Introduction To: Contract of Indemnity v. Contract of Guarantee

Contract of Indemnity v.
Contract of Guarantee

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CHAPTER 1
INTRODUCTION TO CONTRACT
An agreement with specific terms between two or more persons or entities in which there is a
promise to do something in return for a valuable benefit known as consideration. Since the law
of contracts is at the heart of most business dealings, it is one of the three or four most significant
areas of legal concern and can involve variations on circumstances and complexities. The
existence of a contract requires finding the following factual elements: a) an offer; b) an
acceptance of that offer which results in a meeting of the minds; c) a promise to perform; d) a
valuable consideration (which can be a promise or payment in some form); e) a time or event
when performance must be made (meet commitments); f) terms and conditions for performance,
including fulfilling promises; g) performance, if the contract is "unilateral". A unilateral contract
is one in which there is a promise to pay or give other consideration in return for actual
performance. (I will pay you $500 to fix my car by Thursday; the performance is fixing the car
by that date.) A bilateral contract is one in which a promise is exchanged for a promise. (I
promise to fix your car by Thursday and you promise to pay $500 on Thursday.) Contracts can
be either written or oral, but oral contracts are more difficult to prove and in most jurisdictions
the time to sue on the contract is shorter (such as two years for oral compared to four years for
written). In some cases a contract can consist of several documents, such as a series of letters,
orders, offers and counteroffers. There are a variety of types of contracts: "conditional" on an
event occurring; "joint and several," in which several parties make a joint promise to perform,
but each is responsible; "implied," in which the courts will determine there is a contract based on
the circumstances. Parties can contract to supply all of another's requirements, buy all the
products made, or enter into an option to renew a contract. The variations are almost limitless.
Contracts for illegal purposes are not enforceable at law. 2) v. to enter into an agreement.
Contract of Indemnity -A contract by which one party promises to save the other from 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.

Contract of Indemnity v. Contract of Guarantee

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Contract of guarantee -A "contract of guarantee " is a contract to perform the promise, or
discharge the liability, of a third person in case of his default. The person who gives the
guarantee is called the "surety";the person in respect of whose default the guarantee is given is
called the " principal debtor ", and the person to whom the guarantee is given is called the "
creditor ".
CHAPTER 2
Contract of Indemnity
Indemnity literally means Security against loss. In a contract of indemnity one party i.e. the
indemnifier promise to compensate the other party i.e. the indemnified against the loss suffered
by the other.
The English law definition of a contract of indemnity is it is a promise to save a person
harmless from the consequences of an act. Thus it includes within its ambit losses caused not
merely by human agency but also those caused by accident or fire or other natural calamities.
The definition of a contract of indemnity as laid down in Section 124 A contract by which
one party promises to save the other from 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.
The definition provided
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by the Indian Contract Act confines itself to the losses occasioned due
to the act of the promisor or due to the act of any other person
Under a contract of indemnity, liability of the promisor arises from loss caused to the promisee
by the conduct of the promisor himself or by the conduct of other person. [Punjab National Bank
v Vikram Cotton Mills].

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http://www.ehow.com/info types-contract-indemnity.html


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Every contract of insurance, other than life insurance, is a contract of indemnity. The definition
is restricted to cases where loss has been caused by some human agency. [GajananMoreshwar v
Moreshwar Madan]
Section 124 deals with one particular kind of indemnity which arises from a promise made by an
indemnifier to save the indemnified from the loss caused to him by the conduct of the
indemnifier himself or by the conduct of any other person, but does not deal with those classes of
cases where the indemnity arises from loss caused by events or accidents which do not depend
upon the conduct of indemnifier or any other person. [Moreshwar v Moreshwar]
"Contract of indemnity" defined.-A contract by which one party promises to save the other 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".
Types of Indemnity
The conditions listed in a business contract determine the amount or extent of indemnity one
party shoulders on behalf of the other. A business contract will incorporate the types of
indemnity needed based on the nature of the business transaction. Some contracts may assign
indemnity for compensation awards due in cases involving personal injury or property damage,
such as construction contracts. Other contracts may assign indemnity for breach of
confidentiality or negligence, such as with health care-related contracts. In cases where legal
proceedings occur, a contract of indemnity may require the indemnifying party to pay any
resulting legal fee.


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Nature of Contract of Indemnity:
A contract of indemnity may be express or implied depending upon the circumstances of the
case, though Section 124 of the Indian Contract Act does not seem to cover the case of implied
indemnity.A broker in possession of a government promissory note endorsed it to a bank with
forged endorsement. The bank acting in good faith applied for and got a renewed promissory
note from the Public Debt Office. Meanwhile the true owner sued the Secretary of State for
conversion who in turn sued the bank on an implied indemnity. It was held that it is general
principle of law when an act is done by one person at the request of another which act is not in
itself manifestly tortious to the knowledge of the person doing it, and such act turns to be
injurious to the rights of a third person, the person doing it is entitled to an indemnity from him
who requested that it should be done. [Secretary of State v Bank of India].
The Indian Contract Act also deals with special cases of implied indemnity
1. U/s 69 if a person who is interested in payment of money which another is bound by law to
pay and therefore pays it, he is entitled to be indemnified. For instance if a tenant pays
certain electricity bill to be paid by the owner, he is entitled to be indemnified by the owner.
2. Section 145 provides for right of a surety to claim indemnity from the principal debtor for all
sums which he has rightfully paid towards the guarantee.
3. 3.Section 222 provides for liability of the principal to indemnify the agent in respect of all
amounts paid by him during the lawful exercise of his authority.
The plaintiff, an auctioneer, acting on the instruction of the defendant sold certain cattle
which subsequently turned out to belong to someone else other than the defendant. When the
true owner sued the auctioneer for conversion, the auctioneer in turn sued the defendant for
indemnity. The Court held that the plaintiff having acted on the request of the defendant was
entitled to assume that, if it would turned out to be wrongful, he would be indemnified by
the defendant. [Adamson v Jarvis].

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Validity of Indemnity Agreement
A contract of indemnity is one of the species of contracts. The principles applicable to contracts
in general are also applicable to such contracts so much so that the rules such as free consent,
legality of object, etc., are equally applicable.
Where the consent to an agreement is caused by coercion, fraud, misrepresentation, the
agreement is voidable at the option of the party whose consent was so caused. As per the
requirement of the Contract Act, the object of the agreement must be lawful. An agreement, the
object of which is opposed to the law or against the public policy, is either unlawful or void
depending upon the provision of the law to which it is subject.
Contract of indemnity when enforceable
The question whether the liability of indemnifier commences only when the indemnified has
actually suffered loss or when there is an apprehension that the indemnified
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by all chances is
likely to suffer it.
The former view was held in cases like Shankar Nimbaji v LaxmanSapdu / Chand Bibi v
Santosh Kumar Pal.
The plaintiff filed a suit to recover Rs. 5,000/- and interest from defendant by the sale of a
mortgaged property and, in case of deficit, for a decree against the estate of defendant 2 which
was in the hands of his sons, the defendant 2 died during the pendency of the suit. It was held
that plaintiff cannot sue the defendant in anticipation that the proceeds realized by the sale of the
mortgaged property would be insufficient and there would be some deficit. [Shankar Nimbaji v
LaxmanSapdu]

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Contract and specific relief By Avtar Singh 11
th
Edition 2013, Eastern Book Company
Publication (p.572)

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The defendants father while purchasing certain property covenanted to pay off mortgage debt
incurred by the plaintiff and also promised to indemnify him if they were made liable for the
mortgage debt. The defendants father failed to pay off the mortgage debt and plaintiff filed an
action to enforce the covenant. It was held as the plaintiff had not yet suffered any damage, the
suit was premature so far as the cause of action on indemnity was concerned. [Chand Bibi v
Santosh Kumar Pal]
A different point of view was held by the Courts in the following cases
Plaintiff company agreed to act as commission agent for the defendant firm for purchase and
sale of Hessian and Gunnies and charge commission on all such purchases and the defendant
firm agreed to indemnify the plaintiff against all losses in respect of such transactions. The
plaintiff company purchased certain Hessian from one MaliramRamjidas. The defendant firm
failed to pay for or take delivery of the Hessian. Then MaliramRamjidas resoled it at lesser price
and claimed the difference as damages from the plaintiff company. The plaintiff company went
into liquidation and the liquidator filed a suit to recover the amount claimed by Maliram from the
defendant firm under the indemnity. The defendant argued that in as much as the plaintiff had
not yet paid any amount to Maliram in respect of their liability they were not entitled to maintain
the suit under indemnity. It was held negative and decided in plaintiffs favour with a direction
that the amount when recovered from the defendant firm should be paid to MaliramRamjidas.
[Osmal Jamal & Sons Ltd. v Gopal Purushotham]
After the landmark deicision in the case of GajananMoreshwar v Moreshwar Madan Mantri it
has been well established that the liability of the indemnifier commences as soon as the loss of
the indemnified becomes absolute, certain or imminent. It is not necessary that the promisee
should pay for the loss.

Right of the indemnity holder (Section 125)
An indemnity holder (i.e. indemnified) acting within the scope of his authority is entitled to the
following rights

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1.Right to recover damages he is entitled to recover all damages which he might have been
compelled to pay in any suit in respect of any matter covered by the contract.
2.Right to recover costs He is entitled to recover all costs incidental to the institution and
defending of the suit.
3.Right to recover sums paid under compromise he is entitled to recover all amounts which he
had paid under the terms of the compromise of such suit. However, the compensation must not
be against the directions of the indemnifier. It must be prudent and authorized by the
indemnifier.
4.Right to sue for specific performance he is entitled to sue for specific performance if he has
incurred absolute liability and the contract covers such liability. 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

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It is important to note here that the right to indemnity cannot be claimed of dishonesty, lack of
good faith and contravention of the promisors request. However, the right cannot be negatived
in case of oversight. [Yeung v HSBC]

Right of Indemnifier
Section 125 of the Act only lays down the rights of the indemnified and is quite silent of the
rights of indemnifier as if the indemnifier has no rights but only liability towards the
indemnified.
In the logical state of things if we read Section 141 which deals with the rights of surety, we can
easily conclude that the indemnifiers right would also be same as that of surety.
Where one person has agreed to indemnify the other, he will, on making good the indemnity, be
entitled to succeed to all the ways and means by which the person indemnified might have
protected himself against or reimbursed himself for the loss. [Simpson v Thomson]
Principle of Subrogation is applicable because it is an essential part of law of indemnity and is
based on equity and the Contract Act contains no provision in contravention with [Maharaja Shri
JarvatSinghji v Secretary of State for India]

CHAPTER 3
Contract of Guarantee
A "contract of guarantee " is a contract to perform the promise, or discharge the liability, of a
third person in case of his default. The person who gives the guarantee is called the " surety";the
person in respect of whose default the guarantee is given is called the " principal debtor ", and
the person to whom the guarantee is given is called the " creditor ". A guarantee may be either
oral or written.

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Consideration for guarantee.-Anything done, or any promise made, for the benefit of the
principal debtor, may be a sufficient consideration to the surety for giving the guarantee.
Now we will take up the contract of Guarantee. The contract of the guarantee is a contract in
which there are three parties. You should
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understand first of all the specialty of this contract is
there are three parties in a contract. One is known as the principal debtor another party is known
as the creditor and the third party is a surety. Now word surety here stands for the person who
gives the guarantee, principal debtor is a person who gets the loan from the creditor and the
creditor is a person who gives the loan to the debtor. So in the contract of guarantee, when there
are three parties there are three contracts. This is the basic and very interesting feature of the
contract of guarantee. First of all we would like to study the definition which is given in the law.
The term contract of guarantee is defined in section 126 of Indian Contract Act. It says the
contract of guarantee is a contract to perform the promise or discharge the liability of the third
person in case of default. If we analyze the definition we find that in the contract of guarantee
there is a promise by one party. One party undertake a promise that in case the debtor makes a
default, he will compensate or he will fulfill the promise. Now if we put the three parties into the
picture, then who promises in the contract of guarantee the surety promises to the creditor that in
case the debtor makes a default in the making the payment on a due date the surety will make the
payment to the creditor. So first of all we had to understand that there is a major and first of all
contract is between the debtor and the creditor, one contract is between the debtor and the
creditor ,another one between the creditor and the surety and the third is between the surety and
the debtor. So there are three parties and there are three contracts. And the surety promises to the
creditor that in case debtor make default in making the payment on the due date, the surety will
do payment.

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Essentials of Contract of Guarantee

What are the essentials of the contract of guarantee? As we mentioned they are the special
contracts and we have derived the special contract from the general principal of the law. They
must fulfill all the valid essentials for the first in the foremost essential of the contract of
guarantee is the contract of guarantee must have all the essentials of the valid contract. Second is
the party should be competent to contract. We have studied that parties to contract should be
competent to enter into the contract. In the contract of guarantee, party should Page of also be
competent to contract, because if the surety is not competent to contract and if he gives the
guarantee and suppose the principal debtor commits a fault then who will be at the
disadvantageous position, very simple creditor will be a at disadvantageous position, because
when creditor will go to the debtor to get the money. Debtor will say I am not in position to
return the money. Creditor now come to the surety that debtor has made a default please give me
the money and surety says I am minor, I have no property. Then who will be at the losing front
or who will lose the game. The creditor will be at a disadvantageous position. But suppose the
debtor is minor and surety gives the guarantee to the creditor and on the due date the creditor
goes to the debtor to get the money and he refuses to pay the money. Creditor comes to the
surety, surety makes the payment. And when surety goes to get the money from the debtor, he
says I am a minor. Who will be the looser? The surety will be the looser but therefore we
mention the parties to the contract in the contract of guarantee should be competent to contract
and in the interest of the creditor better it is that surety is competent to enter into the contract.
Another essential is that this contract should be supported by the consideration. We have studied
the meaning of consideration. Consideration means something in exchange. Let us take an
example. Debtor goes to the creditor to get the money. Say for example 1 lakh rupees have been
given by the creditor to debtor at the rate of 2%, interest rate is 2% and surety is giving the
guarantee. The consideration for the creditor is rate of interest which he is earning on the loan,
the consideration for the debtor is he is getting the loan. But what is the consideration for the
surety? Law here presumes the consideration for the surety is that when he gave the guarantee
because of his guarantee the debtor got the loan that is the consideration for him. But remember
consideration has to be present. There cannot be any contract of guarantee where the
consideration is absolutely not available. Another essential element of the contract of guarantee

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is that it should not be obtained by the misrepresentation. The misrepresentation here does not
mean the creditor and debtor should disclose all the facts of the contract of guarantee. But here
the misrepresentation means those materials facts for which surety will be liable. The matters
which are related to the surety, the matter related to his interest that should not be
misrepresented. So in the contract of guarantee there should not be any misrepresentation. Now
we move on to anotherPage of point and that is the contract of guarantee should not conceal
anything. There is a difference between misrepresentation and concealment of fact. As you know
sometime it is the prime duty of the creditor to mention certain things to the surety when he is
getting the surety for the loan which he has sanctioned to the debtor. And he deliberately avoids
certain things, he conceals certain things which are necessary to be mentioned to the surety if he
conceals something that contract will be an invalid. The promise to pay must be conditional is
another essential in the contract of guarantee. This says that the payment by the surety should be
conditional meaning thereby when on the due date the debtor commits a fault, then the surety
comes into the picture. If the surety wants to make the payment for that the debtor should
commit the default. It is the condition that on the default of the debtor the surety will make the
payment to the creditor. On the due date the creditor cannot directly go to the surety. He has to
go to the debtor and will ask for the loan and if the debtor commits a fault then he will go to the
surety. Though he can file a suit on the debtor. He can file a suit on a surety or he can file a suit
on both of them. But surety blame liability to pay will be a conditional and that will be the
default on the debtor. The last but not the least is the contract of guarantee should be written or
oral but it is always in the interest of the parties that contract should be written.

Sureties liability:-
The liability of the surety is coextensive with that of the principal debtor, unless it is otherwise
provided by the contract.
Discharge of surety by variance in terms of contract.
Any variance, made without the sureties consent, in the terms of the contract between the
principal 1[debtor] and the creditor, discharges the surety as to transactions subsequent to the
variance.

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Discharge of surety by release or discharge of principal debtor:-
The surety is discharged by any contract between the creditor and the principal debtor, by which
the principal debtor is released or by any act or omission of the creditor, the legal consequence of
which is the discharge of the principal debtor.
Discharge of surety when creditor compounds with, gives time to, or agrees not to sue,
principal debtor.-
A contract between the creditor and the principal debtor, by which the creditor makes a
composition with, or promises to give time to, or not to sue, the principal debtor, discharges the
surety, unless the surety assents to such contract.
Surety not discharged when agreement made with third person to give time to principal debtor.
Where a contract to give time to the principal debtor is made by the creditor with a third person,
and not with the principal debtor, the surety is not discharged.
Release of one co-surety does not discharge others.-
Where there are co-sureties, a release by the creditor of one of them does not discharge the
others; neither does it free the surety so released from his responsibility to the other sureties.
Discharge of surety by creditors act or omission impairing sureties eventual remedy.
Guarantee obtained by misrepresentation invalid.
Any guarantee which has been obtained by means of misrepresentation made by the creditor, or
with his knowledge and assent, concerning a material part of the transaction, is invalid.
Guarantee on contract that creditor shall not act on it until co-surety joins
Where a person gives a guarantee upon a contract that the creditor shall not act upon it until
another person has joined in it as co-surety, the guarantee is not valid if that other person does
not join.

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Co-sureties liable to contribute equally.
Where two or more persons are CO-sureties for the same debt or duty, either jointly or severally,
and whether under the same or different contracts, and whether with or without the knowledge of
each other, the co-sureties, in the absence of any contract to the contrary, are liable, as between
themselves, to pay each an equal share of the whole debt, or of that part of it which remains
unpaid by the principal debtor1*.
Liability of co-sureties bound in different sums.-
Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their
respective obligations permit.
Types of Guarantee
Bid Bonds
Bid bonds are frequently demanded in connection with public invitations to tender. The purpose
of the bid bond is to prevent companies from tendering bids but not accepting or executing the
contract once it has been awarded to them. The buyer wishes to safeguard against the submission
of frivolous or unqualified tenders.
To make a claim under this guarantee, the beneficiary is generally required to declare in writing
that the bidder did not sign the relevant agreement within the defined time frame after being
awarded the contract, and/or did not provide the required performance bond.
Performance Bond
The performance bond serves as collateral for any costs incurred by the buyer if services or
goods are not provided promptly or as contractually agreed.
that the seller did not fulfill his or her contractual obligations properly or on time.
Advance Payment Guarantee
The advance payment guarantee serves as collateral for the reimbursement of an advance
payment made by the buyer in the event the seller does not supply the ordered goods at all or as
contractually agreed.

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that the seller did not fulfill his or her contractual obligations properly.
Warranty Bond
The warranty bond serves as collateral to ensure that ordered goods are delivered as
promised/agreed.
that the exporter did not fulfill his or her warranty obligations as contractually agreed.
Letter of Indemnity (LOI)
Transportation documents known as bills of lading can be lost or delayed in the mail. However, a
carrier may be liable for damages if it delivers a consignment before receiving the original bill of
lading. The damages covered by the guarantee can arise if the presenter of the bills of lading
demands that goods be handed over that have already been delivered to a third party in return for
the provision of a bank guarantee. This can lead to court, legal, and other costs. Parties generally
agree that the guarantee covers between 100% and 200% of the value of the goods, thus securing
the carrier against any costs.
Depending on the wording of the individual guarantee, asserting a claim generally requires that
the beneficiary issue a written statement that the amount required by the guarantee serves to
cover costs and/or claims for damages that have arisen as a result of the delivery of goods
without presenting the original bills of lading.
Payment Guarantee
The purpose of the payment guarantee is to assure the seller that the purchase price will be paid
on the agreed date. A payment guarantee can be issued as an alternative to a letter of credit.
However, it must be remembered that a payment guarantee does not offer the buyer the same
level of security as a documentary credit. The documents required under a bank guarantee are
merely checked against the details given in the guarantee itself, and not to the same extent as
with a letter of credit.
that he or she has fulfilled all of his or her contractual obligations but not received any payment
as of the due date.

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Credit Security Bond
The credit security bond serves as collateral for the repayment of a loan. A loan is often made
subject to the provision of collateral by the borrower him or herself or a third party.
The beneficiary can generally assert claims under this guarantee by declaring in writing that the
borrower has not repaid the loan upon maturity.
Rental Guarantee
The rental guarantee serves as collateral for payments in connection with a rental agreement. It is
either limited to the payment of rent installments or covers all payments owed in connection with
the rental arrangement (e.g. repair costs following the termination of the rental arrangement).
that the tenant did not fulfill his or her contractual obligations under the rental agreement
properly or at all.
Confirmed Payment Order
A confirmed payment order is an irrevocable obligation on the part of the bank to pay the
beneficiary (i.e. the creditor) a specific amount on a specific date on behalf of the client.

Some rights of Surety against principle debtor, Creditor& Co-
sureties in contract of guarantee:
Rights against Principle debtor
1. Right of Subrogation (section 140)
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: Rights of surety on payment or performance- where
a guaranteed debt has become due, or default of the principle debtor to perform a
guaranteed duty has taken place, the surety, upon payment or performance of all that he is
liable for, is invested with all the rights which the creditor had against the principle
debtor.
2. Right to Indemnity (section 145)
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: Implied promise to indemnify surety- in every contract
of guarantee there is an implied promise by the principle debtor to indemnify the surety
and the surety is entitled to recover from the principle debtor whatever sum he has
rightfully paid under the guarantee, but no sums which he had paid wrongfully.

4
Bare act the Indian contract act 1872 s.140

5
Bare act the Indian contract act 1872 s.145

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Rights against Creditor
1. Right of Securities (section 141)
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: Suretys right to benefit of creditors securities- A
surety is entitled to the benefit of every security which the creditor has against the
principle 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 loses, or without
the consent of the surety , parts with such security , the surety is discharged to the extent
of the value of the security.
2. Right to Share Reduction: this right be illustrated by the case of Hobson v. Bass.
J gave a guarantee to B in the following words I here guarantee to you the payment of
all the goods you may supply to E.H. , but so as my liability to you under this or any
other guarantee shall not at any time exceed the sum of $ 250 . E gave a similar
guarantee. B supplied goods to E.H. , to the amount of $ 657. E.H become bankrupt. B
proved the whole sum in the insolvency of E.H and then called on the guarantors who
paid him $250 each. Subsequently B received from the receivers a sum of 2s, and 1d. in
the pound of $657. It was held that each of the guarantors was entitled to a part of the
dividend bearing to the whole the same proportion as $250 to 657.
3. Right of Set Off: if the creditor sues the surety, the surety may have the benefit of the set-
off, if any, that the principle debtor had against the creditor. He is entitled to use the
defense of the debtor against the creditor.

Rights against Co-Sureties
1. Effect of releasing surety (section 138)
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: release of one co-surety does not discharge
others- where there are co-sureties, a release by the creditors of one of them does not
discharge the others, neither does it free the surety so released from his responsibility
to the surety.

6
Bare act Indian contract act s.141

7
Bare act Indian contract act s.138

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2. Right to contribution (section 146, 147)
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: co-sureties liable to contribute equally-
where 2 or more persons are co-sureties for the same debt or duty, either jointly or
severally, and whether under the same or different contract, and whether with or
without knowledge of each other, the co-sureties, in the absence of any contract to the
contrary, are liable as between themselves to pay each an equal share of the whole
debt, or of that part of it which remains unpaid by the principle debt.
Section 147 : Liability of co-sureties bound in different sums- co-sureties who are
bound in different sums are liable to pay equal as far as the limits of their respective
obligations permit.

CHAPTER 4

Difference between Indemnity and Guarantee

A contract of indemnity is one whereby a person promises to save the other from loss caused to
him by the conduct of the promisor himself or of any third person.For example ,a shareholder
executes an indemnity bond favoring the company thereby agreeing to indemnify the company
for any loss caused as a consequence of his own act.The person who gives the indemnity is
called the 'indemnifier' and the person for whose protection it is given is called the 'indemnity-
holder' or 'indemnified'. A contract of indemnity is restricted to cover the loss caused by the
promisor himself or by a third person.The loss must be caused by some human agency.Loss
arising from accidents like fire or perils of the sea are not covered by a contract of indemnity.
A contract of 'guarantee' is a contract,whether oral or written, to perform the promise, or
discharge the liability, of a third person in case of his default. A contract of guarantee involves
three persons,viz. a person who gives the guarantee is called the 'surety'; the person in respect of
whose default the guarantee is given called the 'principal debtor'; and the person to whom the
guarantee is given is called the 'creditor'. A contract of guarantee is a conditional promise by the
surety that if the principal debtor defaults he shall be liable to the creditor.

8
Bare act Indian contract act s. 146 and 147

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In a contract of indemnity there are two parties i.e. indemnifier and indemnified. A
contract of guarantee involves three parties i.e. creditor, principal debtor and surety.
An indemnity is for reimbursement of a loss, while a guarantee is for security of the
creditor.
In a contract of indemnity the liability of the indemnifier is primary and arises when the
contingent event occurs. In case of contract of guarantee the liability of surety is
secondary and arises when the principal debtor defaults.
The indemnifier after performing his part of the promise has no rights against the third
party and he can sue the third party only if there is an assignment in his favour. Whereas
in a contract of guarantee, the surety steps into the shoes of the creditor on discharge of
his liability, and may sue the principal debtor.

Some more difference between Contract of Indemnity and Guarantee-

Modern leases tend to include two separate covenants, one a covenant to guarantee and a second
indemnity covenant. This benefits the landlord because it makes it more difficult for the party
giving the guarantee and indemnity to argue that the obligation created is just a guarantee.
However, disputes could still arise as to the nature of the obligation created and the distinction is
one of substance, which will not be decided on the language alone.
An indemnity is a primary obligation. It is an express obligation to compensate someone for loss
or damage and is independent of the obligations of the party whose covenants are being
reinforced by the provision of the indemnity.
A guarantee is a secondary obligation. A guarantor will only be liable on a guarantee if the party
whose obligations have been guaranteed has failed to perform its primary obligations.
An indemnity has advantages over a guarantee because of the primary nature of the obligation
which will become clear below.
Creation of indemnities and guarantees
In order for a guarantee to be valid it must meet certain requirements.
A guarantee must be:-
in writing or evidenced in writing

19

signed by the guarantor
There are no formal requirements for creating a valid indemnity, so it could be oral, or in writing
but not signed. However, an indemnity would still have to meet the requirements for a valid
contract as it (in common with a guarantee) is only enforceable as a contractual obligation.
Therefore, there must be offer and acceptance, and consideration. In addition, the parties must
have intended to enter into a legal relationship with each other.
Because the agreement by the guarantor/indemnifier
9
in relation to a lease is generally contained
in the lease itself and commercial leases are executed as deeds, problems about whether or not a
guarantee and/or indemnity has been validly created rarely arise in practice.
In a recent case between Trustees of Beardsley Theobalds Retirement Benefit Scheme and
Joshua Yardley, though, the court found that even if the lease was unenforceable as a deed, it
would still have been enforceable as a contract in writing, so long as the landlord could show that
that contract was supported by consideration. The consideration was the landlord granting the
lease, which was the detriment moving from them, on terms that the lessee procured a guarantor
of the rent who was a director of the lessee company, which is the benefit moving from both the
lessee and the guarantor.
Similarly the question of whether the guarantee or indemnity complies with the basic contractual
requirements is answered by their being created by deed.
Consequently, the issue of whether or not there is a valid guarantee is more likely to arise in the
context of a commercial landlord/tenant situation where a tenant is in occupation without having
executed a lease - for example, where a landlord has allowed a tenant into occupation before a
lease has been executed possibly with heads of terms in writing or correspondence between the
landlord and tenant, including reference to a guarantor. It is unlikely that the guarantor will have
signed the heads of terms, with the result that the landlord will not have the benefit of a valid
guarantee. Equally, it is very unlikely that an indemnity would have been given orally by a third
party directly to the landlord and, even if it had, the landlord would face the evidential problem

9
th
Publication (p.646)


20

of proving that the conversation took place. It would also have to prove the basic contractual
requirements mentioned above.

Variations to the terms of a lease
A guarantor's liability is linked with the underlying obligations of the tenant. This means that
care must be taken where the terms of the lease are varied. A guarantee will be discharged if
there has been any substantial variation in the terms of the lease without the consent of the
guarantor. Therefore, consent in writing should always be obtained.
This principle does not apply to an indemnity since this is a primary liability. The variation of a
lease will not discharge the obligations of the person that has given the indemnity. Nevertheless
it would be prudent to obtain the consent of the indemnifier to the variation. In practice, where
the guarantor of a tenant's obligations has also given an indemnity covenant and has consented in
writing to the variation, no further agreement is required.
Guarantors have been released from liability under guarantees in the following circumstances:-

where the landlord granted the tenant a revocable license to widen the permitted use of the
demised property, as in a case between Howard de Walden Estates and Pasta Place in 1995
where the landlord and tenant agreed a surrender of part of the premises comprised in a lease
without the consent of the guarantor , as in an 1887 case between Holme and Brunskill
If a landlord allows a tenant to pay rent late without obtaining written and signed consent from
the guarantor, this may be seen as 'giving time' to the tenant which may operate to discharge the
guarantee (although the position may be different if the lease states that the guarantee will not be
affected by any time given by the landlord to the tenant to make payments).
However, a variation which is not substantial (ie one which does not affect the terms of the
principal obligations and is self-evidently beneficial to the guarantor) will not affect the
guarantor's secondary contract. This was established in a case between Metropolitan Properties
Co Regis Ltd and Bartholomew in 1995.
From a litigator's point of view, variation of the terms of a lease is one of the first things
considered when advising a landlord or guarantor in relation to the guarantor's liability because
this can provide a good defense to a guarantor. However, if the guarantor also gave an

21

indemnity, it will not have a defense to a claim under the indemnity on the grounds of variation.
The importance of the indemnity is clear in this situation.

Discharge of obligations of guarantor and indemnifier
In general terms, if the tenant is discharged from performance of its covenants by the landlord
the liability of the guarantor will also be discharged. This is not the case with an indemnity.

Bankruptcy/insolvency
The situation on the tenant's insolvency is of particular interest in the current economic climate.
To summaries the position, neither the bankruptcy of a tenant who is an individual nor the
liquidation of a tenant company will release a guarantor.
However, if a liquidator disclaims the lease (on the basis it is 'onerous property'), the House of
Lords has confirmed in a case of between Hindcastle Ltd and Barbara Attenborough Associates
Ltd in 1997 that a disclaimer operates only in relation to the liability of the company to which it
relates, i.e. the tenant, and does not affect the liability of any third party such as a guarantor.
Therefore a guarantor will remain liable following disclaimer, as will an indemnifier.


22

Conclusion:
Indemnity and Guarantee have this common features that both are devices for providing
protection against the probable loss. In either case the loss may arise due to human conduct.
However , the techniques of providing protection, the need and occasion for protection and the
number of parties involved mark some difference between them. Guarantee and Indemnity,
which are also describe as securities, are distinct arrangement under which a third party, the
surety, agrees to assume liability if the debtor default or causes loss to the creditor. The former
arrangement is a guarantee, the latter involves an Indemnity.


23

References:
Bibliography-
Bare act The Indian Contract Act, 1872 (9 of 1872)
Law of specific Relief By S.C.Banerjee 12
th
Edition 2013, 105
th
year of publication
th
Publication

Websites-
http://www.ehow.com/info types-contract-indemnity.html
http://www.fin.gov.bc.ca/
https://www.tarion.com/

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