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NIT .9 INDEMNITY AND GUARANTEE
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NIT .9 INDEMNITY AND GUARANTEE
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UNIT .9 INDEMNITY AND GUARANTEEStructure
Objectives
Introduction
Meaning of Contract of Indemnity
Rights of Indemnity Holder
Commencement of Indemnifier's L,iability
Meaning of Contract of Guarantee
Distinction between Contract of Indemnity and Contract of Guarantee
Extent of Surety's Liability
Kinds of Guarantee
Revocation of Continuing Guarantee
Rights of a Surety
9.10. I Rights against tile Principal Dehtor
9.10.2 Rights against the Creditor
9 10.3 Rights against Co-suret~cs
Discharge of Surety from Liability
9.1 1.1 By Revocation of Contract of Gunror~tcc
9.11.2 By Conduct of thc Crcditor
9. 11.3 By Invalidation of the Contract
Let Us Sum U p
Key Words
Answers to Check Your Progress
Terminal Questions
9.0 OBJECTIVES
After studying this unit, you should be able to:
define a contract of indemnity
* describe the rights of inclcrnnity holder
define a contract of guarantee
distinguish. between a cQntract of indemnity and a contract of guarantec
expalin the extent of surety's liability
describe the rights of surety
explain when a surety is discharged.
9.1 INTRODUCTION
You have so far studied the principles applicable to contracts in general. Let us now
take up a particular species of contract viz., Contracts of Indemnity and Contracts of
Guarantee. Since these are specific types of contract, the general principles of
contracts are fully applicable to such contracts. In this unit you will learn the meaning
of contract of indemnity, right of indemnity-holder, and commencement of
indemnifier's liability. You will also study the meaning of contract of guarantee, the
difference between contract of indemnity and guarantee, types of guarantees. rights
of a surety, and discharge of surety from liability.
9.2 MEANING OF CONTRACT OF INDEMNITY
The term 'indemnity' simply means to make good thc loss 01. to compensate the party
who has suffered some loss. The term 'contract of indemnity' is defined in Section
124 of the Indian Contract Act as follows, "Acontract 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, is called a contract of inden~nitg."The person
who promises to compensate for the loss is called the "indemnifier" and the person
to whom this promise is made: o r whose loss is to be made good i s known as
, SPErlFlC CONTRACTS "indemnity-holder" or "indemnified". For example, A contracts to indemnify B
against the consequences of any proceedings which C may take against B in respect
of a certain sum of money. This is a contract of indemnity, here A is the indemnifier
and B is the indemnified.
The above definition restricts the scope of contracts of indemnity as it covers only
the losses caused by the conduct of the promisor himself or by the conduct of any
other person. If a strict view is taken of this definition, it will exclude the losses caused
by accidents. In that case insurance contracts should not fall within the purview of
contracts of indemnity. But the fact is that all contracts of insurance (except life
insurance) are also contracts of indemnity. The intention of law makers had never
been to exclude insurance contracts from the purview of contracts of indemnity. That
is why we follow the English definition which states "a promise to save another
harmless from loss caused as a result of a transaction entered into at the instance of
the promisor". This definition includes a promise to make good the loss arising from
any cause whatsoever e.g. fire, perils of sea, accidents etc. When a person expressly
promises to compensate the other from loss, it is termed as express indemnity. The
contract of indemnity is said to be implied when it is to be inferred from the conduct
of the parties or from the circumstances of the case. Even Section 69 of the Contract
Act (discussed in Unit 8) implies a duty to indemnity in case a person who is
'
interested in the payment of money which another is bound by law to pay, has paid
the amount. Similarly, in an auction salk there is an implied contract of indemnity
between the auctioneer and the person who asks him to sell goods. For example, A,
an auctioneer, sold certain goods on the instructions of B. Later on, it is discovered
that the goods belonged to C and not B. So, C recovered damages from A for selling
the goods belonging to him. Here A is entitled to recover the compensation from B.
In this case there was an implied promise to compensate the auctioneer for any loss
which he may suffer on account of the defective title of B.
As you know that contract of indemnity is a special type of contract, therefore, to
epforce such contracts it is neccssary that all the essentials of a valid contract
(discussed in Unit 1) must be present. In case any one of the essential is missing, the
contract cannot be enforced. Thus if the object or consideration of an indemnity
agreement is unlawful, it cannot be enforced. For example, A asks B to beat C,
prohis~ngto indemnify him against the consequences this cannot be enforced.
Suppose B beats C and is fined Ks. 500, B cannot claim this amount from A, because
the object of the agreement is unlawful.
9.3 RIGHTS OF INDEMNITY HOLDER
In pursuance of Section 125 of the Act the indemnity-holder may recover from the
indemnifier (promisor), the following amounts, provided the acts within the scope of
his authority :
1) He is entitled to recover all damages which he may be compelled to pay in any
suit in respect of any mattcr to which the promise to indemnify applied.
2) He is entitled to recover from the indemnifier all costs which he had paid in
bringing or defending any suit in respect of contracts of indemnity. In bringing
or defending the suit the indemnity-holder must not contravene the orders of the
indemnifier and he must act in the same way as a prudent man would have acted
under similar circumstances in his own case.
3) H e is entitled to recover from the indemnifier, all the amount which he had paid
under the terms of the compromise of such suit. However, it is essential that the
compromise must not be contrary to the orders of the indemnifier and in
compromising the suit, he must act as a prudent man. This right is also available
to the indemnity-holder when he paid any amount under any compromise
entered by him and authorised by the indemnifier.
9.4 COMMENCEMENT OF INDEMNIFIER'S ,,
LIABILITY
An important question in this connection is when does the indemnifier become liable
to pay, or, when is the indemnity-holder entitled to recover his indemnity? The
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