CHAPTER:5

CONTINGENT CONTRACT,
CONTRACT OF INDEMNITY AND
CONTRACT OF GUARANTEE
BY
PROF.SUJIR PRABHAKAR
DEFINITION
• A contingent contract implies a contract, the performance of which
depends on the happening or not happening of uncertain event
incidental to such contract.
• Section:31- a contingent contract is to do or not to do something , if
some event collateral to such contract, does or does not happen.
• Example:- A contracts to pay to B Rs10000 if B’s house gets burnt
down.
• Contract of insurance, indemnity and guarantee are contingent
contracts.
ESSENTIAL INGREDIENTS OF
CONTINGENT CONTRACT
1. Subject to happening or non happening of an uncertain event
collateral to it.
2. The contingent event is of uncertain nature.
3. The uncertain event on which the performance of a contingent
contract depends is collateral or incidental to the contract.
4. The contingency should depend on the will of promisor or of the
promisee.
• Enforcement of contingent contract:-
• If the event becomes impossible the contract become void (section: 32)
ESSENTIALS OF CONTINGENT
CONTRACT
• Contingent contract to do or not to do anything, if an uncertain future
event does not happen, can be enforced when the happening of that
event becomes impossible (section:33)
• Contingent contract to do something or not to do something within a
fixed time may be enforceable after expiry of the time line set.
• Example 1:- A promises to pay B a fixed sum of money if a certain ship
does not return within a year. The contract becomes enforceable if the
ship returns after a year.
• Example 2:- A agrees to pay B Rs 10 lakhs if B marries A’s daughter C. But
C was dead at the time of the agreement, The agreement became void.
CONTRACT OF INDEMNITY
• It is a type of contingent contract.
• Indemnity indicates protection against some loss or damage.
• Section: 124 defines contract of indemnity as “a contract, by which one party
promises to save the other from loss caused by the conduct of promisor himself,
or by the conduct of any other person”.
• ESSENTIALS OF A VALID CONTRACT OF INDEMNITY:-
1. There is promise to indemnify the loss or damage sustained by the indemnified.
2. It comes into force only when the contingency occurs resulting in loss or
damage.
ESSENTIALS FOR A VALID CONTRACT
OF INDEMNITY
3. The liability of an indemnifier commences as soon as the liability of
the indemnity holder becomes clear and certain.
RIGHTS OF AN INDEMNITY HOLDER:-
1. All the damages he was compelled to pay in any suit.
2. All cost he was compelled to pay in any such suit.
3. All sums he may have paid under any compromise of any such suit.
• In nutshell the indemnity holder is entitled to all damages plus all
costs of suit and promised money provided he acted “intra vires”
(within power).
CONTRACT OF SURETY
• A formal promise or assurance made by one person to another
person, if a third person fails to perform a certain duty.
• Example: repayment of a debt.
• Section: 126 defines contract of surety 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”.
• A contract of guarantee is entered into with an objective to enable a
person to get a loan or goods on credit or even employment.
• The person who gives the guarantee is called a surety.
CONTRACT OF SURETY
• The person on whose behalf the guarantee is given is a principal debtor.
• The person to whom the guarantee is given is a creditor.
• The special feature of contract of guarantee is the consideration.
• There need not be any direct consideration between the surety and the
creditor.
• Consideration received by the principal debtor is sufficient for the
surety.
• Incapacity of the principal debtor does not impair the validity of a
contract of guarantee.
KINDS OF GUARANTEE
• Section :128 says “ the liability of the surety is co-extensive with that
of the principal debtor unless it is otherwise provided by the contract”.
• KINDS OF GUARANTEE:-
• Specific guarantee – when a guarantee is given for a single debt or a
specific transaction only, it is called a specific guarantee.
• Continuing guarantee – a guarantee that extends to a series of
transactions is called a continuing guarantee (section:129)
• Here the surety undertakes responsibility for a series of separable and
distinct transactions over a period of time.
REVOCATION OF A GUARANTOR
• By notice of revocation – the surety may at any time revoke
continuing guarantee by serving notice on the creditor as to the
future transactions (section:130)
• By death of the surety – the death of the surety, in the absence of
any contract to the contrary, stands revoked as regards to future
transactions only (section: 131)
• DISCHARGE OF A SURETY/GUARANTOR :-
• NOVATION – replacing an exiting contract by a fresh one with or
without changing the composition of parties- section:62
DISCHARGE OF A SURETY/
GUARANTOR
• VARIANCE IN TERMS OF CONTRACT- any variation or alteration in
the terms of contract made between principal debtor and the creditor
without the consent of the surety – section:133
• RELEASE OR DISCHARGE OF PRINCIPAL DEBTOR – the surety is
discharged by release of principal debtor or by any act of omission of
the creditor –(section:134)
• BY IMPAIRING SURETY’S REMEDY – if the creditor commits any act
which is inconsistent with the rights of surety or fails to perform any
act that his duty to the surety requires him to do – (section:139)
DISCHARGE OF A SURETY/
GUARANTOR
• BY ARRANGEMENT BETWEEN THE PD AND THE CREDITOR- where
the creditor, without the consent of the surety, alters the terms of the
contract.
• BY LOSS OF SECURITY- if the creditor loses or without the consent of
the surety, parts with the security charged, the surety is discharged to
the extent of value of the security.
• BY INVALIDATION OF THE CONTRACT - a surety is also discharged
upon invalidation of the contract – 1.guarantee obtained by
misrepresentation 2. guarantee obtained by concealment.
DISCHARGE OF A SURETY/GURANTOR
• Default on the part of co-surety – where a person gives a guarantee upon a
contract that the creditor shall not act upon it until another person has
joined as co-surety. Such condition makes the contract of guarantee invalid if
the person does not join.
• RIGHTS AGAINST THE PRINCIPAL DEBTOR:-
• Right of subrogation- after discharging the debt, the surety steps into the
shoes of the creditor. He has subrogated all the rights of a creditor against
the principal debtor,
• Right of indemnity - a surety is entitled to be indemnified by the principal
debtor for whatever sum he has rightfully paid under the guarantee-
(section:145)
RIGHTS OF SURETY/GUARANTOR
• RIGHT AGAINST CREDITOR -
• Right to security – a surety is entitled to the benefit of every security
which the creditor has against the PD at the time of the contract even
if the surety is unaware of the existence of the security.
• Right of set off – When the creditor calls upon the surety to pay the
guarantee amount, he is entitled to plead any set off which the PD
may have against the creditor.
• Right against co-sureties – when more than one person have
guaranteed the single debt, they are called co-sureties.
LIABILITY OF CO-SURTIES
• The liability of the co-sureties is joint and several. If there is no
agreement among the sureties, then it is shared equally by the co-
sureties – section: 146&147.
• Where sureties become liable to contribute subject to the maximum
amount guaranteed by each one- co-sureties who are bound to pay
equally as far as the limit of their respective obligations permit.
EXAMPLE-1: A,B and C as sureties for D enter into three separate
bonds- A is responsible up to Rs10000; B is responsible up to Rs 20000
and C is up to Rs40000. D defaults in payment to the extent of Rs
30000. Held that A,B and C are liable to pay Rs10000 each.
LIABILITIES OF CO-SURETY
• EXAMPLE-2: A,B and C are sureties for D who entered into a separate
agreement. As per the “inter se” agreement, A is responsible up to Rs
10000; B up to Rs 20000 and C up to Rs 40000. D defaults to the
extent of Rs40000. Held that A is liable to pay Rs 10000 and the
balance of Rs 30000 has to be shared between equally between B and
C.