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    Indemnity-and-Guarantee

    Uploaded by

    Shyam Kumar

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Indemnity-and-Guarantee

    Uploaded by

    Shyam Kumar
    3 views17 pages

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    Copyright:

    © All Rights Reserved
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    Download as pdf or txt
    3 views17 pages

    Indemnity-and-Guarantee

    Uploaded by

    Shyam Kumar

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 17

    Indemnity and Guarantee

    Contract of Indemnity
     According to the Section 124 of the Indian Contract Act “ A
    Contract by which one party promises to save the other party
    from the loss caused to him by the conduct of the promisor
    himself ,or by the conduct of any other person is called a
    Contract of indemnity.”
     The person who promises to make good the loss is called the
    indemnifier (promisor)
     The person whose loss is to be made good is called the
    indemnified or indemnity-holder(Promise)
     The Contract of Indemnity is a Class of contingent contract.
     A and B claim certain goods from a railway company as rival
    owners. A takes delivery of the goods by agreeing to
    compensate the railway company against loss in case B turns
    out to be the true owner. This is a contract of indemnity
    between A and the railway company.
     A and B go into a shop. B says to the shopkeeper “ let A have
    the goods, I will see you paid.” This is a contract of
    Indemnity.
    Rights of Indemnity-holder when
    sued(Sec.125)
     According to section 125 an indemnity holder is entitled to
    recover from the promisor (i.e.indemnifier)
    1.All damages which he may be compelled to pay in respect of
    any matter in the suit to which the promise to indemnify
    applies.
    2.All costs which he may be compelled to pay in bringing or
    defending such suits.
    3.All sums which he may have paid under the terms of any
    compromise of any such suit. The compromise should not be
    contrary to the orders of the indemnifier and should be
    prudent or authorised by the indemnifier.
    Essentials of a Contract of Indemnity
     There must be two parties in a contract of indemnity,i.e.
    Indemnifier and the Indemnified
     A Contract of Indemnity may be Express or implied
     The contract being a species of contract ,is subject to all the rules
    of contract such as free consent,legality of object,capacity of
    parties etc.
     Consideration in the case of contract of Indemnity is essential to
    enable the indemnity holder to make claim for compensation
     A Contract of Indemnity is enforceable only when the Promisee
    suffers a loss the happening of which is unknown and against
    which the Indemnity holder was promised to be protected.
    Contract of Guarantee
     It is a Contract to perform the promise or discharge the
    liability of a third person in case of his default.(Sec.126)
     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’
     The person to whom the guarantee is given is called
    ‘Creditor’.
     A Guarantee may be either Oral or Written
     It may be Express or Implied
    Example
     S (Surety) requests C (Creditor) to lend Rs.1,00,000 to
    P(Principal Debtor) and guarantees that if P fails to pay the
    amount, he will pay. This is a Contract of Guarantee.
    Bank of Bihar Ltd. Vs. Dr. Damodar
    Prasad
     Bank of Bihar Lent money to Damodar Prasad on the
    Guarantee of Mr. Paras Nath Sinha .
     The Guarantee Bond signed by Mr. Sinha in favour of the
    Bank stated that the surety would pay the liabilities of the
    Principal debtor up to Rs.12,000 and interest thereon within
    two days of the Demand.
     Damodar Prasad defaulted on paying back the principal and
    interest.
     The Bank sent several demand notices to both the parties but
    neither responded
     The Bank filed a suit against them in the Court of Patna.
     The Court decreed the Suit against both Mr. Prasad and Mr.
    Sinha.
     The Court further directed that the Bank should exhaust its
    remedies against Mr. Prasad before turning to the Surety
    Mr.Sinha.
     However the bank was not satisfied with the order of the
    Court as it was not as per the provisions of Section 128 of the
    Indian Contract Act and appealed to the Supreme Court.
     As per Sec.128 the liability of the surety is coextensive with
    that of the Principal Debtor unless it is otherwise provided
    by the Contract.
    Decission of Supreme Court
     The Demand for payment of the liability of the Principal
    Debtor was the only condition for the enforcement of the
    bond.
     Neither the principal debtor nor the surety discharged the
    admitted liability of the principal debtor in spite of demands.
     Under Section 128 of the Indian Contract Act the liability of
    the surety is coextensive with that of the principal debtor.
    The Surety thus become liable to pay the entire amount.
     His Liability was immediate. It was not deferred until the
    creditor exhausted his remedies against the principal debtor.
     Before payment ,the surety has no right to dictate terms to
    the creditor and ask him to pursue his remedies against the
    principal in the first instance.
     In the absence of some special equity, the surety has no right
    to restrain an action against him by the creditor on the
    ground that the principal is solvent or that the creditor may
    have relief against the principal in some other proceedings.
     Similarly where the creditor has obtained a decree against the
    surety and the principal ,the surety has no right to restrain
    execution against him until the creditor has exhausted his
    remedies against the principal
    Essential Features of a Contract of
    Guarantee
     1.Concurrence
     2.Primary Liability in some person
     3.Essentials of a Valid Contract
     Writing not necessary
    Extent of Surety’s Liability
     1.It’s Co-extensive
     Under Section 128 of the Indian Contract Act the liability of
    the surety is coextensive with that of the principal
    debtor,unless it is otherwise provided in the Contract.
     The Surety is liable for what the principal debtor is Liable
     2.Limitation of Surety’s Liability
     3.Liability under continuing guarantee(Sec.129)
    Kinds of Guarantee
     1.Specific Guarantee
     2.Continuing Guarantee
    Rights of Surety
     The Surety has rights against
     1.The Creditor
     2.The Principal Debtor
     3.The Co-Sureties

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