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Contract of Indemnity and

Guarantee

Contract of Indemnity

According to Sec124 of Contract Act,

“A contract by which one party promises to save the other from the loss caused to him by the conduct of the promises himself or by the conduct of any other person is called the contract of indemnity”. The promisor is called the indemnifier and the promisee is called the indemnity holder.

Rights of Indemnifier

There is no specific provision the Contract Act regarding the rights of indemnifier. However it is the principle of law that where one person has agreed to indemnify another, has rights similar to the rights of guarantor.

Contract of Guarantee

According to Sec.126 of the Contract Act, “A contract of guarantee is a contract to perform promise or discharge the liability of a third person in case of default”. The contract of guarantee enables a person enables a person to get loans, goods on credit, employment etc. The contract of guarantee may be written or oral.

Essentials of Contract of Guarantee

Consideration:

There is no direct consideration between the surety and the debtor. Consideration for surety is that the debtor has received loan from the creditor.

Essentials of Contract of Guarantee

Misrepresentation: If the consent of surety is obtained by misrepresentation, the contract of guarantee is invalid, and then the surety is discharged from his liability.

Essentials of Contract of Guarantee

Writing Not Necessary: The contract of guarantee may be in writing or oral.

Surety’s Liability

The quantum of surety’s liability is co-extensive with that of principal debtor. The liability of the surety is the same as that of principal debtor, unless there is a provision to the contrary in the contract. The liability of the surety can be made less than that of principal debtor but never greater. The nature of surety’s liability is as under:

1. Surety’s liability is secondary.
2. Surety’s liability arises immediately on default.
3. Where the creditor holds securities, he should first sue the creditor instead of resorting to securities.

Rights of Surety

• Rights against Creditor
• Rights against Principal Debtor
• Rights against Co-sureties

Rights against Creditor

Right to Securities:

Surety, at the time of payment can demand the securities the creditor had obtained at the time of creation of contract. If the creditor loses any security by his negligence, the surety is discharged to that extent.

Rights against Principal Debtor

Right of Subrogation: When surety has paid the guaranteed debt on default of the principal debtor, he is entitled to all the rights which the creditor had against the principal debtor. The surety is entitled to all remedies which are available to creditor against the principal debtor.

Rights against Principal Debtor

Right of Indemnity:

There is an implied promise by the principal debtor to indemnify the surety in every contract of guarantee. Accordingly surety is entitled to recover from the principal debtor whatever sum he has paid under the guarantee.

Rights against Co-sureties:

Similar Amount:

When there are sureties for the same debt and the debtor has committed a default, each surety is liable to contribute equally to the extent of default.

Different Amount:

When there are sureties for the debt for different amounts, they are bound to contribute equally subject to the limit of their guarantees.

Discharge of Surety from Liability

Notice of Revocation: A specific guarantee may be revoked by notice of revocation if liability has not arisen. A continuing guarantee may be revoked any time by the surety for future transactions by giving a notice.