Amity Law School,

Noida.
LAW OF CONTRACTS
Submitted by- Tejaswini
Enrollment number- A3211118082
Submitted to- Dr. Amit Dhall
Topic- Indemnity and guarantee
Course- BA LLB (H)
Section- A
DR. RAM MANOHAR LOHIYA NATIONAL LAW
UNIVERSITY, LUCKNOW
 SEMINAR PAPER
INTERNATIONAL DISPUTE RESOLUTION
BODIES

WORLD TRADE ORGANISATION DISPUTE

SETTLEMENT MECHANISM

SUBMITTED TO: SUBMITTED

BY:

Mr. Prasenjit Kundu Abhishek Kumar

Singh

Asst. Professor Roll No-

130101004

Settlement of dispute under GATT

A dispute arises when one country adopts a trade policy measure or takes some action that
one or more fellow-WTO members considers to be breaking the WTO agreements, or to be
a failure to live up to obligations. A procedure for settling disputes existed under the old
GATT but it had no fixed timetables, rulings were easier to block, and many cases dragged
on for a long time inconclusively.

The Uruguay Round Agreement

The Uruguay Round agreement introduced a more structured process with more clearly
defined stages in the procedure. The agreement emphasises that prompt settlement is
essential if the WTO is to function effectively. Strict timelines were created for each stages
of the dispute resolution process to speed up the resolution of disputes. If a case runs its full
course to a first ruling, it should not normally take more than about one year or 15 months
if the case is appealed. The agreed time limits are flexible, and if the case is considered
urgent (e.g. if perishable goods are involved), it is accelerated as much as possible. The
Uruguay Round agreement also made it impossible for the country losing a case to block
the adoption of the ruling. Previously under GATT adoption of a panel report required
unanimous support , now a country need unanimous support to block a panel report. Now,
rulings are automatically adopted unless there is a consensus to reject a ruling, any country
wanting to block a ruling has to persuade all other WTO members (including its adversary
in the case) to share its view. The reforms brought other changes too. Unilateral retaliation
is now explicitly prohibited, and a permanent Appellate Body was created to allow bad·
rulings to be appealed. The Reforms also brought greater legal transparency.

Functions and Objectives Of DSU

Providing security and predictability to the multilateral trading system. Preserving the rights
and obligations of WTO Members Clarification of rights and obligations through
interpretation ‘Mutually Agreed Solutions’ as ‘Preferred Solution’. Prompt settlement of
disputes Prohibition against unilateral determinations Exclusive jurisdiction Compulsory
nature
Scope of the dispute settlement system

The Covered Agreement:

The (WTO) dispute settlement system applies to all disputes brought under the WTO
Agreements listed in Appendix 1 of the DSU. In the DSU, these agreements are referred to
as the ³covered agreements´ The covered agreements also include the so-called Plurilateral
Trade Agreements contained in Annex 4 to the WTO Agreement (Appendix 1 of the DSU),
which are called plurilateral´ as opposed to ³multilateral´ because not all WTO Members
have signed them.

A single set of rules and procedures:

Provides a coherent and integrated dispute settlement system applicable to the ‘Covered
Agreements’, End of ‘GATT à la carte’. Subject to certain exceptions, the DSU is applicable
in a uniform manner to disputes under all the WTO Agreements.

BODIES INVOLVED IN DISPUTE SETTLEMENT

Dispute Settlement Body (DSB)

The DSB is similar to the WTO General Council which comprises of the entire membership
of WTO. The DSB has the power to establish panels, adopt panels and Appellate Body
reports etc. the DSB is responsible for the referral of a dispute to adjudication (establishing
a panel); for making the adjudicative decision binding (adopting the reports); generally, for
supervising the implementation of the ruling; and for authorising ‘retaliation’ when a
Member does not comply with the ruling.

Other independent bodies in dispute settlement:

The Director General and the WTO Secretariat.

Panel

Appellate Body

Arbitrator
Experts

The Director General

In a dispute settlement procedure the Director-General mediates and tries to resolve the
dispute, before a request for a panel is made. The Director-General convenes the meetings
of the DSB and appoints panel members upon the request of either party. The Director-
General also appoints the arbitrator (s) for the determination of the reasonable period of time
for implementation, if the parties cannot agree on the period of time and on the arbitrator .

The WTO Secretariat

The staff of the WTO Secretariat, which reports to the Director-General, assists Members
in respect of dispute settlement at their request conducts special training courses. Provides
additional legal advice and assistance to developing country. The Secretariat also assists
parties in composing panels by proposing nominations for potential panellists to hear the
dispute. Assists panels once they are composed Provides administrative support for the
DSB.

Panel

Panels are the quasi-judicial bodies, in a way tribunals, in charge of adjudicating disputes
between Members in the first instance. Panel members are required to be ³well-qualified
governmental or non-governmental individuals´ Or who have been previously panel
members, or have served as governmental representatives to the GATT or WTO, as senior
trade policy officials or with the secretariat, 3 or 5 members of a panel has to be independent,
drawn from diverse background with wide experience. Members cannot be from countries
involved in disputes before the panel. Developing countries can also request that the panel
include at least one member from the developing country.

Appellate Body

v’A permanent body of seven members entrusted with the task of reviewing the legal aspects
of the reports issued by panels. The Appellate Body is thus the second and final stage in the
adjudicatory part of the dispute settlement system. The DSB appoints the members by
consensus , for a four year term and can reappoint a person once .. Appellate Body members
must be persons of recognised authority, with demonstrated expertise in law, international
trade and the subject matter of the covered agreements generally, and they must not be
affiliated with any government .

Arbitrator

In addition to panels and the Appellate Body, arbitrators, either as individuals or as groups,
can be called to adjudicate certain questions at several stages of the dispute settlement
process. Arbitration results are not appeal able but can be enforced through the DSU. Two
forms of arbitration: The first such situation, which an arbitrator may be called to decide on,
is the establishment of the ³reasonable period of time´ granted to the respondent for
implementation The second is where a party subject to retaliation may also request
arbitration if it objects to the level or the nature of the suspension of obligations proposed

Experts

Where a panel considers it necessary to consult experts in order to discharge its duty to make
an objective assessment of the facts, it may consult either individual experts or appoint an
expert review group to prepare an advisory report y Expert review groups perform their
duties under the panel’s authority and report to the panel. y Expert review groups only have
an advisory role. Where panels have so far resorted to experts, they did not establish expert
review groups, but consulted experts on an individual basis.

LEGAL BASIS FOR DISPUTE

The basis or cause of action for a WTO dispute must be found in the ³covered agreements´
listed in Appendix 1 to the DSU, namely, in the provisions on ³consultation and dispute
settlement´ contained in those WTO Agreements. e.g. ± Articles XXII and XXIII of GATT
1994. Article 19 of the Agreement on Agriculture.

When to complain?
If any contracting party should consider that any benefit accruing to it directly or indirectly
under this Agreement is being nullified or impaired or that the attainment of any objective
of the Agreement is being impeded as the result of the failure of another contracting party
to carry out its obligations under this Agreement, or the application by another contracting
party of any measure, whether or not it conflicts with the provisions of this Agreement, or
the existence of any other situation, the contracting party may, with a view to the satisfactory
adjustment of the matter, make written representations or proposals to the other contracting
party or parties which it considers to be concerned. Any contracting party thus approached
shall give sympathetic consideration to the representations or proposals made to it.´

Types of Complaints:

Violation Complaint

Nullification or impairment due to the failure of another contracting party to carry out its
obligations under WTO Agreement

Non-violation Complaint

Nullification or impairment due to the application by another contracting party of any

measure, whether or not it conflicts with the provisions of WTO Agreement

Situation Complaint

Nullification or impairment due to the existence of any other situation.

WTO DISPUTE SETTLEMENT PROCESS

Two ways to settle a dispute

The parties find a mutually agreed solution, particularly during the phase of bilateral
consultations; and y Through adjudication, including the subsequent implementation of the
panel and Appellate Body reports, which are binding upon the parties once adopted by the
DSB.

There are three main stages to the WTO dispute settlement process: Consultations between
the parties by Adjudication by panels and, if applicable, by the Appellate Body The
implementation of the ruling, which includes the possibility of countermeasures in the event
of failure by the losing party to implement the ruling.

Consultations

1. Objective for consultations.

First stage of formal dispute settlement. It give the parties an opportunity to discuss the
matter and to find a satisfactory solution without resorting to litigation

2. Legal basis and requirements for a request for consultations.

Under GATT 1994, two legal bases are available for launching a dispute with a request for
consultations, that is, either Articles XXII:1 or XXIII:1 The main difference between these
two legal bases relates to the ability of other WTO Members to join as third parties.

3. Procedure for consultations.

(WTO) Secretariat is not involved . Respondent must reply to the request within ten days
and enter into consultations in no more than 30 days . Rules are different in cases of urgency
e.g. perishable goods.

4. Third parties in consultations.

Third party may have trade interest or tend to benefit from that. The request must be
addressed to the consulting Members and the DSB within ten days. If the respondent
disagrees, there is no recourse through which the interested Member can impose its presence
at the consultations.
Establishment of a panel

A request for the establishment of a panel must be made in writing and is addressed to the
Chairman of the DSB. In addition to determining the panel’s terms of reference, the request
for establishment of the panel also has the function of informing the respondent and third
parties of the basis for the complaint. In the first DSB meeting in which such a request is
made, the responding Member can still block the panel’s establishment, as was the case in
the dispute settlement system under GATT 1947. At the second DSB meeting where the
request is made, however, the panel will be established, unless the DSB decides by
consensus not to establish the panel (i.e. the ‘negative’ consensus rule applies).

Stages in which a panel works

Before the first hearing:

Each side in the dispute presents its case in writing to the panel. First hearing: the case for
the complaining country and defence: the complaining country (or countries), the
responding country, and those that have announced they have an interest in the dispute,
make their case at the panel’s first hearing. Rebuttals: the countries involved submit written
rebuttals and present oral arguments at the panel’s second meeting.

Experts:

If one side raises scientific or other technical matters, the panel may consult experts or
appoint an expert review group to prepare an advisory report. First draft: the panel submits
the descriptive (factual and argument) sections of its report to the two sides, giving them
two weeks to comment. This report does not include findings and conclusions. Interim
report: The panel then submits an interim report, including its findings and conclusions, to
the two sides, giving them one week to ask for a review.

Review:

The period of review must not exceed two weeks. During that time, the panel may hold
additional meetings with the two sides. y Final report: A final report is submitted to the two
sides and three weeks later, it is circulated to all WTO members. If the panel decides that
the disputed trade measure does break a WTO agreement or an obligation, it recommends
that the measures be made to conform with WTO rules. The panel may suggest how this
could be done. y The report becomes a ruling: The report becomes the Dispute Settlement
Body¶s ruling or recommendation within 60 days unless a consensus rejects it. Both sides
can appeal the report (and in some cases both sides do).

Appellate review

1. Rules on the appellate review-Article 17 is the only article dealing specifically with the
structure, function and procedures of the Appellate Body. The ³gap-filling´ Rule 16(1) of
the Working Procedures permits an Appellate Body division under certain circumstances to
adopt additional procedures for a particular appeal in which the need to do so arises.

2. Deadline for filing an appeal-DSU implies that the panel report must be appealed before
it is adopted by the DSB 3. Right to appeal -DSU makes clear that only the parties to the
dispute, not the third parties, can appeal the panel report. 4. Third participants at the
appellate stage-Third parties cannot appeal a panel report. However, third parties that have
been third parties at the panel stage may also participate in the appeal as a so-called ³third
participant´. 5. Conclusion and Recommendations of Appellate Body are addressed to the
DSB, which is then to request the Member concerned to bring its measure into conformity
with the relevant provisions of WTO law.

Non-implementation

Either compensation or the suspension of WTO obligations.

COMPENSATION

Compensation does not mean monetary payment; rather, the respondent is supposed to offer
a benefit, for example a tariff reduction
Recommendations and rulings of the DSB

First, panels and the Appellate Body only apply WTO law as it is contained in the covered
agreements. They cannot add to or diminish the rights and obligations provided in the WTO
Agreements .

Second, member that does not bring its WTO- inconsistent measure into conformity with
the WTO Agreement risks consequences: it either has to provide compensation with the
agreement of the complainant, or it may face retaliatory countermeasures

Third, the DSU specifically states that there is no obligation to withdraw the WTO-
consistent measure in the event of a successful non-violation complaint .

Legal status of adopted/un adopted reports in other disputes- the reports of panels and the
Appellate Body are not binding precedents for other disputes.

Alternative ways of solving a dispute

1. Take place at the beginning of any dispute. But also at the stage of appellate review,
the appellant may withdraw the appeal at any time for bilateral negotiation. Dispute
resolution mechanisms such as good offices, conciliation or mediation- A prerequisite
for such arbitration is that the complainant has requested the DSB’s authorisation for the
suspension of obligations and that the respondent disagrees with the proposed level of
retaliation.

2. Parties and third parties and principle of confidentiality: Members enter as parties
or third parties in the mechanism. The confidentiality of the process Members have the
right to disclose their submissions to the public Non-participants cannot make any
contribution to the ongoing dispute settlement proceeding

3. Legal representation: WTO agreement has given the countries the right to decide
the composition of the delegation Private legal counsel can appear as representatives of
the party but have to respect the confidentiality of the proceedings. Helpful for the
developing countries.
 4. Amicus Curiae submissions : ³Friend of the court´ Unsolicited advices from neither
the parties nor the third parties. Generally come from Non Governmental Organisations
. According to the Appellate Body, the panels have the right to accept or reject
information even if unsolicited. Contentious among WTO members Only few panels
till date have used their discretionary right to accept and consider unsolicited briefs

Developing countries in WTO dispute settlement

Theory and practice

Theory says that the very existence of a compulsory multilateral dispute settlement system
is itself a particular benefit for developing country and small Members. In practice, also
dispute settlement system has already offered many examples of developing country
Members prevailing in dispute settlement over large trading nations. At the same time these
members also face considerable burdens. Often do not have a sufficient number of
specialised human resources. It may also be difficult for a developing country Member to
endure the economic harm arising from another Member’s trade barrier for the entire period
of the dispute settlement proceedings.

In theory, since 1995 developing countries have been the complainant in one third of the
cases and the respondent in two fifth of the cases. (Shows a healthy number) y In practice
however majority of the cases are still involving developed countries. Developed countries
form two third of the trade volume. But then, the moderate trade volume affected by a
possibly WTO-incompatible trade barrier maintained by another Member might not always
justify the considerable investment of time and money necessary for a WTO dispute.

Special and differential treatment

Special and differential treatment in consultations.

Special and differential treatment at the panel stage.

Special and differential treatment in implementation.

Accelerated procedure at the request of a developing country Member.

Decision of 5 April 1966 - Least-developed country members involved in a dispute - In
addition to the above a few particular rules applicable for LDC’s are: Members must
exercise due restraint in bringing disputes against a least-developed country member and in
asking for compensation or seeking authorisation to suspend obligations against a least-
developed country member that has ³lost´ a dispute . The DSU also specifically foresees
good offices, conciliation and mediation.

Legal assistance Representation by private counsel and the Advisory Centre on WTO Law
receive effective assistance in dispute settlement from the recently established, Geneva-
based Advisory Centre on WTO Law. Assistance in the form of legal assistance and legal
advice.

Evaluation of the WTO dispute settlement system

As a statistical snapshot, in the first ten years of operation of the DSU : 313 disputes were
initiated (i.e. formal Article 4 consultations were requested). 128 panels were established,
covering 158 of the 313 disputes formally initiated (i.e. roughly half). 104 panels were
composed, covering 133 disputes. 80 panel reports were adopted, covering 103 disputes.
53 Appellate Body Reports were adopted. One of the encouraging conclusions which can
be drawn from the above is that many disputes appear to be settled at the consultation stage.

Achievement of the objectives?

The large number of cases in which parties invoked the dispute settlement system in the
first ten years of the WTO suggests that Members have faith in the system. It appears that
the WTO dispute settlement system has fulfilled its main function: to contribute to the
settlement of trade disputes. Moreover, the reports of panels and the Appellate Body have
served to provide clarification of the rights and obligations contained in the covered
agreements

Weaknesses

The long duration of the full dispute settlement procedure causes economic harm if the
challenged measure is indeed WTO inconsistent. y A successful complainant will receive
no compensation for the harm suffered during the time given to the respondent to implement
the ruling. y The ³winning party´ receives no reimbursement from the other side for its legal
expenses. y In a few cases, a suspension of concessions has been ineffective in bringing
about implementation.

Basic Advantage

Compared with other multilateral systems of dispute resolution in international law, the
compulsory nature and the enforcement mechanism of the WTO dispute settlement system
certainly stand out.

Current negotiations

The Doha Development Round and DSU Negotiations Proposals for reform on a significant
number of issues, including: the extension of third party rights; improved conditions for
Members seeking to be joined in consultations; the introduction of remand and interim
review in appellate review proceedings; the sequencing issue and other problems
concerning the suspension of concessions or other obligations; the enhancement of
compensation as a temporary remedy for breach of WTO law; the strengthening of
notification requirements for mutual agreed solutions; and the strengthening of special and
differential treatment for developing country Members.

Conclusion:

To date, the negotiations of the reform have not yet lead to any agreement on the amendment
of the DSU. Many of these proposals are to be welcomed as they will strengthen the WTO
dispute settlement system. With respect to other proposals not included in the Chairman’s
Text, it should be noted that their time has not come yet.

CASE STUDY

United States Anti-Dumping and Countervailing Measures on Steel Plate from India

Key Facts:
Complainant: India
Respondent: United States Of America
Third Parties: Chile; European Communities; Japan
Request for Consultations received: 4 October 2000
Panel Report circulated: 28 June 2002

Complaint by India.

Final affirmative determinations of sales of certain cut-to-length carbon quality steel plate
products from India at less than fair value by US Department of Commerce (DOC) on 13
December 1999 and affirmed on 10 February 2000; Interpretation and use of provisions
relating to facts available in the anti-dumping and countervailing duty investigations by
DOC; and Determination and interpretation by the US International Trade Commission
(ITC) of negligibility, cumulation and material injury caused by the said Indian steel
imports.

Panel and Appellate Body proceedings

The DSB established a Panel at its meeting of 24 July 2001. Chile, the EC and Japan
reserved their third-rights. On 16 October 2001, India requested the Director General to
determine the composition of the Panel. On 26 October 2001, the Director-General
composed the Panel. On 16 April 2002, the Chairman of the Panel informed the DSB that
the Panel would not be able to complete its work in six months in light of scheduling
conflicts. The Panel expected to complete its work in June 2002, depending on translation.

On 28 June 2002, the Panel circulated its report to Members. The Panel concluded that: y
the United States statutory provisions governing the use of facts available, sections 776(a)
and 782(d) and (e) of the Tariff Act of 1930, as amended, are not inconsistent with Articles
6.8 and paragraphs 3, 5, and 7 of Annex II of the AD Agreement. the United States did not
act inconsistently with Article 15 of the

With respect to India’s claims not addressed above, the Panel concluded that: it would not
rule on India’s abandoned claim; and in light of considerations of judicial economy, it was
neither necessary nor appropriate to make findings with respect to the remainder of India’s
claims. The Panel therefore recommended that the DSB request the United States to bring
its measure into conformity with its obligations under the AD Agreement. At its meeting
on 29 July 2002, the DSB adopted the Panel report.

Implementation of adopted reports

On 1 October 2002 the United States and India they have mutually agreed that the reasonable
period of time to implement the DSB recommendations and rulings in this dispute shall be
five months. On 14 February 2003, the parties informed the DSB that they had agreed on
certain procedures under Article 21 and 22 of the DSU. India agrees not to request the
authorisation to suspend concessions under Article 22 until the adoption of the compliance
reports (Panel and AB, if any) and the US agrees not to assert that India is precluded from
doing so given that the request would be made outside the 30-day period.

Contract Of Indemnity And Law Of

Guarantee
The term 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 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].
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. [Gajanan Moreshwar 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 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”.
Illustration
A contract to indemnify B against the consequences of any proceedings which C
may take against B in respect of a certain sum of 200 rupees. This is a contract of
indemnity.

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 tortuous 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. 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].

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 by all chances is likely to suffer it.
The former view was held in cases like – Shankar Nimbaji v Laxman Sapdu /
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 Laxman
Sapdu]
The defendant’s 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 defendant’s 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 –
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 –
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
It is important to note here that the right to indemnity cannot be claimed of
dishonesty, lack of good faith and contravention of the promisor’s request.
However, the right cannot be negative 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 indemnifier’s 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 Jarvat Singhji v Secretary of State for India]
Contract of guarantee, surety, principal debtor and
creditor:-
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.
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.
Illustrations
(a) B requests A to sell and deliver to him goods on credit. A
agrees to do so, provided C will guarantee the payment of the price of the goods. C
promises to guarantee the payment in consideration of
As promise to deliver the goods. This is a sufficient consideration for Cs promise.
(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for
the debt for a year, and promises that, if he does so, C will pay for them in default
of payment by B. A agrees to forbear as requested. This is a sufficient
consideration for Cs promise.
(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to
pay for them in default of B. The agreement is void.
Surety’s liability:-
The liability of the surety is coextensive with that of the principal debtor, unless it
is otherwise provided by the contract.
Illustration
A guarantee to B the payment of a bill of exchange by C, the acceptor. The bill is
dishonored by C. A is liable not only for the amount of the bill but also for any
interest and charges which may have become due on it.
Continuing guarantee.-A guarantee which extends to a series of transactions is
called a “continuing guarantee”.
Illustrations
(a) A, in consideration that B will employ C in collecting the rent of Bs zamindari,
promises B to be responsible, to the amount of
5,000 rupees, for the due collection and payment by C of those rents.
This is a continuing guarantee.
(b) A guarantees payment to B of the price of five sacks of flour to be delivered by
B to C and to be paid for in a month. B
delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C,
which C does riot pay for. The guarantee given by A was not a continuing
guarantee, and accordingly he is not liable for the price of the four sacks.
Revocation of continuing guarantee.-A continuing guarantee may at any time be
revoked by the surety to future transactions, by notice to the creditor.
Illustrations
(a) A, in consideration of Bs discounting, at As request, bills of exchange for C,
guarantees to B, for twelve months, the due payment of all such bills to the extent
of 5,000 rupees. B
discounts bills for C to the extent of 2,000 rupees. Afterwards, at the end of three
months, A revokes the guarantee. This revocation discharges A from all liability to
B for any subsequent discount. But
A is liable to B for the 2,000 rupees, on default of C.
Revocation of continuing guarantee by surety’s death.-The death of the surety
operates, in the absence of any contract to the contrary, as a revocation of a
continuing guarantee, so far as regards future transactions.

Discharge of surety by variance in terms of

contract.
Any variance, made without the surety’s 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.
Illustrations
(a) A becomes surety to C for Bs conduct as a manager in Cs bank. Afterwards B
and C contract, without As consent, that Bs salary shall be raised, and that he shall
become liable for one-fourth of the losses on overdrafts. B allows a customer to
overdraw, and the bank loses a sum of money. A is discharged from his surety ship
by the variance made without his consent, and is not liable to make good this loss.
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.
Illustrations
(a) A contracts with B to grow a crop of indigo an As land and to deliver it to B at
a fixed rate, and C guarantees As performance of this contract. B diverts a stream
of water which is necessary for irrigation of As land and thereby prevents him
from raising the indigo. C is no longer liable on his guarantee.
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 surety’s 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.
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*.
Illustrations
(a)A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes
default in payment. A, la and C are liable, as between themselves, to pay 1,000
rupees each.
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.
Illustrations
(a)A, B and C, as sureties for D, enter into three several bonds, each in a different
penalty, namely, A in the penalty of 10,000
rupees, B in that of 20,000 rupees, C in that of 40,000 rupees conditioned for Ds
duly accounting to E. D makes default to the extent of 30,000 rupees. A, B and C
are liable to pay 10,000 rupees.
Difference between Indemnity and Guarantee:-
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 favor.
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.