SPECIAL CONTRACT

PART-A LAW OF CONTRACTS

UNIT-1 INDEMNITY AND GUARANTEE:

A.CONTRACT OF INDEMNITY

SYNOPSIS
 Introduction
 Definition of indemnity
 Parties to a contract of indemnity
 Essentials to a contract of indemnity
 Rights of indemnity holder
 Indemnifier’s liability
 Conclusion

INTRODUCTION
 A contract of indemnity is one of the most important forms of
commercial contracts.
 Several industries, such as the insurance industry, rely on these contracts.
This is because of the nature of these contracts.
 They basically help businesses in indemnifying their losses and,
therefore, reduce their risks.
 This is extremely important for small as well as large businesses .

DEFINITION OF INDEMNITY
 According to the definition given by Halsbury, the term “indemnity” is a
contract that expressly or impliedly protects a person who entered into a
contract or is about to enter from any losses, irrespective of the fact that
those losses were due to the actions of a third party.
 As mentioned above, the word indemnity is derived from the Latin word
“indemnis”, which means freedom from loss. According to
Longman’s dictionary, it is protection against any kind of loss, expense,
etc., in the form of a promise to pay for those losses.
 For example, A promises to deliver certain goods to B for Rs. 2,000 every
month. C comes in and promises to indemnify B’s losses if A fails to so
deliver the goods. This is how B and C will enter into contractual
obligations of indemnity
PARTIES TO A CONTRACT OF INDEMNITY
In a contract of indemnity, there are two parties:
  Indemnifier: A person who promises to indemnify or pay for the
losses is known as an indemnifier.
 Indemnified: A person for whom such a promise is made is known
as an indemnified or indemnity holder.
Example, A and B have a contract in which B promises to deliver goods to A
for Rs. 10,000 per month. C promises B that he will pay for the loss that will be
suffered by him due to A. Here, C and B are in a contract of indemnity, where B
is the indemnity holder and C is the indemnifier.
ESSENTIALS TO A CONTRACT OF INDEMNITY
For the purpose of a contract of indemnity, the following conditions must be
satisfied:
 There must be two parties.
 One of the parties must promise the other to pay for the loss incurred.
 The contract may be expressed or implied.
 It must satisfy the essentials of a valid contract.
RIGHTS OF INDEMNITY HOLDER
As per Section 125 of the Indian Contract Act, 1872 the following rights are
available to the promisee/ the indemnified/ indemnity-holder against the
promisor/ indemnifier, provided he has acted within the scope of his authority.
 RIGHT TO RECOVER DAMAGES PAID IN A SUIT [SECTION
125(1)]: An indemnity-holder has the right to recover from the
indemnifier all damages which he may be compelled to pay in any suit in
respect of any matter to which the contract of indemnity applies.
 RIGHT TO RECOVER COSTS INCURRED IN DEFENDING A SUIT
[SECTION 125(2)]: An indemnity-holder has the right to recover from
the indemnifier all costs which he may be compelled to pay in any such
suit if, in bringing or defending it, he did not contravene the orders of the
promisor, and acted as it would have been prudent for him to act in the
absence of any contract of indemnity, or if the promisor authorized him to
bring or defend the suit.
 RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE
[SECTION 125(3)]: An indemnity-holder also has the right to recover
from the indemnifier all sums which he may have paid under the terms of
any compromise of any such suit, if the compromise was not contrary to
the orders of the promisor, and was one which it would have been prudent
for the promisee to make in the absence of any contract of indemnity, or
if the promisor authorized him to compromise the suit.
 Indemnifier’s liability
INDEMNIFIER’S LIABILITY
Indian Contract Act, 1872 does not provide the time of the commencement of
the indemnifier’s liability under the contract of indemnity. But different High
Courts in India have held the following rules in this regard:

 Indemnifier is not liable until the indemnified has suffered the loss.
 Indemnified can compel the indemnifier to make good his loss although
he has not discharged his liability.
In the leading case of Gajanan Moreshwar vs. Moreshwar Madan(1942), an
observation was made by the judge that “ If the indemnified has incurred a
liability and the liability is absolute, he is entitled to call upon the indemnifier to
save him from the liability and pay it off”.
Thus, Contract of Indemnity is a special contract in which one party to a
contract (i.e. the indemnifier) promises to save the other (i.e. the indemnified)
from loss caused to him by the conduct of the promisor himself, or by the
conduct of any other person. Section 124 and 125 of the Indian Contract Act,
1872 are applicable to these types of contracts.
CONCLUSION

B.CONTRACT OF GUARANTEE

SYNOPSIS
 Introduction
 Definition of guarantee
 Essentials of a Contract of Guarantee
 Nature and extent of surety’s liability
  Discharge of surety’s liability
 Types of guarantee
 Conclusion
INTRODUCTION
 A contract of guarantee is governed by the Indian Contract Act,1872 and
includes 3 parties in which one of the parties acts as the surety in case
the defaulting party fails to fulfill his obligations.
 Contracts of guarantee are mostly required in cases when a party
requires a loan, goods or employment.
 The guarantor in such contracts assures the creditor that the person in
need may be trusted and in case of any default, he shall undertake the
responsibility to pay.
DEFINITION OF CONTRACT OF GUARANTEE
Contract of Guarantee suggests that a contract is created to perform the
guarantees or discharge the liabilities of the person just in case he fails to
discharge such liabilities. As per Section 126 of the Indian Contract Act, 1872, a
contract of guarantee has 3 parties –
1. Surety: A surety could be a person giving a guarantee during a contract of
guarantee. Someone who takes responsibility to pay cash performs any
duty for one more person just in case that person fails to perform such
work.

2. Principal Debtor: A principal mortal could be a person for whom the

guarantee is given during a contract of guarantee.

3. Creditor: The person to whom the guarantee is given is referred to as a

creditor.

Example, Ankita advances a loan of INR 70000 to Pallav. Srishti who is the
boss of Pallav promises that in case Pallav fails to repay the loan, then she will
repay the same. In this case of a contract of guarantee, Ankita is the Creditor,
Pallav the principal debtor and Srishti is the Surety.
ESSENTIALS OF A CONTRACT OF GUARANTEE
 All the three parties to the transaction that are the principal debtor,
creditor, and surety, must consent with each other's approval.
  A surety's liability is secondary under a guarantee arrangement. This tells
that the primary contract was between the creditor and the principal
debtor.
 It must include all of the fundamental elements of a legitimate contract as
the guarantee contract is an agreement, it must meet all of the standards
as a legal contract.
 The guarantee shouldn't be acquired by misrepresenting the facts to the
surety.

NATURE AND EXTENT OF SURETY’S LIABILITY

 Section 128 of the Indian contracts act states the liability of the surety is
co-extensive with that of principal debtor, unless it is otherwise provided
by the contract
 Surety's liability is the same as that of the principal debtor. A creditor can
move directly against the surety. Without suing the principal debtor, a
creditor may sue the surety directly.
 Surety is liable to make payment immediately after the default of any
payment by the principal debtor.
 Primary responsibility for making payment, however, is from the
principal debtor, and the responsibility of the surety is secondary.
 In fact, if the principal debtor can not be held liable for any payment due
to any document error, then surety is not responsible for such payment as
well.
DISCHARGE OF A SURETY
 By providing a revocation notice for future transactions (section 130).
 the guarantee is revoked for all the future transactions under the
circumstances of the death of the surety (section 131).
 When there is a non-consensual change in terms and condition of the
contract between the creditor and principal debtor.
 In case the creditor releases the debtor or makes any omission due to
which results in the discharge of principal debtor's liability (section 134).
 When the complete payment is made by the principle debtor
 The surety is also discharged when the creditor enters into an
arrangement with the principal debtor for not to sue him or to provide
extra time for payment of debt, (section 135).
 when the creditor does any act, which is inconsistent with the rights of the
surety.
TYPES OF GUARANTEE
 There are two sorts of guarantee contracts: specific guarantee and
ongoing guarantee.
 A specific or simple guarantee is one that is made in respect of a single
debt or unique transaction and is set to expire when the guaranteed debt is
paid or the promise is fulfilled.
 An ongoing guarantee, on the other hand, is a guarantee that covers a
series of transactions (Section129). In this instance, the surety's liability
would remain until all of the transactions were completed or the
guarantor revoked the guarantee for future transactions.
o Specific Guarantee; a particular guarantee is for one debt or any
specific dealings. It involves associates finishing once such debt
has been paid.

o Continuing Guarantee; Act in 1872 defines Continuing Guarantee-

A continuing guarantee is a form of assurance that covers many
transactions. Until the surety revokes it, it applies to all
transactions engaged into by the principal debtor. As a result,
bankers prefer a continuing guarantee because the guarantor's duty
is not limited to the original advances and extends to all subsequent
defaults.

CONCLUSION

C. DISTINCTION BETWEEN INDEMNITY AND GUARANTEE

There is a distinction between the special sorts of contracts, contract of
indemnity and contract of guarantee that is as follows: –
 During a contract of guarantee, there are three parties to a contract,
particularly surety, principal mortal and human whereas just in case of
indemnity there are parties to a contract, promisor, and communicator.
 Three contracts exist in contracts of guarantee whereas in contracts of
indemnity, there is just one contract
 A contract of indemnity serves the purpose of saving the other party from
suffering loss. However, in a contract of guarantee, the purpose is to
assure the creditor that either the contract will be performed, or liability
will be discharged.
 Just in case of the contract of guarantee, the liability of the surety is
secondary whereas during a contract of indemnity the liability of the
communicator is primary.
 During a contract of guarantee, there's an Associate in existing liability
for debt or duty, the surety guarantees the performance of such liability.
 Surety is eligible to proceed against the principal mortal on payment of a
debt, just in case, principal mortal fails to pay the debt. Indemnifier
cannot sue third parties in his name.