INDEMNITY

 Section 124 of the Indian Contract Act 1872, defines Indemnity.

 An indemnity contract is a legal arrangement between two parties in which one party agrees to pay another
party for a loss or harm that meets certain requirements and conditions unless other circumstances are
specified.
 It is a form of contingent contract which is characterized by all the essential elements of a valid contract.

In an indemnity contract, there are only two parties, as stated in:

 The indemnifier:
 The promisor, who agrees to make up the damage caused to the other group, is called the
Indemnifier.

 The Indemnified:
 the person who is assured of compensation for the damage incurred (if any) is referred to as the
indemnity holder or the indemnified.
The mode of the compensation contract can be express or implied, i.e. if a person expressly agrees to save the other
from damages, the mode of the contract will be stated, while if the contract is signified by the terms of the case, the
mode of the contract will be implied.

Examples of the indemnity contract are given below

1. Suppose John had sold Paul a house at Peter's direction. Afterwards it is revealed that Alex is the house's
registered owner. Alex got back John's sum for selling his house. John will now recoup Peter's fee. This is an
implicit form of an indemnity contract.

2. Beta Insurance Company entered into a deal with Alpha Ltd. to reimburse the company's stock of products
up to Rs. 50,00,000 for a premium of Rs.1,00,000 for damages incurred by accidental fire. That is an explicit
type of an indemnity contract.
Rights of indemnity holder
Section 125 of the Indian contracts act states:
Rights of indemnity-holder when sued.
The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from 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.
2. 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;
3. 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.

Rights of the Indemnifier

 After the indemnity holder is paid for the damage incurred, the compensator shall have all the rights to all
the methods and services which can save the compensator from the damage.
 The essence of the indemnity contract is the loss to the party,
 i.e. Indemnification can only be done if the loss to the other party is incurred, or if it is certain that the loss
will incur.
 The Indian Contract Act of 1872 does not provide for the time to commence the liability of the indemnifier
under the contract.
But in this respect different high courts in India held the following rules:
 The Indemnifier shall not be liable until the loss has been suffered by the indemnified person.
 If the indemnified person has not discharged his liability, he may compel the indemnifier to make good his
loss.
 In Gajanan Moreshwar vs. Moreshwar Madan
 the judge made the observation 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.
Contract of Guarantee
 Section 126 of the Indian Contracts Act defines a contract of guarantee,
 as A contract of guarantee is a contract to perform the promise or discharge the liability, of a third person in
case of his default.
Furthermore, the section adds:
 The person who gives the guarantee is called the surety,
 the person in respect of those defaults the guarantee is given called principal debtor, and
 the person to whom guarantee is given is called the creditor.

There are three parties in each guarantee contract, the principal creditor, the surety and the principal
debtor.
A guarantee contract consists 3 contracts:
1. First, the principal debtor himself makes a commitment to fulfill a contract in favor of the creditor.
2. Second, if the principal debtor makes a default, the surety undertakes to be liable to the creditor.
3. Thirdly, the principal debtor's implicit promise in support of the assurance that, in the event that the
protection is obliged to discharge the responsibility of the principal debtor's default, the principal debtor
shall indemnify the protection for it.

Main features of contract of guarantee

1. The contract can be either oral or in writing. Nevertheless, the assurance contract can only be in writing in
English law.
2. The guarantee contract presumes a principal liability or a discharge duty on the part of the principal debtor.
Even if there is no such principal liability, one party agrees to pay another under such situations, and the
enforcement of this obligation is not contingent on anyone else's default, it is an indemnity contract.
3. Sufficient consideration is to support the principal debtor. It is not necessary to have clear consideration
between the creditor and the assurance that it is appropriate that the creditor has done anything for the
good of the principle debtor.
4. Assurance consent cannot be obtained by misrepresentation or cover of any material information relating to
the transaction.

Liability of surety
 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.
Rights of surety
Broadly, the rights of the surety are classified into 3 types:
A. Rights against the principle debtor

o Right to give Notice

o Rights of Sub-rogation
o Right of Indemnity
o Right to get Securities
o Right to ask for Relief

B. Rights against the creditor

o Right to get Securities

o Right to ask for Set-off
o Rights of Sub-rogation
o Right to advice to Sue Principal Debtor
 o Right to insist on Termination of Services

C. Rights against co-sureties

o
Right to ask for contribution
o
Right to claim share in securities
Continuing Guarantee
 One form of guarantee that extends to a series of transactions is a continuing guarantee.
 A continuing guarantee extends to all transactions that the principal debtor enters into before the surety
revokes it.
 A continuing guarantee for future transactions may be withdrawn at any time by notice to the creditors.
 However, the responsibility of a surety for transactions completed prior to such revocation of guarantee is
not diminished.

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.
Exceptions to the discharge of surety
 The surety cannot be discharged, if the contract to provide time to the principle debtor is not made by
the creditor with the principle debtor but with a third party.
 In case of co-surety, if one is released by the creditor, the others do not stand discharged.
Difference between contract of indemnity and contract of guarantee
BASIS FOR
INDEMNITY GUARANTEE
COMPARISON

Meaning A contract in which one party A contract in which a party promises to

promises to another that he will another party that he will perform the
compensate him for any loss contract or compensate the loss, in case
suffered by him by the act of the of the default of a their person, it is the
promisor or the third party. contract of guarantee.

Defined in Section 124 of Indian Contract Act, Section 126 of Indian Contract Act, 1872
1872

Parties Two, i.e. indemnifier and Three, i.e. creditor, principal debtor and
indemnified surety

Number of One Three

Contracts

Degree of liability Primary Secondary

of the promisor

Purpose To compensate for the loss To give assurance to the promisee

Maturity of When the contingency occurs. Liability already exists.

Liability