Contract of Indemnity and Guarantee

Contract of Indemnity

Section 124 of the Indian Contract Act deals with the concept of indemnity. Indemnity is security against or compensation for loss etc. A contract of indemnity means a contract whereby one party promises to save the other from the loss caused to him either:

(i) by the conduct of the promisor himself or
(ii) by the conduct of any other person.

The person who promises to indemnify is known as “indemnifier” and the person in whose favor the promise is made is known as “indemnified” or “indemnity-holder”. The definition covers indemnity for the loss caused by Human Agency only.

Contract of Guarantee

Section 126 of the Indian Contract Act defines the contract of guarantee. A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.

In a contract of Guarantee, three parties and contracts are involved. The three parties are:

  • Surety: The one who gives the guarantee.
  • Principal Debtor: On whose default the guarantee is given.
  • Creditor: The person to whom the guarantee is given

In a single contract of guarantee, three contracts are involved:

  • Principal Debtor with the Creditor: The promise to perform the contract
  • Surety with the Creditor: Undertakes to be liable in case of default
  • Principal Debtor with the Surety: Implied promise to reimburse for the liability

The main features of the contract of Guarantee are:

  • The contract can be oral or written.
  • The surety undertakes to be liable only if the principal debtor fails to discharge his obligation.
  • The benefit to the principal debtor is sufficient consideration. It is not necessary that there should be direct consideration between the creditor and the surety. [Section 127]
  • The consent of the surety should not be having been obtained by misrepresentation or concealment.

As per section 19 of the Indian Contract Act, a guarantee which extends to a series of transactions is called a continuing guarantee.

Discharge of a surety from liability

A surety may be discharged from his liability in the following ways:

  • Revocation by surety
  • By surety death
  • By variance in the terms of the contract
  • By the release of discharge of the principal debtor
  • When creditor compounds gives time to, or agrees not to sue the principal debtor.
  • By creditor’s act or omission impairing surety’s eventual remedy
  • By loss of security by the creditor

Rights of Surety

  1. Right of subrogation
  2. Right to securities with the creditor
  3. Right of indemnity against the principal debtor
  4. Right of contribution against co-securities.