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A Project Report on ‘Features and Distinctiveness of Contracts

of Indemnity and Guarantee: An Analysis’

LAW OF CONTRACTS-II

Submitted by:-

Aaditya Vasu

2013001

SEMESTER 3rd

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY
VISAKHAPATNAM

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Acknowledgement

Writing a project is one of the most significant academic challenges I have ever faced. Though this
project has been presented by me but there are many people who remained in veil, who gave their
all support and helped me to complete this project.

First of all I am very grateful to my subject teacher Miss Parvathy SS, without the kind support of
whom and help the completion of the project was a herculean task for me. She donated her valuable
time from her busy schedule to help me to complete this project and suggested me from where and
how to collect data.

I am very thankful to the librarian who provided me several books on this topic which proved
beneficial in completing this project.

I acknowledge my friends who gave their valuable and meticulous advice which was very useful
and could not be ignored in writing the project. I also owe special thanks to my parents for their
selfless help which was very useful in preparing the project & without whose support this project
wouldn’t have been prepared.

Aaditya Vasu
3rd Semester
2013001

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Bibliography_______________________________________________________(20) 3 . Essential of Guarantee_______________________________________________(14) 12. Conclusion________________________________________________________(19) 15. Objectives________________________________________________________ (4) 4. 1872______________________________(5) 6.1 Rights of Indemnifier_____________________________________________(11) 8. Rights of Indemnity holder___________________________________________ (9) 8. Introduction_______________________________________________________(4) 2. Commencement of Liability__________________________________________ (11) 10. Liability of Surety__________________________________________________(16) 13.2 Duties of Indemnifier_____________________________________________(11) 9. Contract of Indemnity under English Law_______________________________ (5) 5. Definition of Guarantee______________________________________________(13) 11. Index 1.1 India__________________________________________________________(8) 6.2 England_______________________________________________________ (9) 7. Difference between Contract of Indemnity & Guarantee____________________(17) 14. Indemnity as per Indian Contract Act. Research Methodology______________________________________________ (4) 3. Rights and duties of Indemnifier_______________________________________(11) 8. Insurance Contract of Contract of Indemnity_____________________________ (8) 6.

I took the help of various research papers having focus upon the study of Contract. public opinion but to a very limited scope which was basically a feedback from my friends and the most non exhaustive resource that is the Internet. and reinstatement. Indemnity. The person who gives the guarantee is called “surety”. An indemnity is a sum paid by party A to party B by way of compensation for a particular loss suffered by B. how the liability will be discharged under guarantee. the person in respect of whose default the guarantee is given is called the “principal debtor” and the person to whom the guarantee is given is called the “creditor”. 4 . repairs. or discharge the liability. The methodology adopted by me to draw conclusion about the topic is basically depended upon non- doctrinal research. What is the main distinctiveness between Contract of Indemnity and Guarantee? 3. rights of indemnity holders. What is the main features of Contract o Indemnity and Guarantee? 2. Forms of indemnity include cash payments. Consideration for Contract of Guarantee. It can be studied along with the comparison with English Law. RESEARCH METHODOLOGY This topic “FEATURES AND DISTINCTVENESS OF CONTRACT OF INDEMNITY AND GUARANTEE-AN ANALYSIS”. When one person promises to another person that in case another person suffers from some loss the first person will compensate the loss. In the same context Contract of Guarantee means an act to perform the promise. My observations and conclusions are based upon the secondary materials. The books I referred to were mine as well as from the library of Damodaram Sanjivayya National Law University. Contract of Indemnity means enact to compensate or protect somebody from the loss or make good to the loss. the first thing we have to do is to define the both types of Contracts. magazines. Scope of the Study of Contract of Indemnity and Guarantee. replacement. INTRODUCTION When we are discussing about the Contracts of Indemnity and Guarantee. OBJECTIVES 1. of a third person in case of his default. a comparative study is not a very vast topic but is a type of liability commonly found in the Law of Contracts. I also took help from text books. The indemnitor (A) may or may not be responsible for the loss suffered by the indemnitee (B).

etc. 5 . especially in the form of a promise to pay. other than life assurance. sold certain cattle on the instruction of the defendant. The promise may be express or it may be implied from the circumstances of the case. (2) A bond protecting the insured against losses caused by others failing to fulfill their obligations. Indeed. etc. 1 (1872) 4 Bing 66: 5 LJ (OS) (CP) 68: 29 RR 503. every contract of insurance.. Indemnity literally means. but to another person. 1872. a guarantee against losses. turned out to be wrongful. (1) Payment for damage. if. or compensation for loss. It subsequently turned out that the livestock did not belong to the defendant. It is a security against.2 an expressed or implied contract to compensate an individual for loss or damage. who made the auctioneer liable and the auctioneer in his turn sued the defendant for indemnity for the loss he had thus suffered by acting on defendant’s directions. what he did. indemnity is protection against loss. According to Longman’s Dictionary of Contemporary English. The Court laid down that the plaintiff having acted on the request of the defendant was entitled to assume that. Jarvis:1 The plaintiff. Contract of Indemnity under English Law An illustration in English Law of the meaning and effect of a contract of indemnity is to be found in the facts of Adamson v. goods. (3) The granting of exemption from prosecution. or payment for loss of money.g. Indemnity as per Indian Contract Act. Thus “indemnity” in English law means a promise to save a person harmless from the consequences of an act. 2 Chambers New English Dictionary. he would be indemnified by the defendant. e. an auctioneer. The English definition of indemnity is wide enough to include a promise of indemnity against loss arising from any cause whatsoever. is a contract of indemnity. loss caused by fire or by some other accident.

the newspaper can show the indemnity clause that you signed. Typically. Then. protecting them from any form of loss caused due to your conduct.” Well. the onus of fighting the defamation suit becomes your responsibility. The Company asked A to furnish an ‘indemnity bond’ in its favour to protect it against any claim that may be made by any person on the original certificate.(4) an option to buy or sell a specific quantity of stock at a stated price within a given period of time It is entered into with the object of protecting the promises against anticipated loss. A contract of indemnity is one whereby a person promises to save the other from loss caused to him by the conduct of the promisor himself or of any third person. The loss must be caused by some human agency. this section is not so difficult to understand when you relate it to practical house. or by the conduct of any other person. As per Section 124 of the Indian Contract Act. A is the ‘indemnifier’ and the Company is the ‘indemnified’ or ‘indemnity-holder. The contingency upon which the whole contract of indemnity depends is the happening of loss. The person who gives the indemnity is called the 'indemnifier' and the person for whose protection it is given is called the 'indemnity-holder' or 'indemnified'. He applied to the company for the issue of a duplicate certificate. That’s not all about the contract of indemnity as it is incorporated in most contracts. a shareholder executes an indemnity bond favouring the company thereby agreeing to indemnify the company for any loss caused as a consequence of his own act. particularly in real estate purchase 6 . For example. Suppose you are hired by a newspaper to write articles for them as a freelancer. ILLUSTRATIONS: (b) A lost his share certificate. A. “a contract by which one party promises to save other from loss caused to him by the conduct of the promisor himself. your contract would have an indemnity clause so that if you write something against a very important person and that person files a suit against the newspaper for defamatory material. A contract of indemnity is restricted to cover the loss caused by the promisor himself or by a third person. It is a contract of indemnity between A and the Company. Loss arising from accidents like fire or perils of the sea are not covered by a contract of indemnity. accordingly executed the ‘indemnity bond’. the contract of indemnity is defined as.

at p. "Contract of indemnity" defined A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself.R. The only illustration appended to the section says that if a person promises to save another from the consequences of a proceeding which may be commenced against him it is a contract of indemnity.3 3 Gajanan Moreshwar v.” This provision incorporates a contract where one party promises to save the other from loss which may be caused.and bank loans.I. 302. 1872. or ii. 303 7 . This is a contract of indemnity. a contract of indemnity means “a contract by which one party promises 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 the conduct of any other person. or y the reason of liability incurred by something done by the indemnified at the request of the indemnifier. According to Section 124 of the Indian Contract Act. 124. The person who gives the indemnity is called the “indemnifier” and the person for whose protection it is given is called the “indemnity-holder” or “indemnified”. either i. is called a "contract of indemnity". Moreshwar Madan. This definition covers indemnity for loss caused by human agency only. It does not deal with those classes of cases where the indemnity arises from loss caused by events or accidents which do not or may not depend upon the conduct of the indemnifier or any other person. 1942 Bom. By the conduct of any other person. Illustration A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. By the conduct of the promisor himself. A. A person who promises to bear the loss is known as indemnifier and the person whose loss is covered is known as indemnified. These types of contracts are mainly formed between insurance companies and their customers.

& H. Thus. Defendant Company had insured to indemnify plaintiff against any loss sustained by such act.The definition excludes from its purview cases of loss arising from accidents like fire or perils of the sea. M/s. While the goods were in godown.I.I. Ltd. Loss must be caused by some human agency. In United India Insurance Company v. The alleged breach of condition in the contract notice to be given to the defendant regarding discovery of such act could not be said to be fundamental breach. 5 Oriental Insurance Co. INSURANCE CONTRACT IF CONTRACT OF INDEMNITY India: It has been noted above that Section 124 recognizes only such contract as a contract of indemnity where there is a promise to save another person from loss which may be caused by the conduct of the promisor himself or by conduct of any other person. Aman Singh Munshilal. Liability of insurer and breach of fidelity insurance contract Where insured bad of fertilizers stored in plaintiff’s godown. and the insurer was liable as per the insurance contract. Ahmedabad v. Contracts of insurance against loss are covered by the chapter on Contingent Contracts. if under a contract of insurance. Therefore.. as being contingent contracts as defined in Section 31. Held. Ahmedabad. A. 8 .5 4 A. such a contract does not come within the purview of Section 124. 206.R. on its way to the destination the goods were to be stored in a godown and thereafter to be carried o the destination. Gujarat State Warehousing Corpn. 159. It does not cover a promise to compensate for loss not arising due to human agency. It was held that the goods were destroyed during transit. were found missing due to act of embezzlement by the employees of plaintiff Company.R. 2003 Guj. an insurer promises to pay compensation in the event o loss by fire. a contract of insurance is not covered by the definition of Section 124. hence decreeing suit of declaration and recovery of amount with interest by Trial Court was proper. that it would not permit the defendant to negate the legitimate claim of the plaintiff. Moreover.4 the cover note stipulated delivery to consigner. 1994 P. the goods were destroyed by the fire. Such contracts are valid contracts.

I. A contract of life insurance. Rights of Indemnity holder The promisee in a contract of indemnity.R. 1872. acting within the scope of his authority. It includes a contract to save the promise from a loss. A. he may have been compelled to pay damages. because in such a contract different considerations apply. 191. 1958. which reads as under: 124. For that reason also. and incurred costs. it is not a contract of indemnity. the life of a person cannot be valued. The Indian Contract Act does not specifically provide that there can be an implied contract of indemnity. 9 . on the Indian Contract Act. or indemnity for the same does not arise. whether it be caused by human agency or any other event like an accident and fire. the whole of the amount assured becomes payable. “the definition of the ‘Contract of Indemnity’ in Section 124 be expanded to include cases of los caused by events which may or may not depend upon the conduct of any person. since. recognized an implied contract of indemnity also.C. Life insurance contract is.” RIGHTS OF INDEMNITY HOLDER In a suit against the indemnity holder. if the indemnifier has promised an indemnity in such a case. even if a certain sum is payable in the event of death. According to its recommendation. The provision in this regard is contained in Section 125. or on the expiry of a stipulated period of time. a contract of insurance (other than life insurance) is contract of indemnity. however. 1938 P. unlike property. In such a case. not a contract of indemnity. Moreover. It should also provide clearly that the promise may also be implied. paid by him. Under the English law. etc.England: Under English law. for instance may provide the payment of a certain sum of money either on the death of a person.. The Privy Council has. the question of amount of loss suffered by the assured. he can bring an action against the promisor (indemnifier) to recover damages and costs. however. in his own turn. 7 13th Report. 6 The Law Commission of India in its Report7 has recommended the amendment of Section 124. the word ‘indemnity’ carries a much wider meaning than given to it under the Indian Contract Act. etc. The Bank of India Ltd. is entitled to recover from the promisor:- 6 Secretary of State V.

acting within the scope of his authority. he did not contravene the order of the promisor. (2) all costs which he may be compelled to pay in any such suit. 10 Cargill International SA v Bangladesh Sugar & Food Industries Corpn. The indemnity-holder. 9 Bepin v Chunder Seekur Mookerjee. or if the promisor authorised him to bring or defend the suit. is entitled to recover the following amounts- (1) All damages which he may be compelled to pay in any suit in respect of any matter to which the promise of indemnity applies. if in bringing of defending it. in bringing or defending it. or. if the promisor authorised him to bring or defend the suit. A person who encashes an indemnity bond which is in nature of a bank guarantee can retain only that part of the amount of the bond which represents the damage or loss suffered by the bond- holder as a result of the contracting party’s breach. (1996) 4 All ER 563. 10 . and acted as it would have been prudent for him to act in the absence of any contract of indemnity.10 8 Parker v Lewis. and acted as it would have been prudent for him to act in the absence of any contract of indemnity. and was one which it would have been prudent for the promise to make in the absence of any contract of indemnity. 1880 ILR 5 Cal 811. or if the promisor authorised him to compromise the suit.9 (3) All sums which he may have paid under the terms of any compromise of any such suit. he did not contravene the orders of the promisor. if the compromise was not contract to the orders of the promisor. Anything more would be undeserved windfall for one party and penalty of the other. and was one which it would have been prudent for the promise to make in the absence of any contract of indemnity.8 (2) All costs which he may be compelled to pay in such suits if. (3) all sums which he may have paid under the terms of any compromise of any such suit. (1873) LR 8 Ch 1035. or if the promisor authorised him to compromise the suit. if the compromise was not contrary to the orders of the promisor.(1) All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies.

(ii) There must be an occurrence of the anticipated event.Where a motor vehicle (truck) was under indemnity insurance for Rs.11 RIGHTS AND DUTIES OF INDEMNIFIER Rights of the indemnifier: The rights of the indemnity-holder are the duties of indemnifier. it was held that the proper amount of indemnity was as fixed by the surveyor at Rs. he is not liable for indemnity.2’00’000 and it was stolen with no chances of recovery. there is no indemnity by the indemnifier.87. (iv) If the costs demanded by the indemnifier are not caused by negligence. Without any occurrence of the prescribed event. AIR 1997 Cal 179. 11 . (iii) Where the right of indemnity is used by the indemnity-holder prudently and the instruction of the indemnifier is not contravened or when there is no breach of contract. as to whether the indemnifier can be asked to be indemnify before the indemnity-holder has actually suffered the loss. The settlement of claim at a lesser amount by insurance authorities was arbitrary and unfair under Article 14 of the Constitution. According to English Common Law. haphazard behavior. no action could be brought against the indemnifier until the indemnity-holder had suffered actual loss. However. (ii) If indemnity-holder is acting with the intention of causing any loss or damage. (i) If indemnity-holder acts negligently. or his liability arises only after the loss has been suffered by thee indemnity-holder. 1. and duties of the indemnity- holder are the rights of the indemnifier. (iii) If he is acting against the instructions of the other party (promisor). The situation created a great hardship in those 11 Mohit Kumar Saha v New India Assurance Co Ltd. There are not prescribed any specific rights of the indemnifier either in Nepalese law or in Indian law.492 and that it was payable with 18% interest for the delay period. COMMENCEMENT OF LIABILITY When can indemnifier be made liable? Can he claim to be indemnified before he is demnified ?There has been a controversy regarding the point. Duties of indemnifier: The duties of an indemnifier arise in the following circumstances: (i) There must be a loss in accordance with the contract to make the indemnifier liable.

R. The retention money of 10% from the Proforma Invoices of the material reached at the site.14 the respondent. 13 Ranganath v. Mula Sahakari Sakhar Karkhana Ltd. The operative portion of the Bank Guarantee read as “to indemnify and keep indemnified Mula Sahakari Sakhar Karkhana Ltd.C. the indemnity-holder can compel the indemnifier to save him from the loss in respect of liability against which indemnity has been promised. A.cases where the indemnity-holder was not in a position to meet the claim out of his pocket. According to the view expressed by Lahore12 and Nagpur13 High Courts. Holding that the document 12 Sham Sunder v. 2007 S.. i..I. against all losses. it was no more necessary for the indemnity-holder to be demnified before he could be indemnified. Pentagon Engineering Pvt. a co- operative society. entered into a contract with one M/s.I. In other words. 2361 12 . and they are in favour of the application of law similar to the one recognized in England by the Court of Equity. an indemnity-holder can compel the indemnifier to indemnify even before the indemnity-holder has actually suffered the loss. Ltd.R.I. a person must be demnified before he can be indemnified. There has been a difference in opinion between various High Courts in India as to whether the indemnity-holder can claim indemnity before he has actually suffered the loss. Pachusao. Patna. for the installation of a paper plant. Madras. having a sugar factory. no indemnity can be claimed until the indemnity- holder has already actually suffered the loss. Chandu. 117 14 A. Calcutta.R. 1935 Lahore 974.” Disputes and differences arose between the parties and as a result. In State Bank of India v. According to the decisions of the courts. According to the rules evolved by the Court of Equity. claims damages actions and cost in respect of such sums which the supplier shall become liable to pay as the terms of the said order. 1935 Nag. the respondent terminated the contract and invoked the Bank guarantee against the Pentagon. and Allahabad have expressed a different view. Relief was not provided to the indemnity-holder in such cases by the Court of Equity. As per the agreement the Pentagon furnished a Bank Guarantee/Indemnity for the release.e. A. The High Courts of Bombay.

or discharge the liability. of a third person in case of his default . The object of a contract of guarantee is to provide additional security to the creditor in the form of the promise by the surety to fulfill a certain obligation in case the principal debtor fail to do that in every contract of guarantee there are three parties the creditor the principal debtor and the surety there are three contracts in contract of guarantee . surety. The contract of guarantee is no doubt tripartite in nature18 but it is not necessary or essential that the principal 15 Contract act section 126 16 Ibid1 17 Section 145also see NS bank Vs Union of India. the principal debtor shall indemnify the surety 17. “Contract of guarantee “. the Apex Court said that the claim made by the assured on termination of contract need not be honoured by the Bank without the proof of loss. air 1969 cal 371 13 .indemnifying the respondent was a contract of indemnity and not guarantee.16 Thirdly an implied promise by the principal debtor in favor of the surety that in case the surety has to discharge the liability of the default of the principal debtor. principal debtor and creditor – a contract of guarantee is a contract to perform the promise. AIR 1991 AP 153. secondly the surety undertakes to be liable towards to the creditor if the principal debtor makes a default. who’s liability is secondary because he promises to perform the same duty in case there is default on the on part of A.at 158 18 Mahabir shum sher vs Lloyds bank.the person who gives the guarantee is called the surety.firstly the principal debtor himself makes a promise in favors of creditor to perform a promise. Definition of Guarantee Contract of guarantee is defined in section 126 of Indian contract act.15 For example: A takes a loan from a bank A promises to the bank to repay the loan B also makes the promise to the bank saying that if A does not repay the loan then I will pay . the bank in who’s favors the promise has been made is the creditor. the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom guarantee is given is called creditor a guarantee may be either oral or written.in this case A is a principal debtor who undertakes to repay the loan B Is the surety.

4. The surety undertakes to be liable only if the principal debtor fails to discharge his obligation. promises the seller. it is necessary that it should be in writing and signed by party to be charged therewith. 14 . C 3 21 S. This type of collateral undertaking to be liable for the default of another is called a “contract of guarantee”. The function of contract of guarantee is to enable a person to get a loan.chattantha karayalar vs central bank. or the supplier or the employer that he (the person in need) may be trusted and in case of any default . If there is no such principal debt. but there is a promise by one party in favor of 19 (1709) 91 ER 27:1 Salk 27. There should be a principal debt A contract of guarantee pre supposes a principal debt or an obligation to be discharged by the principal debtor. Some person comes forward and tells the lender. the position in India is different from that in England. and other to give him credit.for e. In English law under the provisions of statutes of fraud a guarantee is not enforceable unless it is “in writing and signed by the party to be charged “21 2. According to English law. for a valid contract of guarantee. In English law a guarantee is defined as “a promise to answer for the debt. or goods on credit. a guarantee may be either oral or written.g. On this point. Thus. The contract may be either oral or in writing According to sec 126. I will pay’. statute of frauds 1677. debtor must expressly be a party to that document. ‘if he does not pay you. default or miscarriage of another”20 Essentials of Guarantee 1. in old case of Birkmy vs Darnell 19 the court said “if two comes to a shop and one buys. 20 S. on an employment. 29 II. the principal debtor may be a party to the contract by implication. there is a possibility that a person may become a surety without the knowledge and consent of the principal debtor. In a contract of guarantee.

is invalid. A agrees to do so . another for compensating in a certain situation.LR 7 HL 17. the guarantee is invalid. provided C promises will guarantee the payment of the prices of the goods . The position is explained by section 142 and 143 which are as under “142.(1935) 156 IC 200. it is enough that the creditor had done something for the benefit of the principal debtor. Consent of the surety should not have been obtained by misrepresentation or concealment The creditor should not obtain guarantee either by any misrepresentation or concealment of any material facts concerning the transaction. or any promise made for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee.-Any guarantee which has been obtained by means of misrepresentation made by the creditor . A guarantee without consideration is void23. For surety’s promise. Guarantee obtained by misrepresentation invalid. the existence of a recoverable debt is necessary. it is a contract of indemnity. this is a sufficient consideration for C’s promise 4. Consideration Like every other contract. 23 Janak paul vs dhokal mall kidarbux . 2012 Ex. 15 . it is not necessary that there should be a direct consideration between the creditor and surety. affirmed .” 22 Mountstephens vs lakeman. concerning a material part of the transaction. The purpose of a guarantee being to secure a payment of debt. or with his knowledge ans assent. 22 3. Benefit to the principal debtor constitutes a sufficient consideration to the surety for giving the guarantee.C promises to guarrntee the payment in consideration of A’s promise to deliver the goods . If the guarantee has been obtained that way.” Illustrations (a) B requests A to sell and deliver to him goods on credit. a contract of guarantee should also be supported by some consideration. This is clear from sec 127 which read as under “Anything done. and the performance of this promise is not dependent upon the default of somebody else. 1871 lr 7 QB 196.

Similarly. This agreement is concealed from A is not liable as a surety. A does not acquaint C with B’s previous conduct. without being informed that the said employee is already indebted to an extent more that of the guarantee. B fails to account for some of his receipts and A in consequence calls upon him to furnish security for his duly accounting gives his guarantee for B‘s duly accounting . B and C have privately agreed that B should pay five rs er ton beyond the market price. “143. Guarantee obtained by concealment invalid. or by keeping silence as regards material circumstances. which could affect the surety’s mind to stand as surety or not. (c) According to the above stated provision. A guarantee to C payment for iron to be supplied by him to B to the amount of 2000 tons. would render the guarantee void. such excess to be applied in liquidation of an old debt.24 Liability of surety: its nature and extent According to section 128 . B afterwards makes default. Keeping silence as regards material circumstances. the guarantee is invalid. (b) The guarantee is invalid . obtaining a person’s consent to act a surety either by misrepresentation. renders such a contract invalid. under these circumstances. Thus if a cashier has been found guilty of embezzlement. if a surety is made to guarantee an employee’s existing and future liabilities.. the surety will not be liable as such. but this fact is not disclosed when a surety has been made to guarantee the future conduct of the cashier. (1863) 17 CBNS 482 (Ex Ch) 16 .Any guarantee which the creditor has obtained by means by means of keeping silence as to material circumstances is invalid” Illustrations (a) A engages B as a clerk to collect money. unless it is otherwise provided by the contract” 24 Lee vs jones. “the liability of the surety is coextensive with that of that of the principal debtor.

1872 defines the "Contract of Indemnity". the acceptor. This is a contract of indemnity. A guaranteed to B the payment of bill of exchange by C.R. after the creditor has recovered the part of the sum due from him out of his property.  A contract of guarantee is defined in Section 126 of the Act. It has been held in an English case27 . 25 Harigopal aggarwal vs state bank of india a. 1956mad 211 26 A. This may be further explained by the e.g.g.  Section 124 of the Indian Contract Act. For instance.r. A is liable not only for the amount of the bill but also for any interest and charges which may have become due on it. 104 17 .i. or by the conduct of any other person. There are distinguishing differences between Indemnity and Guarantee in the Indian Contract Act. of a third person in case of his default.25In Narayan singh vs chattarsingh26it has been held that if the principal debtor’s liability is scaled down in an amendment decree or otherwise extinguished in whole or in part by a statute. e. The creditor may recover from the surety the sum of 10000 plus the interest becoming due thereon as well as the amount spent by him in recovering that amount. The person who gives the guarantee is called the surety. that the guarantee of the loan or an overdraft to an infant is void. the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor.(1947) k. If the principal debtor’s liability is reduced.I. 1973 raj 347 27 Coutts & co vs browne lecky . because the loan to infant is itself is void ab initio. 'A' contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 20000 rupees. If the principal debtor happens to be a minor and the agreement is made by him is void. the surety too cannot be made liable in respect of the same because the liability of the surety is coextensive with that of principal debtor.The provisions that the surety’s liability is coextensive with that of the principal debtor mean that his liability is exactly the same as that of the principal debtor. the principal debtor makes a default in the payment of the debt Rs 10000. DIFFERENCE BETWEEN CONTRACT OF INDEMNITY & GUARANTEE. the liability of the surety is also reduced accordingly. or discharge the liability. It is a contract to perform the promise.b. the liability of the surety pro tanto be reduced or extinguished. It is contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself.

In guarantee the surety is discharged by payment made by principal debtor. there is primary and independent liability. In guarantee the surety has collateral liability. In contract of indemnity there are only two parties viz the indemnifier or promisor and the indemnity holder or promisee.  In indemnity.  There are two contracts in a contract of indemnity where there are three contracts in the case of guarantee.  In Indemnity the promisor is discharged by payment. 18 . principal debtor and surety.  There is no existing debt generally in the case of contract of indemnity where there is existing debt in the case of guarantee. In contract of guarantee there are three parties viz the creditor.  Indemnifier may have some interest in the transaction where the surety will not have any connection with the transaction.

mainly under Section 31of the Act dealing with contingent contracts. Therefore. unless such construction leads to absurdity. but has given a very narrow definition of indemnity. The extent of liability under a contract of indemnity depends on the nature and terms of the contract and each case must be governed by its own facts and circumstances. CONCLUSION Indemnity is a special contract under the Indian Contract Act. 19 . the principles regarding indemnities which have been laid down by common law are definitely addressed by other provisions of the Act. care should be taken so as to give the meaning to the terms and phrases according to the common parlance used in that business rather than resorting to other means of interpretation. Interpretation of the contract or clause of indemnity thus plays a crucial role in fixing the liability. Such decisions have not created a problem. 1872. it would suffice to say that though the definition of indemnity under the Indian Contract Act is narrow. due to which the Indian Courts have time and again held that certain documents do not come under the purview of the definition of indemnity contained in the Act. The main purpose of construction and interpretation of a contract of indemnity is to ascertain and give effect to the intention of the parties. While interpreting the indemnity clause in a business contract. since the courts covered the liability under other provisions of the same Act. The legislation is a very well drafted one.

13th Edition Reprint 2012.  Mitra. P. 2005. 2006.K. Eastern Book Company. 20 . 2008. Lucknow. Nagpur. Law of Contract. Orient Publishers. Kolkata. Law of Contract. R. S.C.  Bangia. H. Avtar. New Delhi.  Markanda. Eastern Law House. Law of Contract. Contract -2. Allahabad Law Agency. Vol-2. Nagpur. by Anirudh Wadhwa.  Singh. Faridabad. 2008. Wadhwa Publishers.  MULLA. Dutt on Contract.  Saharay.C. The Indian Contract Act. Lexis Nexis Butterworths Wadhwa Publication. 2004. BIBLIOGRAPHY Books referred:-  Black’s Law Dictionary.K.