Contract of Indemnity

“A contract of indemnity is 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.” (Section 124)
Mr. A contracts with the Government to return to
India from abroad after completing his studies
and serve the Government for a fixed period.
He fails to return to India. This is a contract of
indemnity and he is bound to reimburse the
Government.
• A person who promises to make good the
losses, i.e., the promisor is called the
indemnifier and the person whose loss is to
be made good, i.e., the promisee is called
the indemnity-holder or the person who is
indemnified.
• By a contract of indemnity, a security is
provided to the promisee against any
anticipated loss.
• To ‘indemnify’ means to save from loss.
 Essentials & Rights
Essentials
• Must contain all the essentials of a valid contract.
• Promisee must have suffered a loss.
Rights of indemnity-holder (promisee)
• Entitled to recover from promisor – Damages.
• Entitled to recover from promisor – Costs.
• Entitled to recover from promisor – All sums.
• Entitled to recover from promisor – Suit for
specific performance.
Note: Rights of indemnifier are analogous to the rights of a surety.
 Contract of Guarantee
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 the
principal debtor and the person to whom
the guarantee is given is the creditor.
• A guarantee may be either oral or written; express
or implied.
• To invoke contract of guarantee, default must be
committed by the third person on whose behalf a
person stands surety.
• Contract of guarantee is also known as a contract
of suretyship.
• A lends money to B, and C promises A that in
case B fails to pay the money he will pay the
money. This is contract a contract of guarantee.
• Every contract of guarantee has 3 parties, viz.,
Principal Debtor (B), Creditor (A), and Surety or
Guarantor (C).
 Consideration
• Something done or any promise made for the
benefit of the principle debtor, is presumed by
law to be sufficient consideration in the contract
of guarantee. It is not necessary that there should
be some benefit to the surety himself.
• B requests A to sell and deliver to him goods on
credit. A agrees to do so provided C will
guarantee the payment of the price of the goods.
C promises to guarantee the payment in
consideration of A’s promise to deliver the
goods. This is sufficient consideration for C’s
promise.
 Essentials of Contract of
Guarantee
• Debt must exist, which should be recoverable.
• Existence of three parties.
• Must be a distinct promise to pay by surety in
case of default committed by P. Debtor.
• P. Debtor must be primarily liable. Surety’s
liability is secondary.
• There should be some consideration.
• Liability must be legally enforceable.
• Must have all the essentials of a contract.
 Continuing Guarantee
• A guarantee which extends to a series of transactions is
called a Continuing Guarantee.
• Series of transactions implies series of separate and
distinct future transactions.
• For instance, guarantee for the conduct of a servant
appointed to collect rents.
• A guarantee which covers a single transaction is called
Single or Specific guarantee.
• In a specific guaratee, the liability of surety exists only to
a single or specific transaction, while in a continuing
guarantee his liability is not restricted to a single
transaction but to a series of transactions.
 Revocation of Continuing
Guarantee
• By Notice (Section 130): Revoked by surety as to
future transactions by notice to creditor.
• By death of the Surety (Section 131)
• By discharge of Surety: It is discharged by the
following ways.
By way of any variance (Section 133) in terms of the contract w/o surety’s
consent.
By release or discharge of P. Debtor.
By creditor compounding (favoring) with P. Debtor.
By creditor’s act/omission impairing surety’s eventual remedy (Section 139).
By creditor losing security against the P. Debtor (Section 141).
By misrepresentation of facts by creditor (Section 142).
By concealment of facts by creditor (Section 143).
By Failure of co-surety to join (Section 144).
 Rights of Surety
• Rights of Subrogation (Section 140): This is right
of surety against P. Debtor. This arises on payment
of the whole sum due or performance of the entire
duty. Surety steps into the shoes of the creditor.
And may now sue the P. Debtor if required.
• Right to benefit of creditor’s securities (Section
141): Entitled to the benefit of every security
which the creditor has against the P. Debtor at the
time when the contract of suretyship is entered
into.
• Right to indemnity (Section 145): Entitled to
recover from the P. Debtor whatever sum he
has rightfully paid under the guarantee, but
no sums which he has paid wrongfully.
• Right to be contributed equally in case where
2 or more persons are co-sureties. That is,
right of a surety against the co-surety
(Section 146).
A, B and C, as sureties to D for the sum of
Rs.3000 lent to E. E makes default in
payment. A, B and C are liable, as between
themselves, to pay Rs.1000 each.