Business Law Final Project

Contract of Indemnity is better than Contract of

Guarantee
Submitted by:
Haseeb Abbasi (18236)
Umar Afridi

(18281)

Syed Faraz

(18024)

M.Usman

(18110)

Abdul Saboor

(18097)

Absaar Ansari

(18017)

Submitted to:
Miss. Nuzhat Mehmood

1 | Page

Acknowledgements
We would sincerely like to thank Miss Nuzhat Mehmood for
being so cooperative and encouraging throughout the
semester, she has delivered the course very loyally and
sincerely due to which we have a good understanding of our
course, this project has given us a wider and informative
prospect, it was really a reflective and a thought provoking
project.
Finally, we would like to thank our family and friends for
supporting us during the research of this project and for
contributing valuable inputs to the research work.

2 | Page

Table of Contents
S.No
.

Content

Page

1.

Contract of Guarantee

2.

Contract of Indemnity

3.

Case Studies

4.

Analysis

10

5.

Conclusion

11

3 | Page

Contract of Indemnity is better than Contract of

Guarantee
Contract of Guarantee:
Section 126 provides that, A contract of guarantee is a contract to
perform the promise or discharge the liability of a third person in case of
his default.
Example:
Mr. Moin requested Mr. Ejaz to lend 10 lac rupees to Mr. Umar. If Mr.
Umar fails to pay 10 lac rupees to Mr. Ejaz on time then Mr. Moin has to
perform the contract on behalf of Mr. Umar because Mr. Moin acted as
guarantor in this contract.
Explanation:
There are three parties in a contract of guarantee
1. Surety (guarantor)
2. Creditor
3. Principal debtor

Types of Guarantee

Simple Guarantee:
A guarantee which extends to a single transaction is called simple or
specific transaction.

Continuing Guarantee:
A guarantee which extends to a series of transactions is called
continuing guarantee.

4 | Page

Contract of Indemnity:
According to Sec. 124 of Contract Act A contract by which one party
promises to save the other from the loss caused to him by himself or by
other person is called the contract of indemnity.
Example
Ali parked his car in a parking garage but he loses his token given by
security guard. To get the car Ali promises security guard for
compensation against the loss if any other person claims the car.
Explanation:
There are two parties in a contract of indemnity:
1. Indemnifier
2. Indemnity holder

5 | Page

Case Study
Bank Guarantee:
Bank guarantee is an independent and distinct contract between the
bank and the beneficiary and is not qualified by the underlying
transaction and the validity of the primary contract between the person at
whose instance the bank guarantee was given and the beneficiary.
Unless fraud or special equity present, the beneficiary cannot be
restrained from encasing the bank guarantee even if dispute arises in
performance of the contract.

FACTS:
The petitioner/appellant (A) had undertaken to do some construction for
the defendant/respondent(R) and as per the terms of the contract had
furnished a bank guarantee (BG) for faithful performance and for getting
mobilization advance against the construction contract. The
constructions were to be done within a given time but a failed to do so. R
sought to encase the Bank Guarantee. A resorted to arbitration and
while it was pending prayed in High Court that BG should not be
invoked.

CONTENTIONS: (Appellant):
Since the amount due and payable by A was not determined in the suit,
BG could not be invoked.
R had played fraud on A in entering into the contract and seeking
extension of the time. After the promise, to extend time for construction
and extension of BG, the contract was terminated.

ISSUE:
6 | Page

Whether A had made out any case of irreparable injury by proof of

special equity or fraud so as to invoke the jurisdiction of the Court by
way of injunction to restrain R from encasing the bank guarantee?

HELD:
High Court (rejected the contentions, dismissed the petition, answered
the issue in negative)

SUPREME COURT:

It is not a case of fraud but one of acting in terms of contract.

All the clauses of, the contract of the bank guarantee are to be read
together. The Bank unconditionally and irrevocably promised to pay, on
demand, the amount of liability undertaken in the guarantee without any
demur or dispute in terms of the bank guarantee. Final adjudication is
not a pre-condition to invoke the bank guarantee and that is not a
ground to issue injunction restraining the beneficiary to enforce the bank
guarantee. The liability of, the bank is absolute and unequivocal and
bank should not be concerned with the ultimate decision of a court in
such cases.

7 | Page

Claiming Indemnity
FACTS:
Plaintiff (P) got a plot of land on lease from municipal corp. P allowed
Defendant (D) to erect building on that land. D, in this course, incurred
debt of Rs.5000 from building material supplier (K), twice. On both the
occasion, P mortgaged part of the land to K. P, on Ds request
transferred the land to D, on the consideration that he (P) would be
discharged of all the liabilities arising out of that land. D failed to adhere
to his consideration. P filed a suit for discharge of liabilities on him,
alleging D to be indemnifier.
ISSUE: Whether the suit for indemnity was premature as P had not yet
incurred any loss as such?

CONTENTIONS (Defendant):
As per section 124, the promisor promises to safeguard the other from
the damage that is caused to him, not the damage which may because

8 | Page

to him. Since there is no damage to the plaintiff as yet, P is not entitled

to sue the indemnifier.

The liability of the plaintiff is not absolute but contingent. There is nothing
to show that if the mortgagee was to sue to enforce his mortgage and
the property was sold, there would be any deficit for which the plaintiff
would be liable.

HELD (High Court):

Section 124 deals only with one particular kind of indemnity in which the
loss is caused by the conduct of the indemnifier himself or of other
person, but does not cover the cases outside this or cases when liability
arises because of something done by the indemnified at the request of
the indemnifier. S 124 talks about subsequent conduct but here the
liabilities were past, i.e. prior to the date when the contract was actually
entered into force. Earlier to this contract, all the acts were done merely
on request and without any consideration and hence, were not binding.
Therefore s.124 is inapplicable here.
Under both the mortgage and the further charge there is a personal
covenant by the plaintiff to pay the amount due, and it would be open to
9 | Page

the mortgagee to sue the plaintiff on the personal covenant reserving his
rights under the security. Therefore, the liability of the plaintiff under the
personal covenant is absolute and unconditional.
Principles of equity (as applied in English Courts) can be applied here to
relieve P from all the liabilities (as ICA is not exhaustive of the law of
indemnity)

Analysis of Cases
LAW POINT
Bank guarantee is an independent and distinct contract between the
bank and the beneficiary and is not qualified by the underlying
transaction and the validity of the primary contract between the person at
whose instance the bank guarantee was given and the beneficiary.
Unless fraud or special equity present, the beneficiary cannot be
restrained from encasing the bank guarantee even if dispute arises in
performance of the contract.
So therefore Contract of Indemnity is better than contract of Guarantee.

10 | P a g e

Conclusion
This report basically belongs to the contract of Guarantee and indemnity
and their implications and clauses, that what legal and lawful action will
be taken if breach of terms and conditions between the parties. This
report also mentions the types/classifications of contract of guarantee
and indemnity. There are two cases explained in this report as an
example and discussed as reference cases. It also explains the legal
factor in the case of failure of beneficiary case.

11 | P a g e