“CONTRACT OF INDEMNITY AND GUIRANTY”

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Project proposed by Abhishek Kumar Project proposed to Mr. Vijay kumar vimal

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Roll.no: 1805

Semester: 3rd

b SUBJECT:- CONTRACT- II

s Project submitted in the final fulfilment for the degree- B.B.A., L.L.B (Hons.)

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e
s
Month of submission: August

Year of submission: 2018

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CHANAKYA NATIONAL LAW UNIVERSITY, NYAYA NAGAR, MITHAPUR, PATNA –
800001

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DECLARATION

I, Abhishek Kumar, student of Chanakya National Law University, hereby declare that the project
work entitled “contract of indeminity and guirenty.” submitted to the Chanakya National Law
University, Patna is a record of an original work done by me under the guidance of Mr. vijay kumar
vimal, teacher in subject, Chanakya National Law University, Patna.

THANK YOU,
NAME: Abhishek Kumar
COURSE: B.B.A., LL.B. (Hons.)
ROLL NO: 1805
SEMESTER –3rd
SESSION- 2017-2022
ACKNOWLEDGEMENTS

I would especially like to thank my guide, mentor, Mr. Vijay kumar vimal without whose constant
support and guidance this project would have been a distant reality.

This work is an outcome of an unparalleled infrastructural support that I have received from
Chanakya National Law University, Patna.
I owe my deepest gratitude to the library staff of the college.

It would never have been possible to complete this study without an untiring support from my
family, specially my parents.

This study bears testimony to the active encouragement and guidance of a host of friends and well-
wishers.

THANK YOU,
NAME: Abhishek Kumar
COURSE: B.B.A., LL.B. (Hons.)
ROLL NO: 1805
SEMESTER – 3rd
SESSION- 2017-2022
OBJECTIVE OF THE STUDY:

The project in question deals with the topic in relation with the significance of contract of indemnity
and gairenty. The researcher intends to explain the meaning, origin, evolution and development
indemnity and gairenty in deciding over any breach of contract.

HYPOTHESIS:

1) contract of indemnity and gairenty protects the right of individual.

RESEARCH METHODOLOGY:

The researcher has followed doctrinal method of research in pursuance of the project.

SOURCES OF DATA:

Primary and Secondary sources of data have been used in the pursuance of the project.

*Primary sources: indiancontract act, Cases, Judgements.

*Secondary sources: Newspaper articles, books, websites, commentaries and reviews.

LIMITATIONS OF THE STUDY:

In the pursuit of the project, the researcher faced time, monetary & territorial limitations.

CHAPTERISATION

1.) introduction of contract.

2.) indeminity: Meaning and defination.

3.) Gairenty : meaning and defination

4.) indeminity and gairenty under indian legal system.

5.) Difference between indeminity and gairenty.

6.) conclussion and Suggestions

INTRODUCTION

A contract is a promise or set of promises that are legally enforceable and, if violated, allow the
injured party access to legal remedies1. Contract law recognises and governs the rights and duties
arising from agreements.2 In the Anglo-American common law, formation of a contract generally
requires an offer, acceptance, consideration, and a mutual intent to be bound. Each party must have
capacity to enter the contract3. Although most oral contracts are binding, some types of contracts
may require formalities such as being in the form of a signed, dated written agreement in order for a
party to be bound to its terms. In the civil law tradition, contract law is a branch of the law of
obligations.

FORMATION

At common law, the elements of a contract are offer, acceptance, intention to create legal relations,
and consideration. Not all agreements are necessarily contractual, as the parties generally must be
deemed to have an intention to be legally bound. A so-called gentlemen's agreement is one which is
not intended to be legally enforceable, and which is "binding in honour only".

A contract consists of following

1) Offer and acceptance:-

In order for a contract to be formed, the parties must reach mutual assent (also called a meeting of
the minds). This is typically reached through offer and an acceptance which does not vary the offer's
terms, which is known as the "mirror image rule". An offer is a definite statement of the offeror's
willingness to be bound should certain conditions be met. If a purported acceptance does vary the
terms of an offer, it is not an acceptance but a counteroffer and, therefore, simultaneously a rejection
of the original offer.

2) Intention to be legally bound:-

In commercial agreements it is presumed that parties intend to be legally bound unless the parties
expressly state the opposite as in a heads of agreement document. For example, in Rose & Frank
Co v JR Crompton & Bros Ltd an agreement between two business parties was not enforced because
an 'honour clause' in the document stated "this is not a commercial or legal agreement, but is only a
statement of the intention of the parties".
1 "Case Note - Contract Law - Rule of Law Institute of Australia". Rule of Law Institute of Australia. 2018-
05-31. Retrieved 2018-09-14.
2 Ryan, Fergus (2006). Round Hall nutshells Contract Law. Thomson Round Hall.
p. 1. ISBN 9781858001715.
3 "Contracts". www.lawhandbook.sa.gov.au. Retrieved 2018-09-14.
In contrast, domestic and social agreements such as those between children and parents are typically
unenforceable on the basis of public policy.

3)Consideration

A concept of English common law, consideration is required for simple contracts but not for special
contracts (contracts by deed). The court in Currie v Misa4 declared consideration to be a “Right,
Interest, Profit, Benefit, or Forbearance, Detriment, Loss, Responsibility”. Thus, consideration is a
promise of something of value given by a promissor in exchange for something of value given by a
promisee; and typically the thing of value is goods, money, or an act. Forbearance to act, such as an
adult promising to refrain from smoking, is enforceable only if one is thereby surrendering a legal
right.5

In Dunlop v. Selfridge Lord Dunedin adopted Pollack's metaphor of purchase and

sale[clarification needed] to explain consideration. He called consideration 'the price for which the
promise of the other is bought'.

4) capacity

Sometimes the capacity of either natural or artificial persons to either enforce contracts, or have
contracts enforced against them is restricted. For instance, very small children may not be held to
bargains they have made, on the assumption that they lack the maturity to understand what they are
doing; errant employees or directors may be prevented from contracting for their company, because
they have acted ultra vires (beyond their power). Another example might be people who are
mentally incapacitated, either by disability or drunkenness.

CONTRACT OF INDEMNITY

DEFINITION
: The term indemnity means to compensate or make good the loss. Section124 provides that “A
contract by which one party promises to save the other from losscaused to him by the conduct of the
promisor himself or by the conduct of any other person is called a contract of indemnity.”

4Currie v Misa (1875) LR 10 Ex 893

5 Bronaugh R. (1976). Agreement, Mistake, and Objectivity in the Bargain Theory of Conflict. William &
Mary Law Review.
ESSENTIALS OF CONTRACT OF INDEMNITY:
1-It must contain all the essentials of a valid contract of indemnity .
2-It is a contract between two parties. One person promises to sale the other from any
loss which he may suffer6.
3-The loss may be caused by the conduct of the promisor himself or any other person.
4-The conduct of indemnity may be expressed or implied.

RIGHT OF INDEMNITY HOLDER :

(section 125)
1-He can recover all damages which he may be compelled to pay in respect of anysuit
filed against him.
2-He can recover expenses in respect of any suit filed by him with the authority
of indemnifier.
3-He can recover all expenses which he might have paid as a result of anycompromise
which was made with the consent of indemnifier.

RIGHTS OF IMDENIFIER :
There is no provision in law about the rights of indemnifier. However the rights of indemnifier are
the same as the rights of guarantor. It is a principal of law that where one person has agreed to
indemnify, another, his rights will be similar to the rights of guarantor.
Indemnity is a contractual obligation of one party (indemnifier) to
compensate the loss occurred to the other party (indemnity holder) due to the act of the indemnitor
or any other party. The duty to indemnify is usually, but not always, coextensive with a the
contractual duty to "hold harmless" or "save harmless". In contrast, a guarantee is an obligation of
one party assuring the other party that guarantor will perform the promise of the third party if it
defaults.

Indemnities form the basis of many insurance contracts; for example, a car owner may
purchase different kinds of insurance as an indemnity for various kinds of loss arising from
operation of the car, such as damage to the car itself, or medical expenses following an accident. In
an agency context, a principal may be obligated to indemnify their agent for liabilities incurred
while carrying out responsibilities under the relationship. While the events giving rise to an
indemnity may be specified by contract, the actions that must be taken to compensate the injured
party are largely unpredictable, and the maximum compensation is often expressly limited.

6 Sweigart, Raymond. "English Indemnity Law–Parsing the Promise: Words Are Important, But So Are
Actions". Pillsbury Winthrop Shaw Pittman. Retrieved 26 February 2015.
English comman law

Under section 4 of the Statute of Frauds (1677), a "guarantee" (an undertaking of secondary
liability; to answer for another's default) must be evidenced in writing. No such formal requirement
exists in respect of indemnities (involving the assumption of primary liability; to pay irrespective of
another's default) which are enforceable even if made orally. (Ref: Peel E: "Treitel, The Law of
Contract")

Under current English law, indemnities must be clearly and precisely worded in the contract
in order to be enforceable.Since 1977, the Unfair Contract Terms Act s4 stated that a consumer
cannot be made to unreasonably indemnify another for their breach of contract or negligence,
however this section was repealed by the Consumer Rights Act 2015 sch 4 para 6.

Contract award

In England and Wales an "indemnity" monetary award may form part of rescission during an action
of restitutio in integrum. The property and funds are exchanged, but indemnity may be granted for
costs necessarily incurred to the innocent party pursuant to the contract. The leading case
is Whittington v Seale-Hayne,7 in which a contaminated farm was sold. The contract made the
buyers renovate the real estate and, the contamination incurred medical expenses for their manager,
who had fallen ill. Once the contract was rescinded, the buyer could be indemnified for the cost of
renovation as this was necessary to the contract, but not the medical expenses as the contract did not
require them to hire a manager. Were the sellers at fault, damages would clearly be available.

The distinction between indemnity and damages is subtle may be

differentiated by considering the roots of the law of obligations: how can money be paid where
the defendant is not at fault? The contract before rescission is voidable but not void, so, for a period
of time, there is a legal contract. During that time, both parties have legal obligation. If
the contract is to be voided ab initio the obligations performed must also be compensated.
Therefore, the costs of indemnity arise from the (transient and performed) obligations of the
claimant rather than a breach of obligation by the defendant.8

7 (1900) 82 LT 49
8 Furmston, M, Law of Contract, ed11 (2001).
GUATANTEE

Guarantee is a legal term more comprehensive and of higher import than either warranty or
"security". It most commonly designates a private transaction by means of which one person, to
obtain some trust, confidence or credit for another, engages to be answerable for him. It may also
designate a treaty through which claims, rights or possessions are secured. It is to be differentiated
from the colloquial "personal guarantee" in that a Guarantee is a legal concept which produces an
economic effect. A personal guarantee by contrast is often used to refer to a promise made by an
individual which is supported by, or assured through, the word of the individual. In the same way, a
guarantee produces a legal effect wherein one party affirms the promise of another (usually to pay)
by promising to themselves pay if default occurs.

At law, the giver of a guarantee is called the surety or the "guarantor". The
person to whom the guarantee is given is the creditor or the "obligee"; while the person whose
payment or performance is secured thereby is termed "the obligor", "the principal debtor", or simply
"the principal".

Suretys have been classified as follows:

1.Those in which there is an agreement to constitute, for a particular purpose, the relation of
principal and surety, to which agreement the secured creditor is a party;
2.those in which there is a similar agreement between the principal and surety only, to which the
creditor is a stranger;
3.those in which, without any such contract of suretyship, there is a primary and a secondary
liability of two persons for one and the same debt, the debt being, as between the two, that of one of
those persons only, and not equally of both, so that the other, if he should be compelled to pay it,
would be entitled to reimbursement from the person by whom (as between the two) it ought to have
been paid.9

Civil law

According to various existing civil codes, a suretyship, when the underlying obligation is "non-
valuable", is null and void unless the invalidity is the result of personal incapacity of the principal
debtor10 In some countries, however, the mere personal incapacity of a minor to borrow suffices to
eliminate the guarantee of a loan made to him The Egyptian codes sanction guarantees expressly
entered into "in view of debtor's want of legal capacity" to contract a valid principal obligation The
Portuguese code retains the surety's liability, in respect of an invalid principal obligation, until the
9 Duncan Fox and Co. v. North and South Wales Bank, 6 App. Cas. 11
10 Codes Civil, France and Belgium, 2012; Spain, 1824; Portugal, 822; Italy, 1899; Netherlands, 1858;
Lower Canada, 1932
latter has been legally rescinded According to several codes civil sureties are divided into
conventional, legal and judicial,while the Spanish code further divides them into gratuitous and for
valuable consideration.

The German code civil requires the surety's promise to be verified by writing where he has
not executed the principal obligation. The Portuguese code renders a guarantee provable by all the
modes established by law for the proof of the principal contract According to most civil codes civil
a guarantee like any other contract can usually be made verbally in the presence of witnesses and in
certain cases (where for instance considerable sums of money are involved) sous signature
privee[jargon] or by a judicial or notarial instrument.11The French and Belgian Codes, moreover,
provide that suretyship is not to be presumed but must always be expressed

contract laws

In England the common-law requisites of a guarantee are the same as any other contract. The
mutual assent of two or more parties, competency to contract and valuable consideration.An offer to
guarantee must be accepted, either by express or implied acceptance. If a surety's assent to a
guarantee has been procured by fraud by the person to whom it is given, there is no binding
contract. Fraud may consist of suppression, concealment or misrepresentation. However, only facts
that are really material to the risk undertaken need be spontaneously disclosed. 12 The competency of
the parties to enter into a contract of guarantee may be affected by insanity or intoxication of the
surety, if known to the creditor, or by any disability. The ordinary disabilities are those of minors.

In some guarantees the consideration is "entire". For example, in consideration

for a lease being granted, the surety becomes answerable for the performance of the covenants of
the lease. In other cases it is "fragmentary" or supplied from time to time, as where a guarantee is
given to secure the balance of a running account at a bank, for goods supplied 13 When the
consideration is "entire", the guarantee runs on through the duration of the lease and is irrevocable.
When the consideration is "fragmentary", unless the guarantee stipulates to the contrary, the surety
may at any time terminate his liability under the guarantee.Total failure of consideration or illegal
consideration by the party giving a guarantee will prevent its being enforced. Though in all
countries the mutual assent of two or more parties is essential to the formation of any contract, a
consideration is not everywhere regarded as a necessary element. Thus in Scotland a contract may
be binding without a consideration to support it.14

11 See Codes Civil, France and Belgium 1341; Spain, 1244; Portugal 2506, 2513; Italy, 1341 et seq.;
Pothier's Law of Obligations, Evans's ed. i. 257; Burge on Suretyship, p. 19; van der Linden's Institutes of
Holland, p. 120
12 Seaton v. Burn and Burn v. Seaton, 1900 A.C. 135
13 Lloyd's v. Harper, 16 Ch. Div. 319
14 Stair i. to. 7
Liability

The liability incurred by a surety under his guarantee depends upon its terms, and is not necessarily
coextensive with that of the principal debtor. It is, however, obvious that the surety's obligation
cannot exceed that of the principal.By many existing civil codes, however, a guarantee which
imposes on the surety a greater liability than that of the principal is not invalidated but is merely
reducible to that of the principal.15 However, in India the liability of the surety is, unless otherwise
provided by contract, coextensive with that of the principal.

Where the liability of the surety is less extensive in amount than that of the
principal debtor, questions have arisen in England and America as to whether the surety is liable
only for part of the debt equal to the limit of his liability, or, up to such limit, for the whole debt.
The surety cannot be made liable except for a loss sustained by reason of the default guaranteed
against. Moreover, in the case of a joint and several guarantee by several sureties, unless all sign it
none are liable thereunder. The limit of the surety's liability must be construed so as to give effect to
what may fairly be inferred to have been the intention of the parties as expressed in writing. In cases
of doubtful import, recourse to parol evidence is permissible, to explain, but not to contradict, the
written evidence of the guarantee.

As a general rule, the surety is not liable if the principal debt cannot be
enforced. It has never been actually decided in England whether this rule holds good in cases where
the principal debtor is a minor and on that account is not liable to the creditor. When directors
guarantee the performance by their company of a contract which is beyond their authority, and
therefore not binding on the company, the directors' liability is enforceable against them
personally.16

liability

It is not always easy to determine for how long liability under a guarantee endures. Sometimes a
guarantee is limited to a single transaction, and is obviously intended to be security against one
specific default only. On the other hand, it as often happens that it is not exhausted by one
transaction on the faith of it, but extends to a series of transactions, and remains a standing security
until it is revoked, either by the act of the parties or by the death of the surety. It is then termed a
continuing guarantee.

15 Codes Civil, France and Belgium 2013; Portugal 823; Spain, 1826; Italy, 1900; Netherlands, 1859;
Lower Canada, 1933
16 Yorkshire Railway Waggon Co. v. Maclure, 21 Ch. D. 309 C.A.
No fixed rules of interpretation determine whether a guarantee is a continuing one or not, but each
case must be judged on its individual merits. Frequently, in order to achieve a correct construction,
it becomes necessary to examine the surrounding circumstances, which often reveal what was the
subject matter which the parties contemplated when the guarantee was given, and what was the
scope and object of the transaction between them. Most continuing guarantees are either ordinary
business securities for advances made or goods supplied to the principal debtor or else bonds for the
good behavior of persons in public or private offices or employment. With regard to the latter class
of continuing guarantees, the surety's liability is, generally speaking, revoked by any change in the
constitution of the persons to or for whom the guarantee is given. 17 In England the Commissioners
of Her Majesty's Treasury to vary the character of any security, for good behavior by the heads of
public departments given by companies for the due performance of the duties of an office or
employment in the public service.

Limitation of liability
Before the surety can be rendered liable on his guarantee, the principal debtor must have made
default. When, however, this has occurred, the creditor, in the absence of express agreement to the
contrary, may sue the surety, without informing him of such default having taken place before
proceeding against the principal debtor or resorting to securities for the debt received from the
latter. In those countries where the municipal law is based on the Roman law, sureties usually
possess the right (which may, however, be renounced by them) of compelling the creditor to insist
on the goods, etc. (if any) of the principal debtor being first "discussed," i.e., appraised and sold,
and appropriated to the liquidation of the debt guaranteed before having recourse to the
sureties. This right "accords with a common sense of justice and the natural equity of mankind". 18In
England this right has never been fully recognized, nor does it prevail in America and Scotland.

In England, however, before any demand for payment has been made by the
creditor on the surety, the latter can, as soon as the principal debtor has made default, compel the
creditor, on giving him an indemnity against costs and expenses, to sue the principal debtor if the
latter is solvent and able to pay. and a similar remedy is also open to the surety in America.In
neither of these countries nor in Scotland can one of several sureties, when sued for the whole
guaranteed debt by the creditor, compel the latter to divide his claim among the sureties, and reduce
it to the share and proportion of each surety. However, this beneficium divisionis, as it is called in
Roman law, is recognized by many existing codes.19

17 Government Offices (Security) Act 1875, Amended by the Statute Law Revision Act 1883
18 Mercantile Law Amendment Act (Scotland) 1856 §8
19 France and Belgium 2025-2027; Spain, 1837; Portugal, 835- 836; Germany, 426; Netherlands, 1873-
1874; Italy, 1911-1912; Lower Canada, 1946; Egypt [mixed suits], 615,616
Enforcement of liability
The usual mode in England of enforcing liability under a guarantee is by action in the High Court or
a County Court. It is also permissible for the creditor to obtain redress by means of a set-off
or counterclaim, in an action brought against him by the surety. On the other hand, the surety may
now, in any court in which the action on the guarantee is pending, avail himself of any set-off which
may exist between the principal debtor and the creditor. Moreover, if one of several sureties for the
same debt is sued by the creditor or his guarantee, he can, by means of a third-party complaint,
claim contribution from his co-sureties towards the common liability. Independent proof of the
surety's liability under his guarantee must always be given at the trial. The creditor cannot rely on
admissions made by or a judgment or award against the principal debtor.20

A person liable as a surety for another under a guarantee possesses rights against
the person to whom the guarantee was given. As regards the surety's rights against the principal
debtor, where the guarantee was made with the debtors consent but not otherwise, after he has made
default, be compelled by the surety to exonerate him from liability by payment of the guaranteed
debt.21 If the surety has paid any portion of the guaranteed debt, the surety is entitled to rank as a
creditor for the amount paid and to compel repayment.

In the event of the principal debtor's bankruptcy, the surety can in England act
against the bankrupt's estate, not only in respect of payments made before the bankruptcy of the
principal debtor, but also, it seems, in respect of the contingent liability to pay under the
guarantee.22 If the creditor has already acted, the surety who has paid the guaranteed debt has a right
to all dividends received by the creditor from the bankrupt in respect to the guaranteed debt, and to
stand in the creditor's place as to future dividends. The rights of the surety against the creditor are in
England exercisable even by one who in the first instance was a principal debtor, but has since
become a surety, by arrangement with his creditor.

Rights of surety against the creditor

The surety's principal right against the creditor entitles him, after payment of the guaranteed debt, to
the benefit of all securities which the creditor held against the principal debtor. If the creditor has
lost these securities by default or laches or rendered them otherwise unavailable, the surety is
discharged pro tanto. This right, which is not in abeyance till the surety is called on to pay extends
to all securities, whether satisfied or not.23 "[E]very person who being surety for the debt or duty of
another, or being liable with another for any debt or duty, shall pay such debt or perform such duty,

20 Ex parte Young In re Kitchin, 17 Ch. Div. 668

21 Antrobus v. Davidson, 3 Meriv. 569, 579; Johnston v. Salvage Association, 19 Q.B.D. 460, 461; and
Wolmershausen v. Gullick, 2 Ch. 514 (1893)
22 Rouse v. The Bradford Banking Co., 1894 A.C. 586
23 Dixon v. Steel, 1901, 2 Ch. 602
shall be entitled to have assigned to him, or to a trustee for him, every judgment, specialty, or other
security, which shall be held by the creditor in respect of such debt or duty, whether such judgment,
specialty, or other security shall or shall not be deemed at law to have been satisfied by the payment
of the debt or performance of the duty, and such person shall be entitled to stand in the place of the
creditor, and to use all the remedies, and, if need be, and upon a proper indemnity, to use the name
of the creditor, in any action or other proceeding at law or in equity, in order to obtain from the
principal debtor, or any co-surety, co-contractor, or co-debtor, as the case may be, indemnification
for the advances made and loss sustained by the person who shall have so paid such debt or
performed such duty; and such payment or performance so made by such surety shall not be
pleadable in bar of any such action or other proceeding by him, provided always that no co-surety,
co-contractor, or co-debtor shall be entitled to recover from any other co-surety, co-contractor, or
co-debtor, by the means aforesaid, more than the just proportion to which, as between those parties
themselves, such last-mentioned person shall be justly liable".The right of the surety to
be subrogated on payment by him of the guaranteed debt, to all the rights of the creditor against the
principal debtor is recognized in America and many other countries.24

Rights of surety against other sureties

A surety is entitled to contribution from a co-surety in respect of their common liability. This
particular right is not the result of any contract, but is derived from a equity, on the ground of
equality of burden and benefit, and exists whether the sureties be bound jointly, or jointly and
severally, and by the same, or different, instruments. There is, however, no right of contribution
where each surety is severally bound for a given portion only of the guaranteed debt; nor in the case
of a surety for a surety;25 nor where a person becomes a surety jointly with another and at the latter's
request. Contribution may be enforced, either before payment, or as soon as the surety has paid
more than his share of the common debt;26 and the amount recoverable is now always regulated by
the number of solvent sureties, though formerly this rule only prevailed in equity. In the event of the
bankruptcy of a surety, proof can be made against his estate by a co-surety for any excess over the
latter's contributive share. The right of contribution is not the only right possessed by co-sureties
against each other, but they are also entitled to the benefit of all securities which have been taken by
any one of them as an indemnity against the liability incurred for the principal debtor.The Roman
law did not recognize the right of contribution among sureties. It is, however, sanctioned by many
existing codes.27

24 Codes Civil, France and Belgium 2029; Spain, 1839; Portugal 839; Germany, - 994; Netherlands, 1877;
Italy, 1916; Lower Canada, 2959; Egypt [mixed suits], 617; ibid. [native tribunals], 505
25 Denton's Estate, 1904, 2 Ch. 178 C.A.
26 Wolmershausen v. Gullick, 1893, 2 Ch. 514
27 Code Civil France and Belgium 2033; Germany, 426,474; Italy, 1920; Netherlands, 1881; Spain, 1844;
Portugal 845; Lower Canada, 1955; Egypt [mixed suits], 618, ibid. [native tribunals], 506; Indian Contract
Act 1872, §§146-147
Discharge of liability
The most prolific ground of discharge of a guarantor usually arises from the creditor's conduct. The
governing principle is that if the creditor violates any rights which the surety possessed when he
entered into the suretyship, even though the damage is only nominal, the guarantee cannot be
enforced. The surety's discharge may be accomplished

(1) by a variation of the terms of the contract between the creditor and the principal debtor, or of
that between the creditor and the surety;

(2) by the creditor taking a new security from the principal debtor in lieu of the original one;

(3) by the creditor discharging the principal debtor from liability;

(4) by the creditor binding himself to give time to the principal debtor for payment of the
guaranteed debt; or

(5) by loss of securities received by the creditor in respect of the guaranteed debt.

The first four of these acts are collectively termed a novation. In general whatever extinguishes the
principal obligation necessarily determines that of the surety, not only in England but
elsewhere.28 By most civil codes the surety is discharged by conduct of the creditor inconsistent
with the surety's rights, although the rule prevailing in England, Scotland, America and India which
releases the surety from liability when the creditor extends without the surety's consent the time for
fulfilling the principal obligation, while recognized by two existing codes civil, is rejected by the
majority of them.29A revocation of the contract of suretyship by act of the parties, or in certain cases
by the death of the surety, may also operate to discharge the surety.

The death of a surety does not per se determine the guarantee, but, save where
from its nature the guarantee is irrevocable by the surety himself, it can be revoked by express
notice after his death, or by the creditor becoming receiving constructive notice of the death; except
where, under the testator's will, the executor has the option of continuing the guarantee, in which
case the executor should specifically withdraw the guarantee in order to terminate it. If one of a
number of joint and several sureties dies, the future liability of the survivors continues, at least until
it has been terminated by express notice. In such a case, however, the estate of the deceased surety
would be relieved from liability. The statute of limitations may bar the right of action on guarantees
subject to variation by statute in any U.S. state where the guarantee is sought to be enforced.

28 See Rickaby v. Lewis, 22 T.L.R. 130

29 Codes Civil France and Belgium 2039; Netherlands, 1887; Italy, 1930; Lower Canada, 1961; Egypt
[mixed suits], 613; ib. [native tribunals], 503); see Morice, English and Dutch Law, p. 96; van der
Linden, Institutes of Holland, pp. 120-121
Difference between contract of indemnity and contract of garanti

An indemnity, by contrast, accommodates simultaneous obligation with the principal although and
there is no compelling reason to “look first” at the principal. Generally it is an agreement that the
surety will hold the lender innocuous against all misfortunes emerging from the agreement between
the principal and the lender. Generally, a guarantee accommodates an obligation far-reaching with
that of the principal. At the end of the day, the guarantor can’t be at risk for much more than the
client. The document will be understood as a guarantee if, on its actual development, the
commitments of the surety are to “remained behind” the principal and just go to the fore once a
commitment has been broken as between the principal and the lender. The commitment is an
auxiliary one, reflexive in character. An indemnity emerges on event of an occasion, whereas a
guarantee emerges on default by a third party.30 Hence we have explained what indemnity and
guarantee means and on what grounds they differ on like the number of parties involved and the
nature of risks involved and we have also worked upon the small but significant differences both in
working and in principal between guarantee and indemnity. Therefore, though guarantee and
indemnity have a few similarities, they are inherently different in nature.

Indemnity and Guarantee are a type of contingent contracts, which are

governed by Contract Law. Simply put, indemnity implies protection against loss, in terms of
money to be paid for loss. Indemnity is when one party promises to compensate the loss occurred to
the other party, due to the act of the promisor or any other party. On the other hand, the guarantee is
when a person assures the other party that he/she will perform the promise or fulfill
the obligation of the third party, in case he/she default.The surety will be discharged from his liabilities by
invalidation of the contract ofguarantee in the following cases:1. Guarantee obtained by misrepresentation2.
Guarantee obtained by concealment3. Contract of guarantee without consideration4. Contract of guarantee where co-
surety fails to join the surety

When it’s about securing one’s interest while entering into the contract, people mostly go
for a contract of indemnity or guarantee. At first instance, these two will appear same, but there are
some differences between them. So if you are also interested to know about the differences between
guarantee and indemnity then let’s take a further read.

The following are the major differences between indemnity and guarantee:

1.In the contract of indemnity, one party makes a promise to the other that he will compensate for
any loss occurred to the other party because of the act of the promisor or any other person. In the

30 Peter Hallward. "Peter Hallward: Option Zero in Haiti. New Left Review 27, May-June 2004".
Newleftreview.org. Retrieved 2018-02-19.
contract of guarantee, one party makes a promise to the other party that he will perform the
obligation or pay for the liability, in the case of default by a third party.

2.Indemnity is defined in Section 124 of Indian Contract Act, 1872, while in Section 126, Guarantee
is defined.

3.In indemnity, there are two parties, indemnifier and indemnified but in the contract of guarantee,
there are three parties i.e. debtor, creditor, and surety.

4.The liability of the indemnifier in the contract of indemnity is primary whereas if we talk about
guarantee the liability of the surety is secondary because the primary liability is of the debtor.

5.The purpose of the contract of indemnity is to save the other party from suffering loss. However,
in the case of a contract of guarantee, the aim is to assure the creditor that either the contract will be
performed, or liability will be discharged.

6.In the contract of indemnity, the liability arises when the contingency occurs while in the contract
of guarantee, the liability already exists.

Example

Indemnity
Mr. Joe is a shareholder of Alpha Ltd. lost his share certificate. Joe applies for a duplicate one. The
company agrees, but on the condition that Joe compensates for the loss or damage to the company if
a third person brings the original certificate.
Guarantee
Mr. Harry takes a loan from the bank for which Mr. Joesph has given the guarantee that if
Harry default in the payment of the said amount he will discharge the liability. Here Joseph plays
the role of surety, Harry is the principal debtor and Bank is the creditor.
CONCLUSION

An indemnity, by contrast, accommodates simultaneous obligation with the principal although and
there is no compelling reason to “look first” at the principal. Generally it is an agreement that the
surety will hold the lender innocuous against all misfortunes emerging from the agreement between
the principal and the lender. Generally, a guarantee accommodates an obligation far-reaching with
that of the principal. At the end of the day, the guarantor can’t be at risk for much more than the
client. The document will be understood as a guarantee if, on its actual development, the
commitments of the surety are to “remained behind” the principal and just go to the fore once a
commitment has been broken as between the principal and the lender. The commitment is an
auxiliary one, reflexive in character. An indemnity emerges on event of an occasion, whereas a
guarantee emerges on default by a third party. Hence we have explained what indemnity and
guarantee means and on what grounds they differ on like the number of parties involved and the
nature of risks involved and we have also worked upon the small but significant differences both in
working and in principal between guarantee and indemnity. Therefore, though guarantee and
indemnity have a few similarities, they are inherently different in nature.

After having a deep discussion on the two, now we can say that these two types of contract are
different in many respects. In indemnity, the promisor cannot sue the third party, but in the case of
guarantee, the promisor can do so because after discharging the creditor’s debts he gets the position
of the creditor.

BIBLIOGRAPHY

BOOKS:-

1) Aggarwal S. K and Singhal K. (2006): Indian Business Laws , Second Edition pages 213-235. Galgotia
Publications, New Delhi,

2) Tulsian P. C. (2003):
Business Law,
Second Edition pages 12.1-12.23.Tata Megraw HillPublishing Company Ltd., New Delh

WEBSITES:-

www.wiki.org.in
www.scribd.in
www.investopedia.in
www.academia.edu.in