CONTRACT OF INDEMNITY

Contract of Indemnity and Guarantee are the special types of contracts given under
sections 124 to 147 of the Indian Contract Act, 1872.

In terms of Section 124 of the Act, „a contract by which one party promises to
save the other from loss caused to him by the conduct of the promisor himself or
the conduct of any person is called a “contract of indemnity”. This is also a
known as typical form of contingent contract.

There are two parties in this form of contract. The party who promises to indemnify/
save the other party from loss is known as ‘indemnifier’, where as the party who is
promised to be saved against the loss is known as ‘indemnified’.

For examples,

(1) A may contract to indemnify B against the consequences of any proceedings which
C may take against B in respect of a sum of ` 5000/- advanced by C to B.

In consequence, when B who is called upon to pay the sum of money to C fails to do
so, C would be able to recover the amount from A as provided in Section 124.

(2) X, a shareholder of a company lost his share certificate. He applied for the
duplicate. The company agreed to issue the same on the term that X will
compensate the company against the loss where any holder produces the
original certificate. Here there is contract of indemnity between X and the
company.

In a contract of indemnity, the promisee i.e., indemnity- holder acting within the scope
of his authority is entitled to recover from the promisor i.e., indemnifier the following
rights:

(a) all damages which he may be compelled to pay in any suit

(b) all costs which he may have been compelled to pay in bringing/ defending the suit
and

(c) all sums which he may have paid under the terms of any compromise of suit

It may be understood that the rights contemplated under section 125 are not
exhaustive. The indemnity holder/ indemnified has other rights besides those
mentioned above. If he has incurred a liability and that liability is absolute, he is
entitled to call upon his indemnifier to save him from the liability and to pay it off.

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CONTRACT OF GUARANTEE

A contract of guarantee is a contract to perform the promise made or discharge

liability incurred by a third person in case of his default (Section 126).

There are three parties in a contract of guarantee.

Surety- person who gives the guarantee,
Principal debtor- person in respect of whose default the guarantee is given,
Creditor- person to whom the guarantee is given.

Meaning of Contract Guarantee

A contract of guarantee is a contract to perform the promise, or discharge the liability

of a third person in case of is default. The person who gives the guarantee is called the
Surety, the person for whom the guarantee is given is called the Principal Debtor; and
the person to whom the guarantee is given is called the Creditor (Section 126). A
guarantee' may be either oral or written, although in the English law, it must be in
writing.

Any guarantee given may be oral or written.

For examples,

(1) Where „A‟ obtains housing loan from LIC Housing and if „B‟ promises to pay LIC
Housing in the event of „A‟ failing to repay, it is a contract of guarantee.

(2) X and Y go into a car showroom where X says to the dealer to supply latest model
of Zen to Y. In case of his failure to pay, he will be paying for it. This is a contract of
guarantee because X promises to discharge the liability of Y in case of his defaults.

Distinction between Indemnity and Guarantee: A contract of indemnity differs from

a contract of guarantee in the following ways:

 In a contract of indemnity there are only two parties: the indemnifier and the
indemnified. In a contract of guarantee, these are three parties; the surety,
the principal debtor and the creditor.

 In a contract of indemnity, the liability of the indemnifier is primary. In a contract

of guarantee, the liability of the surety is secondary. The surety is liable only if the
principal debtor makes a default, the primary liability being that of the principal
debtor.

 The indemnifier need not necessarily act at the request of the debtor;' the
surety gives guarantee only' at the request of the principal debtor.

 In the case of a guarantee there is an existing debt or duty, the performance of

which is guaranteed by the surety, whereas in the case of indemnity the possibility

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 of any loss happening is the only contingency against which the indemnifier
undertakes to indemnify.

 The surety, on payment of the debt when the principal debtor has failed to pay is
entitled to proceed against the principal debtor in his own right, but the
indemnifier cannot sue third-parties in his own name, unless there be assignment.
He must sue in the name of the indemnified.

Extent of Surety's liability

The liability of the surety is co-extensive with that of the principal debtor unless the
contract otherwise provides (Section 128). A creditor is not found to proceed against
the principal debtor. He can sue the surety without suing the principal debtor. As
soon as the debtor has made default in payment of the debt, the surety is immediately
liable. But until default the creditor cannot call upon the surety to pay. In this sense,
the nature of the surety's liability is secondary.

Illustration

A guarantees to 8 the payment of a bill exchange by C, the acceptor. The bill is

dishonored by C. 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.

Section 128 only explains the quantum of a surety's obligation when terms of the
contract do not limit it. Conversely it doesn't follow that the surety can never be liable
when the principal debtor cannot be held liable. Thus, a surety is not discharged from
liability by the mere fact that the contract between the principal debtor and creditor
was voidable at the option of the former, and was avoided by the former. Where the
agreement between the principal debtor and creditor is void as for example in the case
of minority of principal debtor, the surety is liable as a principal debtor; for in such
cases the contract of the so-called surety is not collateral, but a principal contract
(Kashiba v. Shripat (1894) 19 Born. 697)

Kinds of Guarantees

A contract of guarantee may be for an existing debt, or for a future debt. It may be a
specific guarantee, or it may be continuing guarantee.

A specific guarantee is given for a single debt and comes to an end when the debt
guaranteed has been paid.

A continuing guarantee is one which extends to a series of transactions (Section

129).

It is a continuing guarantee where A, in consideration of B's discounting, at A's

request, bills of exchange of C, guarantees to B for 12 months, the due payment of all
such bills to the extent of Rs. 10,000, or A becomes answerable to C for B's purchases
from C for 6 months to the extent of Rs. 1,000.

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Revocation of Continuing Guarantee

A continuing guarantee is revoked in the following circumstances:

(a) By notice of revocation by the surety (Section 130): The notice operates to
revoke the surety's liability as regards future transactions. He continues to be liable
for transactions entered into prior to the notice (Offord v. Davies (1862) 6 L.T.S. 79).

(b) By the death of the surety: The death of the surety operates, in the absence of
contract (Lloyds v. Harper (188) 16 Ch. D. 290). As a revocation of a continuing
guarantee, so far as regards future transactions (Section 131). But for all the
transactions made before his death, the surety's estate will be liable.

Rights of Surety

A surety has certain rights against the creditor, (Section 141) the principal debtor
(Sections 140 and 145) and the co-securities (Sections 146 and 147) that are

(a) Surety's rights against the creditor: Under Section 141 a surety is entitled to
the benefit of every security which the creditor has against the principal debtor at the
time when the contract of surety ship is entered into whether the surety knows of the
existence of such security or not; and, if the creditor losses or, without the consent of
the surety parts with such security, the surety is discharged to the extent of the value
of the security.

(b) Rights against the principal debtor: After discharging the debt, the surety steps
into the shoes of the creditor or is subrogated to all the rights of the creditor against
the principal debtor. He can then sue the principal debtor for the amount paid by him
to the creditor on the debtor's default; he becomes a creditor of the principal debtor for
what he has paid. In some circumstances, the surety may get certain rights even
before payment. The surety has remedies against the principal debtor before payment
and after payment.

In Mamta Ghose v. United Industrial Bank (AIR 1987 Cal. 180) where the principal
debtor, after finding that the debt became due, started disposing of his properties to
prevent seizure by surety, the Court granted an injunction to the surety restraining
the principal debtor from doing so. The surety can compel the debtor, after debt has
become due to exonerate it from his liability by paying the debt.

(c) Surety's rights gains co-sureties: When a surety has paid more than his share of
debt to the creditor, he has a right of contribution from the co-securities who are
equally bound to pay with him. A, B and C are sureties to D for the sum of Rs. 3,000
lent to E who makes default in payment. A, B and Care liable, as between themselves
to pay Rs. 1,000 each. If anyone of them has to pay more than Rs. 1,000 he can claim
contribution from the other two to reduce his payment to only Rs. 1,000. If one of
them becomes insolvent, the other two shall have to contribute the unpaid amount
equally.

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Discharge of Surety

A surety may be discharged from liability under the following circumstances:

(a) By notice of revocation in case of a continuing guarantee as regards future

transaction (Section 130.)

(b) By the death of the surety as regards future transactions, in a continuing

guarantee in the absence of a contract to the contrary (Section 131).

(c) Any variation in the terms of the contract between the creditor and the principal
debtor, without the consent of the surety, discharges the surety as regards all
transactions taking place after the variation (Section 133).

(d) A surety will be discharged if the creditor releases the principal debtor, or acts or
makes on omission which results' in the discharge of the principal debtor (Section
134). But where the creditor fails to sue the principal debtor within the limitation
period, the surety is not discharged.

(e) Where the creditor, without the consent of the surety, makes an arrangement with
the principal debtor for composition, or promises it give him time or not to sue him,
the surety will be discharged (Section 135).

(f) If the creditor does any act which is against the rights of the surety, or omits to do
an act which his duty to surety requires him to do, and the eventual remedy of the
surety himself against the principal debtor is hereby impaired, the surety is
discharged (Section 139).

(g) If the creditor loses or parts with any security which at the time of the contract the
debtor had given in favor of the creditor, the surety is discharged to the extent of the
value of the security, unless the surety consented to the release of such security by
creditor in favor of the debtor.

It is immaterial whether the surety was or is aware of such security or not (Section
141).

Illustrations

(1) X guarantees to Y to the extent of Rs. 10,000 that C shall pay all the bills that. B
shall draw upon him. B draws upon C, C accepts the bill. A gives notice of revocation,
C dishonors the bill at maturity. A is liable upon his guarantee (Section 130).

(2) A becomes surety to C for B's conduct as a manager in C's bank. Afterwards B
and C contract without A's consent that B's salary shall be raised and that he shall
become liable for one-fourth of the losses on overdrafts. B allows a customer to
overdraw and the bank loses a sum of money. A is discharged from his surety ship by
the variance made without his consent, and is not liable to make good this loss
(Section 133).

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(3) C contracts to lend B Rs. 5,000 on 1 st March, A guarantees repayment. C pays the
money to B on 1 st of January. A is discharged from his liability. A is discharged from
his liability, as the contract has been varied in as much as C might sue B for the
money before 1 st of March, (Section 133).

(4) X contracts with B to build a house for a fixed price within a stipulated time, Y
supplying the necessary timber. Z guarantees X's performance. Y omits to supply the
timber. Z is discharged from liability (Section 134).

(5) B contracts to build a ship for C for a given sum, to be paid by installments as the
work reaches certain stages. A becomes surety to C for B's due performance of the
contract, without the knowledge of A; C prepays to B the last two installments‟~_ A is
discharged by this prepayment (Section 139).

Key Points

 A contract of indemnity- A contract where one party promises to indemnify the

other from loss caused to him by the conduct of the promisor or by the conduct of
any other person.
 A contract of guarantee- A contract to perform the promise or discharge the
liability of a third person in case of his default.
 Contract of guarantee must be supported by consideration. The consideration
received by the principal debtor may be sufficient consideration to the surety for
giving guarantee.
 The liability of surety is co-extensive with that of principle debtor. In certain cases
surety will be liable though principal debtor is not liable-(i) principal debtor is
incompetent to contract. (ii) Principal debtor is adjudged insolvent. (iii) The debts
become time-barred.
 Specific/ simple guarantee-Guarantee for single debt/particular transaction.
 Continuing guarantee-Guarantee that extends to a series of transactions.
 A contract of guarantee becomes invalid, when-(i) Obtained by misrepresentation
(ii) Obtained by concealment of material facts (iii) Co-surety does not join (iv)
When consideration fails.

BAILMENT- SEC 148

 The word Bailment is derived from the French word “ballier” which means “to
deliver”.

 Bailment means delivery of goods by one person to another for some purpose, upon
a contract, that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the instructions of the person delivering them.

 The person delivering the goods is called the ‘bailor’ and the person to whom they
are delivered is called the „bailee’.

 For example where „X‟ delivers his car for repair to „Y‟, „X‟ is the bailor and „Y‟ is the
bailee.

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Essentials of bailment

 There are two persons namely Bailor and Bailee.

 Bailor means the person delivering the goods, Bailee means the person to whom
the goods are delivered.
 There must be delivery of goods.
 The goods must be in deliverable condition.
 Only the goods are delivered but not the ownership of goods, there must be
purpose.
 Bailee can use the goods.
 Goods must be returned or disposed off after the purpose is accomplished.

Case: For example if X bails his ornaments to „Y‟ and „Y‟ keeps these ornaments in his
own locker at his house along with his own ornaments and if all the ornaments are
lost/stolen in a riot „Y‟ will not be responsible for the loss to „X‟. If on the other hand
„X‟ specifically instructs „Y‟ to keep them in a bank, but „Y‟ keeps them at his
residence, then „Y‟ would be responsible for the loss [caused on account of riot].

 Gratuitous Bailment

A gratuitous bailment is one in which neither the bailor nor the bailee is entitled to
any remuneration. Such a bailment may be for the exclusive benefit of the bailor, e.g.,
when A leaves his dog with a neighbor to be looked after in A's absence on holiday. It
may again to be for exclusive benefit of the bailee, e.g., where you lend your book to a
friend or yours for a week. In neither case any charge is made. A gratuitous bailment
terminates by the death of either the bailor or the bailee (Section 162). '

Under Section 159 the lender of a thing for use may at any time require its return if
the loan was gratuitous, even though he lent it for a specified time or purpose. But if
on the faith of such loan made for a specified time or purpose, the borrower has acted
in such a manner that the return of the thing lent before the time agreed upon would
cause him loss exceeding the benefit actually derived by him from the loan, the lender
must, if he compels the return, indemnify the borrower the amount in which the loss
so occasioned exceeds the benefit so derived.

Bailment- for Reward

This is for the mutual benefit of both the bailor the bailee. For example, A lets out a
motor-car for hire to B. A is the bailor and receives the hire charges and B is the bailee
and gets the use of the car. Where, A hands over his goods to B, a carrier for carriage
at a price. A is the bailor who enjoys the benefit of carriage and B is the bailee who
receives a remuneration for carrying the goods.

Duties of Bailee

The bailee owes the following duties in respect of the goods bailed to him:

(a) The bailee must take as much care of the goods bailed to him as a man of ordinary
prudence would take under similar circumstances of his own goods of the same bulk,
quality and value as the goods bailed (Section 151). If he takes this much care he will

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not be liable for any loss, destruction, or deterioration of the goods bailed (Section
152). The degree of care required from the bailee is the same whether the bailment is for
reward of gratuitous. Of course, the bailee may agree to take special care of the goods,
e.g., he may agree to keep the property safe from all perils and answers for accidents
or thefts. But even such a bailee will not be liable for loss happening by an act of God
or by public enemies.

b) The bailee is under a duty not to use the goods in an unauthorized manner or for
unauthorized purpose (Section 153). If the does so, the bailor can terminate the
bailment, and claim damages for any loss or damage caused by the unauthorized used
(Section 154).

(c) He must keep the goods bailed to him separate from his own goods (Sections 155-
157). If the bailee without the consent of the bailor mixes the goods of the bailor with
his own goods, the bailor and the bailee shall have an interest, in production to their
respective shares, in the mixture thus produced. If the bailee without the consent of
the bailor mixes the goods of the bailor with his own goods, and the goods can be
separated or divided, the property in the goods remains in the parties respectively; but
the bailee is bound to bear the expenses of separation, and any damages arising from
the mixture. If the bailee without the consent of the bailor mixes, the goods of the
bailor with his own goods, in such a manner that it is impossible to separate the goods
bailed from the other goods and deliver them back, the bailor is entitled to be
compensated by the bailee for the loss of goods.

(d) He must not set up an adverse title to the goods.

(e) It is the duty of the bailee to return the goods without demand on the time fixed or
when the purpose is accomplished (Section 160). If he fails to return them, he shall be
liable for any loss, destruction or deterioration of the goods even without negligence on
his part (Section 161)

(f) In the absence of any contract to the contrary, the bailee must return to the bailor
any increase, accretion, or profits which have accrued from the goods bailed; for
example, when A leaves a cow in the custody of B to be taken care of and the cow
gets a calf, B is bound is deliver the cow as well as the calf to A (Section 163).

Duties of bailor

The bailor has the following duties:

(a) The bailor must disclose all the known faults in the goods; and if he fails to do
what, he will be liable for any damage resulting directly from the faults (Section 150).
For example, A delivers to B, a carrier, some explosive in a case, but does not warn B.
The case is handled without extraordinary care necessary for such articles and
explodes. A is liable for all the resulting damage to men and other goods.
In the case of bailment for hire, a still greater responsibility is placed on the bailor. He
will be liable even if he did not know of the defects (Section 150). A hires a carriage of
B. The carriage is unsafe though B does not know this. A is injured. B is responsible
to A for the injury.

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(b) It is the duty of the bailor to pay any extraordinary expenses incurred by the bailee.
For example, if a horse is lent for a journey, the expense of feeding the house would, of
course, subject to any special agreement be borne by the bailee. If however the horse
becomes ill and expenses have been incurred on its treatment, the bailor shall have to
pay these expenses (Section 158).

(c) The bailor is bound to indemnify the bailee for any cost or costs which the bailee
may incur because of the defective title of the bailor of the goods bailed. (Section 164).

Bailee's Particular Lien (Section 170)

Where the goods are bailed for a particular purpose and the bailee in due performance
of bailment, expands his skill and labor, he has in the absence of an agreement of the
contrary a lien on the goods, Le., the bailee can retain the goods until his charges in
respect of labor and skill used on the goods are paid by the bailor. A gives a piece of
cloth to B, a tailor, for making it into a suit, B promises to have the suit ready for
delivery within a fortnight, B has the suit ready for delivery. He has a right to retain
the suit until he is paid his dues. The section expresses the Common Law principle
that if a man has an article delivered to him on the improvement of which he has to
bestow trouble and expenses, he has a right to detain it until his demand is paid.
The right of lien arises only where labor and skill have been used so as to confer an
additional value on the article.

Termination of bailment

Where the bailee wrongfully uses or dispose of the goods bailed, the bailor may
determine the bailment (Section 153.)

As soon as the period of bailment expires or the object of the bailment has. been
achieved, the bailment comes to an end, and the bailee must return the goods to the
bailor (Section 160). Bailment is terminated when the subject matter of bailment is
destroyed or by reason of change in its nature, becomes incapable of use for the
purpose of bailment.

A gratuitous' bailment can be terminated by the bailor at any time, even before the
agreed time, subject to the limitation that where termination before the agreed period
causes loss in excess of benefit, the bailor must compensate the bailee (Section 159).
A gratuitous bailment terminates by the death of either the bailor or the bailee
(Section 162).

PLEDGE SEC 172

Pledge is a variety or specie of bailment. It is bailment of goods as security for payment

of debt or performance of a promise.

The bailment of goods as security for payment of a debt or performance of a

promise is called “Pledge”

The bailor in this case is called the “pledger” or “pawnor” and the bailee is called the
“pledgee” or “pawnee”

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Section 172 to 182 of the Indian Contract Act, 1872 deal specifically with the
bailment of pledge.

For example: A lends money to B in lieu of a jewellary deposited by B as

security to A. This bailment of jewellary is a pledge as security for lending the
money. B is a pawnor and the A is a pawnee.

Let us now examine the essentials of pledge and rights of pawnee and pawnor.

Essentials of contract of pledge:

There must be bailment for security for payment of debt/ performance of a promise.
Goods must be the subject matter of the contract of pledge.
The goods pledged must be in existence.

The following are the essential ingredients of a pledge:'

 There must be a delivery of goods from pawnor to pawnee

 The property pledged should be delivered to the pawnee
 Delivery should be in pursuance of contract.
 Delivery should be for the purpose of security.
 Delivery should be upon a condition to return

Rights of the Pawnee

No property in goods pawned passes to the pawnee, but the pawnee gets a "special
property to retain possession even against the true owner until the payment of the
debt, interest on the debt, and any other expense incurred in respect of the possession
or for preservation of the goods" (Section 173). The pawnee must return the goods to
the pawnor on the tender of all that is due to him. The pawnee cannot confer a good
title upon a bona fide purchaser for value. Should the pawnor make a default in
payment of the debt or performance of the promise, at the stipulated time, the pawnee
may

(i) file a suit for the recovery of the amount due to him while retaining the goods
pledged as collateral security; or
(ii) sue for the sale of the goods and the realization of money due to him; or
(iii) himself sell the goods pawned, after giving reasonable notice to the pawnor; sue for
the deficiency, if any, after the sale.

If the sale is made in execution of a decree, the pawnee may buy the goods at the sale.
But he cannot sell them to himself in a sale made by himself under (Hi) above. If after
sale of the goods, there is surplus, the pawnee must pay it to the pawnor (Section
176).

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Rights of Pawnor

On default by pawnor to repay on the stipulated date, the pawnee may sell the goods
after giving reasonable notice to the pawnor. If the pawnee makes an unauthorized
sale without giving notice to the pawnor, the pawnor has the following rights

(i) to file a suit for redemption of goods by depositing the money treating the sale as if
it had never taken place; or
(ii) to ask for damages on the ground of conversion.

Pledge by Non-owners

Ordinarily, the owner of the goods would pledge them to secure a loan but the law
permits under certain circumstances a pledge by a person who is not the owner but is
in possession of the goods. Thus, a valid pledge may be created by the following non-
owners.
(a) A mercantile agent: Who with the consent of the owner, in possession of goods or
documents of title to goods may, in the ordinary course of his business as mercantile
agent, pledge the goods; such a pledge will bind the owner (Section 178).

(b) Seller of buyer in possession after sale: A seller, left in possession of goods sold,
in no more the owner, but pledge by him will be valid, provided the pawnee acted in
good faith and had no notice of the sale of goods to the buyer (Section 30 of The Sale
of Goods Act 1930).

(c) Pledge having limited interest: When the pawnor is not the owner of the goods
but has a limited interest in the goods which he pawns, e.g., he is a mortgagee or he
has a lien with respect of these goods, the pledge will be valid to the extent of such
interest.

(d)Pledge. by co-owner: One of the joint-owners in sole possession of goods, with

consent of the others can make a valid pledge

(e) Pledge by person in possession under a voidable contract.- A person may obtain
possession under a contract which is voidable at the option of the lawful owner on the
ground of misrepresentation, fraud etc. The person in possession may pledge the
goods before the contract is avoided by the other party. (Section 178A)

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