Indemnity and

Guarantee
ANIRUDH VENKATESH
Indemnity

Incurred by the
Indemnified as a
result of the actions
of the indemnifier
or any third party
Indemnity Defined

 To “indemnify” is to “secure against a loss”.

 Parties – The one who secures the loss is the Indemnifier.
The one whose loss is secured is the indemnified.
 Indemnity is a promise to save a blameless person from
the consequences of acts they did not participate in.
 Sec 124 - confines the liability under indemnity to losses
occasioned due to the act of the promisor (indemnifier)
or due to the act of any other person (third party).
New India Assurance Company
Ltd. Vs. Kameshwra Rao and Others
 A contract of indemnity is a direct engagement
between two parties thereby one party promises
to protect the other from harms.
 It is limited to events or accidents caused due to
conduct of the indemnifier or any other person.
 It is not a promise to protect against harms or
losses that are out of the control of the
indemnifier or the said third party interloper.
Nature of an Indemnity

 Although indemnity can be express or implied in the

general sense of contracts, Sec 124 of the Act makes it
seem that Indemnity ought to be express.
 However, the general principle is when an act is done by
one person at the request of another, and the act is not
a violation of any right itself to the knowledge of the
person doing it, and if that act turns out to injurious to
someone’s right anyway, the parson doing the act is
entitled to an indemnity from the person who requested
the act be done. [Secretary of State v. Bank of India]
Elements of an Indemnity

 There must be a Loss

 The Loss must be caused either by the
indemnifier or by any other third person
 The indemnifier is liable only for the loss

 Thus, it is clear that an indemnity contract is

contingent in nature and is enforceable only
when the loss occurs.
Rights of the Indemnified (Sec 125)

 Right to recover damages

 Right to recover costs
 Right to recover sums paid under a compromise – limited
by what has been authorized by the indemnifier.
 Right to sue for specific performance

 However, it is important to note that indemnity cannot

be claimed dishonestly, with a lack of good faith or
fraud. [Yeung v. HSBC]
Rights of the Indemnifier

 Interestingly, no section directly mentions the rights of the

Indemnifier.
 Some cases have discussed a similarity with the rights of
a surety under Sec 141.
 When one person has agreed to indemnify the other, he
will, on making good the indemnity, be entitled to
succeed to all the ways and means by which the person
indemnified might have protected himself against or
reimbursed himself for the loss. [Simpson v. Thompson]
Guarantee

Surety

Principal
Creditor
Debtor
Guarantee Defined

 A Contract of Guarantee is a contract to perform a

promise, or discharge the liability, of a third person in
case of his default.
 Parties: The person in respect of whose default the
guarantee is given – Principal Debtor.
 The person to whom the guarantee is given is the
Creditor
 The person who gives the guarantee is called the Surety
Nature of Guarantee

 A guarantee may be verbal or written.

 As per Sec 127, anything done or any promise made for
the benefit of the principal debtor in relation to the debt
may be considered sufficient consideration to the Surety
for giving the guarantee.
 Eg: When A requests B to lend 10k to C and guarantees
that C will repay the amount within the agreed time and
that on the failing to do so, he will pay B. This is a
contract of guarantee and the promise to pay on
default works as consideration for the contract.
The Three Contracts

 A Principal Contract between the principal

debtor and the creditor.
 A Secondary Contract between the creditor
and Surety
 An implied contract between the surety and the
principal debtor whereby the principal debtor is
under and obligation to indemnify the surety, on
the fulfilment of the guarantee.
Essentials

 The Essentials of a Valid Contract apply – The Principal

Debtor need not be competent, however, on default
the Surety is considered the Principal Debtor and will be
personally liable.
 Surety need not benefit from the Guarantee.
 Guarantee not to be obtained by misrepresentation
(S.142)
 Guarantee not to be obtained by concealment (S.143)
 The Tripartite Contracts all need to be valid
Essentials Continued…

 There must be consent of all the three parties to the agreement.

 Valid liability.

 The liability of the Surety is co-extensive/identical to the Principal

Debtor.
 The liability of the Surety is only attracted once the default has
occurred.
 If the Principal debtor is not liable due to a defect of the Creditor,
the Surety is also no liable.
Surety’s Liability

 Surety’s liability continues even if the principal debtor has

not been sued or is omitted from being sued.
 Surety’s liability may be conditional. May impose
conditions to make liability contingent or limited.
 In Industrial Financial Corporation of India v. Kannur
Spinning & Weaving Mills Ltd. it was held that the liability
of surety does not cease merely because of discharge
of the principal debtor from liability.
Kinds of Guarantees

 Specific – Extends to a single debt or a specific

transaction. Is discharged when the guaranteed debt
has been duly paid or the promise is duly performed.

 Continuing – Extends to a series of transactions.

Continues until revoked.
 A Continuing guarantee may be given for a part of the
entire debt or for the entire debt subject to a limit.
Revocation of a Continuing
Guarantee
 By Notice (Sec 130) – future transactions only.

 By Death of Surety (131) – Unless otherwise

mentioned in the contract. Again only in relation
to future transactions.

 By modes of discharging the surety

Rights of a Surety

 Rights against the Principal Debtor:

1. Right to Subrogation [140] – Surety becomes the
creditor after guarantee is discharged.
2. Right to Indemnity [145] – Principal Debtor must
indemnify the Surety on his default.

➢ Rights against Creditors:

1. Right to Securities [141]
2. Right to Claim Set Off
Rights against Co-sureties

1. Equal/simultaneous contribution
2. Liability bound in different sums –
Discharge of one surety does not
discharge all.
3. Right to Claim Contribution
4. Right to share Security
Discharge of Surety

 a) novation,
 b) variance in terms,
 c) release or discharge of principal debtor,
 d) when creditors release the surety,
 e) creditor’s default,
 f) loss of security provided to the principal debtor
 g) Revocation
 h) Invalidation by misrepresentation or concealment.
Difference between Indemnity and
Guarantee
Indemnity Guarantee
 Two Parties – Indemnifier  Three parties – Principal
and Indemnified Debtor, Creditor, Surety.
 One contract.  Three Contracts
 To protect the promise  Is a security for the
against a man made loss Creditor
 Indemnifier has full  Main liability is PD and
liability. secondary is Surety.
Differences Continued…

Indemnity Guarantee
 Contingent on loss  Liability arises only on the
caused by indemnifier or non-performance/default
third person. of the principal debtor.
 Indemnifier need not act  The surety acts at the
at the request of the request of the principal
indemnified. debtor.
 Indemnifier cannot sue  The Surety can sue the
the third party for causing principal debtor on the
loss. Privity. discharge of the debt