♦ INDEMNITY:

  • Old English law defines indemnity as a promise to save a person harmless from the consequences of an act.
  • It can be express or implied.
  • According to Section 124 of the Indian Contract Act, 1872, “A contract by which one party promises to save another from loss caused to him by the conduct of the promisor or any other person”.

> Adamson v. Jarvis

Facts: The plaintiff, an auctioneer, sold certain cattle on instruction if 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 suffered by acting on the defendant’s directions.

Held: 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.

Conceptual business illustration with the words indian contract act, 1872

  • Essentials for a contract of indemnity to come into force:

(i) Two parties

(ii) There should be some loss

(iii) The loss should be caused by the promisor or any other person.

(iv) The indemnifier is liable for that loss only.

  • Section 125: Deals with rights of an indemnity holder when sued with respect to the recovery of damages, costs, and sums from the indemnifier or promisor.

> Gajanan Moreshwar v. Moreshwar Madan

Facts: Plaintiff (P) got a plot of land on lease from municipal corp. of Mumbai. P allowed Defendant (D) to erect building on that land. D, in this course, incurred debt of Rs.5ooo from building material supplier (K), twice. On both the occasion, P mortgaged part of the land to K. P, on D’s request transferred the land to D, on the consideration that he (P) would be discharged of all the liabilities arising out of that land. D failed to adhere to his consideration. P filed a suit for discharge of liabilities on him, alleging D to be indemnifier.

Legal Issue: When does the liability of indemnifier commence? Should the indemnity holder be payable only after he has suffered actual loss by paying off the claim? Maxim of English law: “you must be damnified before you can claim to be indemnified”.

Judgment: Process of transformation in law observed by J. Chagla of Bombay High Court as he held in relation to the case: “… if his(indemnity holder) liability had become absolute then he was entitled either to get the indemnifier to pay off the claim or to pay into court sufficient money which would constitute a fund for paying off the claim whenever it was made.” Thus, an indemnity-holder can compel the indemnifier to indemnify even before the indemnity holder has actually suffered the loss. Sections 124 and 125 are not exhaustive on the law of indemnity.

  • Recommendations of the Law Commission of India: 13th Report, 1958, on the Indian Contract Act 1872.
    • A contract by which one party promises, expressly or impliedly, to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person or by any event not depending on such conduct, is called a “contract of indemnity”.
    • The LCI recommended for the insertion of one more section, i.e. S 125 A, with a view to fully define the rights and remedies of the indemnity holder even in cases where he has not been sued.

♦ GUARANTEE:

  • Section 126 of the Act defines guarantee as: “It is a contract to perform the promise or to 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’. The person to whom it is given is called ‘creditor’.
  • The guarantee can be either written or oral.
  • Essentials of a contract of guarantee:

(i) There should be a principal debt.

(ii) There exists a principal debtor, a surety, and a creditor.

(iii) The liability must be legally enforceable.

(iv) There should be a distinct promise of surety.

(v) It should be without misrepresentation and concealment.

  • Principal debtor: Has primary liability. Indemnity holder (in the contract of indemnity between him and the surety. Takes loan from the creditor and gives the creditor something as a security.
  • Creditor: gives the loan to the principal debtor and receives security from him. He is only the custodian of the security; he cannot sell it or touch it.
  • Surety: he has primary liability. He is the indemnifier in the contract of indemnity that exists between him and the principal debtor.
  • The liability of the principal debtor and surety is co-extensive in nature.
  • There exists a contract between the principal debtor and creditor, between the creditor and the surety, and between the surety and principal debtor.
  • Continuing Guarantee:
    • As per section 129 of the Act, a guarantee which extends to a series of transactions is called a continuing guarantee.
    • For instance, ‘A’ guarantees payment to ‘B’ for any tea that ‘C’ may buy from him from time to time to the amount of Rs. 1,000/-. Later on B supplies C tea to the amount of Rs. 2,000/- and C fails to pay. A’s guarantee is a continuing guarantee and he is liable only to the extent of Rs. 1,000/-.
    • Revocation of continuing guarantee: As per Section 130, a continuing guarantee can be revoked at any time by the surety by duly furnishing a notice to the creditor. Once the guarantee is revoked the surety is not liable for any future transactions. However, he is liable for all those transactions that were done before the notice was given.
  • Rights of surety against principal debtor:

(i) Right to indemnity

(ii) Right of subrogation: When on default of the principal debtor the surety pays the entire due amount to the creditor then the surety becomes the new creditor and gets all the rights of the creditor.

  • Rights of surety against creditor:

(i) Right to send a notice of revocation (only in the case of Continuing Guarantee), but not for transactions which have already taken place before the notice was served.

(ii) Right to receive security: In case of default by the principal debtor when the surety pays everything to the creditor then he has the right to receive the security whether or not he knew about it.

  • Rights of surety against co-surety: There can be more than one surety and their liability will be co-extensive. The rights of a surety against co-surety or co-sureties will be those as in the case of joint promisors.
    • Effect of releasing a co-sureties (S. 138): Where there are co-sureties, a release by the creditor of one of them does not discharge the others neither does set free the surety so released from his responsibility to the other sureties.
    • 146: Where two or more persons are co-sureties for the same debt or duty, either jointly or severally, and whether under the same or different contract, and whether with or without the knowledge of each other the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor.
    • 147: Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.
  • Discharge of liabilities of a surety:
    • If there is any variance in the terms and conditions of the agreement then the liability of the surety will be discharged.
    • If the creditor does anything that impairs the right of the surety.
    • Through a notice of revocation (only in the case of continuing guarantee, as discussed earlier).
  INDEMNITY GUARANTEE
Number of Parties Two: indemnifier and indemnified Three: principal debtor, creditor, and surety
Number of Contracts One: Between the indemnifier and indemnified Three: between the principal debtor and creditor, between the creditor and the surety, and between the surety and the principal debtor
Nature of Liability There is no classification or sharing of liability and absolute liability rests with the indemnifier. There will be two types of liability, primary and secondary lying with the principal debtor and surety respectively.
Nature of Contract As it includes only two parties and one contract thus it is simple in nature. As it includes three parties and three sub- contracts, it is complex in nature.
Recovery If the indemnifier compensates the indemnified for any loss then he cannot recover this amount. If the surety makes the payment  to the creditor on the default of the principal debtor then he can recover that amount from the principal debtor.

*****

Disclaimer: – The entire contents of this document have been prepared on the basis of relevant provisions and rules and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.

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Qualification: CS
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Location: Shubham Phophalia, Gujarat, India
Member Since: 08 May 2021 | Total Posts: 57
I am Shubham from Batch 2016-21 of GNLU. I am in my final year of 5 years integrated BA LLB course from GNLU, Gandhinagar, and I have completed Company Secretary Course meanwhile with 3rd Rank in Ahmedabad, Gujarat in CS Professional. I am a keen reader and enthusiastic listener of Corporate laws an View Full Profile

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One Comment

  1. Rajeev says:

    Hi
    Your article was very informative I have one query that if bank guarantee is made in the name of government department and the time mentioned in Bank guarantee is expired do the government have right as per limitation act if the bank has not issued any notice To benificiary govt dept
    Thanks

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