INDEMNITY AND

GUARANTEE

BY
SYED SIKANDAR SHAH MOHMAND
DEPARTMENT OF LAW, NUST
 WHAT IS CONTACT OF INDEMNITY

DEFINITION AND NATURE

A Contract by which one party promises to save the other from any loss caused to him by the
conduct of the promisor himself or by the conduct of any other person is called a contract
of indemnity.
In other worlds, a contract where one person promises to compensate the other for the loss,
which may arise due to the conduct of the promisor himself or any other person is called a
contract of indemnity.
For Example:
A Contract to indemnify B against the consequence of any proceedings which C may take
against B in respect of disputed piece of land between B and C.This is a contract of
indemnity.
 Illustration

A parked his scooter at the college parking stand and

went to attend his Law of contract lecture. When A
came back to take back his scooter he lost his
parking ticket which was given by the security guard.
The security guard refused to return the scooter to A
unless A gives the security guard an indemnity bond
against any loss which he may suffer if any other
person claims the scooter from the security guard.
 Example of Indemnity Contract

A wants to construct a 10 Marla plot in D-12

Islamabad. A goes to B a building constructor for
building his house.B hands over the map to Mr.Z to
build this house within a year. Here in this case A said
to B that I have given the map to you to construct this
house for me and you handover the map to Mr.Z which
I don’t know.
B promises A do not worry I would indemnify you for
any loss, if your house is not according to the terms
and conditions. This is an example of indemnity
contract.
In common language the word indemnity means
undertaking, whereby one person agrees to
compensate the other for any future loss.
The expression contract of indemnity in section 124 of the
contract Act has been used in a narrow sense and the
general law about contracts of indemnity is much wider than
the contract of indemnity as defined in the contract Act.
FOR EXAMPLE: The contract of fire insurance or marine
insurance is always contract of indemnity though under the
contract Act it would more properly come under section 31
defining contingent contracts. In fire insurance let suppose
you insure your house against fire due to short circuit, gas
leakage and fire etc.The insurance company(Indemnifier)
will compensate the indemnity holder for all those losses
which has been incurred because of fire.
The contingency upon which the whole contract of
indemnity depends is the happening of loss.
Therefore the contract of indemnity is part of a
general class of contingent contracts. Contracts of
insurance are common examples of indemnity.
Parties to the contract of indemnity:
There are two parties to a contract of indemnity.
Indemnifier: (promisor):
The person who promises to indemnify or compensate
for the loss is known as indemnifier.
Indemnity-holder:(Promisee)
The person whose is to be compensated is known as
indemnity-holder.
 Indemnity for illegal agreement

What do you think, can we indemnify the indemnity

holder for illegal agreements…..?
 Essentials of contract of Indemnity

There must be loss to indemnity-holder or promisee

Object of the contract must be lawful
 Conclusion to the contract of Indemnity

To conclude it can be said that, indemnity is a

compensation paid by one party to another. It is
made in order to protect the indemnity holder
against the anticipated loss. It depends upon
happening of loss.
In contract of indemnity there are two parties, the
indemnifier and the indemnity holder.
 Rights of Indemnity Holder

Following are the rights of the indemnity holder

against the indemnifier under section 125 of the
contract Act.
He/she can recover all damages and expenses from
the indemnifier which he/she may be compelled to
pay in respect of any suit filed against him.
Right to recover the sum paid during compromise
with third person.
 Example

A surgeon has already insured himself/herself for

any malpractice medical practice against the third
party. Now if the third party file a case against that
doctor and win the case. Later on the doctor will
claims those damages from the insurance company
or either ask the insurance company to pay the
claims directly to the third party who won the case
against the surgeon.
 WHAT IS GUARANTEE IN LAW OF CONTRACT

A person who seeks to borrow money or to undertake

some other obligations, may be required to pledge
some property with the creditor as security.
But in case of guarantee the creditor may be willing to
lend money to a person if he can provide someone to
shoulder personal liability as a security for the re-
payment of the loan or for the performance of the
promised act, just in case the debtor fails to pay the
debt. In this case the creditor gives a loan to the debtor
on the combined financial standing of the debtor and
some third person called surety.
 Definition of the contract of Guarantee

According to section 126 of the contract Act,1872:

A contract to perform the promise or discharge the
liability of a person in case of his default is a contract
of guarantee.
For example:
When A request B to lend C money of 2000 rupees
and A guarantee that C will repay the amount within
a fixed time, say within two months for borrowing
money and if C failing to pay, A will himself pay to
B,there is a Contract of guarantee.
 Bail bond/Surety Bond of accused to appear before the Court for
trail

Bail bond is a written undertaking given by an

accused person along with his surety when the
accused is released on bail to the effect that in case
he(the accused) fails to turn up for trial before the
Court, the amount mentioned in the bond may be
taken from the surety and forfeited to the State. The
object of obtaining bail bond from the third person,
the surety is to secure attendance/appearance of the
accused in court when he is called upon, and in case
of failure to appear, the money mentioned in the
surety bond has to be paid to the court by the surety.
 PARTIES TO A CONTRACT OF GUARANTEE

There are three parties to the contract of guarantee

Surety/Guarantor: it is the person who gives the
guarantee
Creditor: It is the person to whom the guarantee is
given
Principal Debtor: It is the person in respect of
whose default the guarantee is given.
CAN THE SURETY/GUARANTOR CLAIM BACK THE MONEY PAID TO
THE CREDITOR FROM THE PRINCIPAL DEBTOR

A surety is a person who comes forward to pay the

amount in the event of the borrower failing to pay
the amount . It means that on a default having been
made by the principal debtor the creditors can
recover from the surety all what he could
have recovered from the principal debtor.
Contract of GUARANTEE CHART
 There are Three Agreements in a contract of
guarantee

In a contract of guarantee there are three separate but collateral

contracts giving rise to a triangular relationship:
Contract between the creditor and principal debtor;
In this contract it is mentioned that the debt has to be paid
back to the creditor on stipulated and fixed time.
Contract between surety and creditor:
There is a contact by which the surety guarantees to pay the
creditor just in case the principal debtor default.
Contract between Surety and Principal debtor:
There is also a contract that principal debtor shall reimbursed
surety in case surety pays in the event of default by principal
debtor
ESSENTIALS AND CHARACTERISTICS OF CONTRACT OF
GUARANTEE:

Concurrence of three parties:

A contract of guarantee or surety-ship requires the
concurrence of three person viz,Principal debtor, the
creditor and the surety/guarantor. In the absent of
the consent of any of them no contract is made.
LIABILITY: There must be liability legally
enforceable. If that liability does not exist, there
cannot be a contract of guarantee.
 ESSENTIALS AND CHARACTERISTICS OF
CONTRACT OF GUARANTEE (Continued)

All Essential of a valid contract:

The contract of guarantee must have all the essentials
of a valid contract
Guarantee may be oral or written:
Guarantee may be in the form of oral contract or it can
be in the form of written contract. I would suggest
that even in oral contract of guarantee you must
provide two witnesses.
SURETY’S RIGHTS AGAINST THE CREDITOR AND PRINCIPAL
DEBTOR

Right to set-off:
if the creditor sues the surety, the surety may have the
benefit of the set-off if any, that the principal debtor
had against the creditor. The surety is also entitled to
use the defenses of the principal -debtor against the
creditor.
 Right of subrogation

The surety on making payment of the guaranteed

debt is subrogated to all the rights of the creditor
which the creditor had against the principal debtor.
Now the surety step into the shoes of the Creditor
and the surety is entitled to all the claims from the
principal debtor which the Creditor had.
Surety right against the Principal debtor:
The surety can claim all the compensations which he
paid to the creditor from the principal debtor.
 Liability of co-sureties against each other

Sometimes there are more than one sureties in a

contract of guarantee for a single principal debtor, so
it depends on the terms and conditions of the
contract that up to what extent the co-sureties take
the responsibility. Either for half debt or with
responsibility of 70% and 30% each. Than each
surety shall be responsible according to his/her
share of responsibility and not for the whole
responsibility.
 If there is no agreement between the co-sureties

If there is no agreement between the co-sureties for

the liability to the creditor just in case of principal
debtor default, then all have to pay to the creditor in
equal shares.
Liabilities of the co-surety against the other co-sureties

In the absence of any agreement regarding the

liabilities of payment of debt, if the creditor
compelled one of the co-sureties to pay the entire
debts outstanding from the principal debtor. Than in
that case the surety who paid the whole amount of
debt has the right of contribution from the other co-
sureties.
Release of one co-surety will not release the other from there
liability.
 Discharge of Surety from liability

 Discharge of liability on accomplishment of

liability:
A surety is said to be discharged from liability when
his liability comes to an end. It comes to an end in
any one of the following ways.
 DISCHARGE BY NOTICE OF REVOCATION BY THE SURETY

A Surety cannot be revoked if the creditor has

already given the loan. It can only be revoked
through notice if the creditor has not yet given the
debt to the principal debtor.
Example: A lends B a certain sum on the guarantee
of C.C can revoke the guarantee if A has not yet given
the sum to B.C can not revoke the contract of
guarantee once A has advanced the money to B.
 Discharge of surety by death of the surety

In case of the death of the surety, the surety is

personally discharged from the liability but not his
property if the deceased has any property after his
death.
 Release or discharge of Principal debtor by the
creditor

When the creditor discharge the principal debtor

from any liability the surety is automatically
discharged from his/her liabilities.
 Change of terms and conditions between the creditor and
Principal debtor without the consent of surety.

Any variation in the terms of the contract between

the principal debtor and the creditor without surety’s
consent.
DISTINGUISH BETWEEN INDEMNITY AND GUARANTEE

INDEMNITY GUARANTEE

There are two parties in There are three parties in the

the contract of indemnity contract of guarantee. i.e the

creditor, the principal debtor
the indemnifier and the and the surety
indemnity holder. In guarantee, there are three
In indemnity there is contracts one between
only one contract creditor, and the principal
debtor, the second between the
between the indemnifier creditor and the surety, and
and the indemnified. the third between the surety
and the principal debtor.
INDEMNITY GUARANTEE

The liability of The liability of surety is

indemnifier is primary secondary. it means
and independent. that surety is liable
only if the principal
debtor fails to perform
his obligations.
INDEMNITY GUARANTEE

In a contract of In a contract of

indemnity the guarantee, the surety
indemnifier can not sue after he discharges the
the third party for the debt owing to the
loss in his own name. creditor, can proceed
against the principal
debtor in his own
name.
INDEMNITY GUARANTEE

Indemnity aims at the  In guarantee the creditor

reimbursement of loss is secured by the surety if
from the indemnifier. the debtor does not pay
In indemnity the cause of the debt, the surety will
action against the pay.
indemnifier/Promisor In guarantee the cause of
arises when the indemnity action arises against the
holder/promisee actually surety as soon as the
indemnifies the third debtor commits a default
person. in paying debts.