consent of the principal debtor. The function of contract of
guarantee is to enable a person to get a loan, or goods on credit, on an employment. Some person
comes forward and tells the lender, or the supplier or the employer that he (the person in need)
may be trusted and in case of any default .for e.g. in old case of Birkmy vs Darnell 19 the court said

if two comes to a shop and one buys, and other to give him credit, promises the seller, if he does
not pay you, I will pay.

This type of collateral undertaking to be liable for the default of another is called a contract of
guarantee. In English law a guarantee is defined as a promise to answer for the debt, default or
miscarriage of another20

Essentials of Guarantee

1. The contract may be either oral or in writing

According to sec 126, a guarantee may be either oral or written. On this point, the position in India
is different from that in England. According to English law, for a valid contract of guarantee, it is
necessary that it should be in writing and signed by party to be charged therewith. In English law
under the provisions of statutes of fraud a guarantee is not enforceable unless it is in writing and
signed by the party to be charged 21

2. There should be a principal debt

A contract of guarantee pre supposes a principal debt or an obligation to be discharged by the

principal debtor. The surety undertakes to be liable only if the principal debtor fails to discharge
his obligation. If there is no such principal debt, but there is a promise by one party in favor of

19
(1709) 91 ER 27:1 Salk 27.
20
S.4, statute of frauds 1677, 29 II. C 3
21
S.chattantha karayalar vs central bank.

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 another for compensating in a certain situation, and the performance of this promise is not
dependent upon the default of somebody else, it is a contract of indemnity. The purpose of a
guarantee being to secure a payment of debt, the existence of a recoverable debt is necessary. 22

3. Consideration

Like every other contract, a contract of guarantee should also be supported by some consideration.
A guarantee without consideration is void23. For suretys promise, it is not necessary that there
should be a direct consideration between the creditor and surety; it is enough that the creditor had
done something for the benefit of the principal debtor. Benefit to the principal debtor constitutes a
sufficient consideration to the surety for giving the guarantee. This is clear from sec 127 which
read as under
Anything done, or any promise made for the benefit of the principal debtor may be a
sufficient consideration to the surety for giving the guarantee.
Illustrations

(a) B requests A to sell and deliver to him goods on credit. A agrees to do so , provided C promises
will guarantee the payment of the prices of the goods .C promises to guarrntee the payment in
consideration of As promise to deliver the goods . this is a sufficient consideration for Cs promise

4. Consent of the surety should not have been obtained by misrepresentation or concealment
The creditor should not obtain guarantee either by any misrepresentation or concealment of any
material facts concerning the transaction. If the guarantee has been obtained that way, the
guarantee is invalid. The position is explained by section 142 and 143 which are as under

142. Guarantee obtained by misrepresentation invalid.-Any guarantee which has been

obtained by means of misrepresentation made by the creditor , or with his knowledge ans
assent, concerning a material part of the transaction, is invalid.

22
Mountstephens vs lakeman, 1871 lr 7 QB 196, 2012 Ex, affirmed ,LR 7 HL 17.
23
Janak paul vs dhokal mall kidarbux ,(1935) 156 IC 200,

15
 143. Guarantee obtained by concealment invalid.- Any guarantee which the creditor has
obtained by means by means of keeping silence as to material circumstances is invalid

Illustrations

(a) A engages B as a clerk to collect money. B fails to account for some of his receipts and A in
consequence calls upon him to furnish security for his duly accounting gives his guarantee for Bs
duly accounting . A does not acquaint C with Bs previous conduct. B afterwards makes default.

(b) The guarantee is invalid , A guarantee to C payment for iron to be supplied by him to B to the
amount of 2000 tons. B and C have privately agreed that B should pay five rs er ton beyond the
market price, such excess to be applied in liquidation of an old debt. This agreement is concealed
from A is not liable as a surety.

(c) According to the above stated provision, obtaining a persons consent to act a surety either by
misrepresentation, or by keeping silence as regards material circumstances, renders such a contract
invalid. Keeping silence as regards material circumstances, which could affect the suretys mind
to stand as surety or not, would render the guarantee void. Thus if a cashier has been found guilty
of embezzlement, but this fact is not disclosed when a surety has been made to guarantee the future
conduct of the cashier, the surety will not be liable as such, under these circumstances. Similarly,
if a surety is made to guarantee an employees existing and future liabilities, without being
informed that the said employee is already indebted to an extent more that of the guarantee, the
guarantee is invalid.24

Liability of surety: its nature and extent

According to section 128 , the liability of the surety is coextensive with that of that of the
principal debtor, unless it is otherwise provided by the contract

24
Lee vs jones, (1863) 17 CBNS 482 (Ex Ch)

16
The provisions that the suretys liability is coextensive with that of the principal debtor mean that
his liability is exactly the same as that of the principal debtor. For instance, the principal debtor
makes a default in the payment of the debt Rs 10000. The creditor may recover from the surety
the sum of 10000 plus the interest becoming due thereon as well as the amount spent by him in
recovering that amount. This may be further explained by the e.g. A guaranteed to B the payment
of bill of exchange by C, the acceptor. 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. If the principal debtors liability is
reduced, e.g. after the creditor has recovered the part of the sum due from him out of his property,
the liability of the surety is also reduced accordingly.25In Narayan singh vs chattarsingh26it has
been held that if the principal debtors liability is scaled down in an amendment decree or otherwise
extinguished in whole or in part by a statute, the liability of the surety pro tanto be reduced or
extinguished. If the principal debtor happens to be a minor and the agreement is made by him is
void, the surety too cannot be made liable in respect of the same because the liability of the surety
is coextensive with that of principal debtor. It has been held in an English case27 , that the guarantee
of the loan or an overdraft to an infant is void, because the loan to infant is itself is void ab initio.

DIFFERENCE BETWEEN CONTRACT OF INDEMNITY & GUARANTEE.

There are distinguishing differences between Indemnity and Guarantee in the Indian Contract Act.

Section 124 of the Indian Contract Act, 1872 defines the "Contract of Indemnity". It is
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. 'A' contracts to
indemnify B against the consequences of any proceedings which C may take against B in
respect of a certain sum of 20000 rupees. This is a contract of indemnity.
A contract of guarantee is defined in Section 126 of the Act. It 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.

25
Harigopal aggarwal vs state bank of india a.i.r. 1956mad 211
26
A.I.R. 1973 raj 347
27
Coutts & co vs browne lecky ,(1947) k.b. 104
17
 In contract of indemnity there are only two parties viz the indemnifier or promisor and the
indemnity holder or promisee. In contract of guarantee there are three parties viz the
creditor, principal debtor and surety.
In indemnity, there is primary and independent liability. In guarantee the surety has
collateral liability.
There is no existing debt generally in the case of contract of indemnity where there is
existing debt in the case of guarantee.
There are two contracts in a contract of indemnity where there are three contracts in the
case of guarantee.
In Indemnity the promisor is discharged by payment. In guarantee the surety is discharged
by payment made by principal debtor.
Indemnifier may have some interest in the transaction where the surety will not have any
connection with the transaction.

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 CONCLUSION
Indemnity is a special contract under the Indian Contract Act, 1872. The legislation is a very well
drafted one, but has given a very narrow definition of indemnity, due to which the Indian Courts
have time and again held that certain documents do not come under the purview of the definition
of indemnity contained in the Act. Such decisions have not created a problem, since the courts
covered the liability under other provisions of the same Act, mainly under Section 31of the Act
dealing with contingent contracts. Therefore, it would suffice to say that though the definition of
indemnity under the Indian Contract Act is narrow, the principles regarding indemnities which
have been laid down by common law are definitely addressed by other provisions of the Act.
The main purpose of construction and interpretation of a contract of indemnity is to ascertain and
give effect to the intention of the parties. While interpreting the indemnity clause in a business
contract, care should be taken so as to give the meaning to the terms and phrases according to the
common parlance used in that business rather than resorting to other means of interpretation, unless
such construction leads to absurdity. The extent of liability under a contract of indemnity depends
on the nature and terms of the contract and each case must be governed by its own facts and
circumstances. Interpretation of the contract or clause of indemnity thus plays a crucial role in
fixing the liability.

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 BIBLIOGRAPHY
Books referred:-

Blacks Law Dictionary.

Bangia, R.K. Contract -2, Allahabad Law Agency, 2004, Faridabad.
Saharay, H.K. Dutt on Contract, Eastern Law House, 2006, Kolkata.
Mitra, S.C. Law of Contract. Vol-2, Orient Publishers, 2005, New Delhi.
Markanda, P.C. Law of Contract. Wadhwa Publishers. 2008. Nagpur.
Singh, Avtar. Law of Contract. Eastern Book Company. 2008. Lucknow.
MULLA, The Indian Contract Act, 13th Edition Reprint 2012, by Anirudh Wadhwa.
Lexis Nexis Butterworths Wadhwa Publication, Nagpur.

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