INDEMNITY

 Rights in personem – Whose extensibility is limited only against the individual they
originally arise from that person’s representatives.
 To indemnify means to save from loss in respect of the liability against which the
indemnity is given as approved in Osman Jamal & Sons Ltd. v. Gopal Purshottam where
money could be recovered even if the payment had not been done to a third party.
 Section 124 – A contract by which one party promises to save the other from loss
caused by the conduct of the promisor himself, or by the conduct of any other person. It
means recompense for any loss or liability which a person has incurred, such duty arising
from agreement or otherwise. This along with section 125 is not exhaustive i.e., limited to
its explanation and evolves its presence with more and more cases.
 Types of Indemnity Contracts – The first type of contract is where the indemnity
factor is the crux of the contract (E.g. - Insurance). The second includes a contract where
the indemnity factor plays the role of an incidental clause (E.g. - Property Sale).
 The difference between Indemnity and Damages solely relies on the fact that in cases of
Indemnity, there is a pre-existing knowledge that a situation might occur in the future,
while also keeping in mind that a possible loss doesn't need to have occurred. Indemnity
is a primary obligation, unlike Damages which is a form of reimbursement that happens
when there is a breach of contract.
 Shanti Swarup v Munshi Singh (1967) - The plaintiff-respondents mortgaged their land,
later selling half to the appellants with funds designated to pay the mortgage, which was
neglected. The mortgagees sued, resulting in a final decree. Under the U.P. Encumbered
Estates Act, liabilities were apportioned. Consequently, the respondents executed a self-
liquidating mortgage, incurring a loss and filing the current suit. The trial court ruled for
the plaintiffs, and the High Court upheld the decision despite the appellant's time-bar
defence of exceeding 3 years. The Supreme Court considered Section 83 of the Limitation
Act which stated that indemnity contracts have a limitation of 3 years while considering
that such contracts may be expressed or implied. The appeal was dismissed because the
limitation began when the plaintiffs were damnified and not when the mortgage decree
was passed.
 Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri (1942) - The plaintiff agreed
with an MNC to lease a plot of land in which he was put in possession in pursuance of the
agreement. The plaintiff on request of the defendant transferred the benefit (possession) to
the defendant. The defendant had decided to erect a building on the said land for whom
the materials purchased by 'C' exceeded Rs 5000. After multiple payment requests, the
plaintiff mortgaged (limited transfer of immovable property in return for a loan) the
property to 'C' to make the payment of the amount with interest. The plaintiff, at the
defendant's request, secured a further charge (can be fixed or floating and on immovable
or movable) property for Rs. 5,000 and transferred land to the defendant. Despite the
defendant's responsibility to discharge mortgages, he failed to do so. The plaintiff, who
remained liable, demanded the release from liability, which was not obtained. The
defendant admitted the facts but argued the suit was premature since no actual loss was
 claimed. The plaintiff contended the indemnity arose from his liability due to the
defendant's request. The defendant agreed to the facts but was told that the suit was
premature as no loss was incurred. The court disagreed, stating that the plaintiff's liability
was absolute due to personal covenants in the mortgage and further charge thus ruling in
favour of the plaintiff.
 Section 125 – The promisee in an indemnity contract within his authority can recover
– All damages which he may be compelled to pay in any suit to which the indemnity
applies; all costs incurred in any lawsuit he brings or defends if he followed the
promisor's orders, acted prudently as if there were no indemnity contract, or had the
promisor's authorization to bring or defend the suit; all sums paid in a settlement of any
lawsuit if the settlement followed the promisor's orders, was prudent to make without an
indemnity contract, or if the promisor authorized the settlement. When drafting it is better
to use the term ‘compensate up to a specific amount” which fulfils the clause of
indemnity instead of agreeing to ‘hold him harmless’.
 Subrogation/Substitution - The indemnifier is entitled to some sort of monetary
compensation. Subrogation substitutes the indemnifier for the position of a creditor,
making the indemnity holder in the debt of the indemnifier.
 SBI v Moti Thawardas Dadlani (2007) – To understand the right of indemnifier, we look
into concepts/chapters other than the one on Indemnity. (Section 140) When an
indemnifier pays for a loss on behalf of the indemnified, the indemnifier is entitled to
assume the legal rights of the indemnified against any third parties responsible for the
loss. This means the indemnifier "steps into the shoes" of the indemnified, gaining the
right to recover the amount paid from those third parties. This principle ensures that the
indemnifier, having fulfilled their obligation to compensate the indemnified, can seek
reimbursement from those ultimately liable for the loss, thereby restoring the indemnifier
to their original financial position before the indemnity payment.

GUARANTEE
 Contracts to answer for the default of another contract. They are contracts of personal
security along with Indemnity. It is always consequential, secondary, and works in the
form of an accessory agreement which kicks only when there is a breach. The core of the
Guarantee is ‘Default’, whereas for Indemnity it is ‘Loss’. It is a tripartite contract/3
parties with 3 contracts. If the guarantor has a personal interest/stake in the case then it's
an indemnity contract.
 Section 126 – It is an oral or written 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 the
Surety (If PD does not repay, this individual repays)/(Guarantee). The person in respect of
whose default the promise is given is called the Principal Debtor (PD) (Legal relationship
with S upon request of PD). The person to whom the guarantee is given is called the
Creditor (C) (Who agrees to do something for the PD thus forming a primary contract).
 Section 127 – Anything done (something already done) for any promise made, for the
principal debtor, may be a sufficient consideration to the surety for giving the guarantee.
 Section 128 – The liability of the surety is co-extensive with that of the principal
debtor unless otherwise provided by the contract. Both S and PD stand on the same
footing for the Creditor. The liability of one rises and falls with the liability of the other.
No need to directly go to the PD instead can go to the Surety. The liability kicks in when
the creditor has the right to pursue remedies i.e., the PD defaults. The liability must be
proved against the Surety in the same way as proved against the principal debtor. The
Surety may limit his guarantee to a fixed amount, if the balance is floating, then it is
presumed that the liability is only for part of the debt. Payment of interest by a debtor
does not extend the limitation period against the surety unless the surety is bound by the
principal debtor's acknowledgements per the contract terms.
 Bank of Bihar v Damodar Prasad (1969) – The Creditor is the Bank of Bihar; Damodar
Prasad is the PD and Paras Nath Sinha is Surety. The guaranteed bond was executed
against the PD with the Surety. The surety agreed to pay the amount decided. The PD
defaulted in making the payment, thus turning to Surety. The Surety also defaulted and
when asked to pay, they claimed that the PD had money and was not insolvent. Section
128 of the Indian Contract Act of 1872, establishes that the liability of the surety is
coextensive with that of the principal debtor, meaning the surety is equally responsible for
the debt as the principal debtor. The surety’s obligation to pay is immediate and not
contingent upon the creditor's first exhausting remedies against the principal debtor. The
surety cannot dictate terms to the creditor or demand that the creditor first pursue the
principal debtor. Even if the principal debtor is solvent, this does not prevent the creditor
from enforcing the debt against the surety. The Creditor doesn't need to exhaust all of its
remedies against the principal debtor. Upon paying the debt, the surety is entitled to step
into the shoes of the creditor and recover the amount from the principal debtor under
Section 140. The court upheld the Surety’s liability and emphasized that the purpose of a
guarantee, especially in banking, is to provide the creditor with an immediate and reliable
means of securing payment later seeking recourse from the principal debtor.
 Section 129 – A guarantee that extends to a series of transactions is called a
continuing guarantee which extends over a particular period. If the limit is capped to a
one-time limit/transaction, then it is not a continuing guarantee. It aims to keep the surety
concept alive. It is a form of unilateral contract with an open offer given by Surety which
is accepted by the Creditor. It follows the traditional rules of guarantee i.e., Section 128.
In contracts of guarantee, revocation is difficult because the Surety cannot revoke
themselves i.e., only upon altering the original contract between C and PD.
 Revocation in continuing guarantee can take place by providing notice to the creditor
(Section 130) or when the Surety dies, where he is removed from the liability of
future transactions (Section 131). Only when prior liability exists upon the Surety can
its legal heirs be held liable, if it is for upcoming or future transactions, no liability exists.
 Section 132 – If two people agree to share a responsibility with a third person but also
agree between themselves that one will only pay if the other fails to do so, this internal
agreement does not change their responsibility to the third person. Both are still fully
responsible to the third person, regardless of their private arrangement.
 Section 133 - Any variance in the contract, made without the Surety’s consent, in the
contract formed between the principal debtor and creditor, the Surety is discharged from
his liability to the variance made. If the alteration is immaterial then surety is not
discharged, if it is material, then one should question if it harms Surety, then also surety is
discharged. A material alteration is a change in a document that affects the rights,
liabilities, or legal position of the parties involved, making the document legally tampered
with and potentially invalid (Gounder v Gounder (1970).
 Anirudhan v Thomco’s Bank (1963) – The creditor is Thomco’s Bank, the PD is
Shankaran and Anirudhan is the Surety. He approaches for a loan from the bank and gets
promissory notes/guarantee with Anirudhan for a surety of 25000rs when he initially is
rejected, he alters and reduces the amount to Rs 20000 that the bank accepts. When
Anirudhan is asked to pay, he rejects the claim by mentioning the change. Section 133
talks about material variation which discharges him from the variance. The court allows
for the variations by saying that creates a contract of agency through the fact that
Anirudhan gave the Surety to the PD and not directly to the Creditor, thus claiming that
Anirudhan knew about it. The court held that such material alterations, if done without
the consent of the surety, could void the contract. However, in this case, since the
alteration reduced the liability and did not prejudice the surety, the court ruled that the
alteration did not void the guarantee. The principle established is that material
modifications to a contract without consent generally void the contract, but changes that
do not harm or that benefit the party may not necessarily invalidate it.
 Section 134 – The surety is discharged by any contract between the principal debtor
and creditor by which the principal debtor is released or by any act or omission of the
creditor, the legal consequence of which is the discharge of principal debtor.
 Subramania Chettiar v. Narayanswami (1951) -
