-Dr.

Shikha Dimri
 CONTRACT-II

 SALE OF GOODS

 PARTNERSHIP
INDEMNITY

GUARANTEE

BAILMENT

PLEDGE

AGENCY
SECTIONS 124 -125
 Dictionary or general Meaning
of Indemnity is :

 protection against loss

 security

 compensation for loss.

 1. Indemnity is a contract, therefore
elements of valid contract must be present.

 2. After he suffers loss , the indemnity

holder may sue for all damages.
 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 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’
Definition under Indian Contract Act is
somewhat narrower.

It excludes from its purview cases of loss

arising from accidents like fire or perils
of the sea.

Loss must be caused by some human

agency
 Contracts of insurance against
accidental loss are covered under
Contingent contracts
Under English Law the contract of indemnity
is much wider and the contracts to save the
indemnified from loss whether caused by
human agency or from loss arising from
accidents like fire or perils of the sea.

Thus all insurance contracts other than those

of life insurance are contracts of indemnity.

Promise may be express or implied.

 Case – Adamson v Jarvis

Adamson v. Jarvis (1827)

- defendant asked the plaintiff to auction certain cattle.
Plaintiff sold the same, later it was found that the cattle did
not belong to defendant and the true owner sued the
plaintiff for recovery – implied indemnity.
- Court laid down that plaintiff, having acted on the
request of the defendant, was entitled to assume that ,if
what he did, turned out to be wrongful, he would be
indemnified by the defendant.
Dugdale v. Lovering (1875)

The defendants and a company ,both demanded delivery of

certain trucks from the plaintiff possession but plaintiff
refused to deliver the same without indemnity bond.
Though the bond was not given trucks were delivered. The
company sued plaintiff for conversion of goods which
forced plaintiffs to sue the defendant for indemnity.
Held implied indemnity as there was intention which was
communicated.
 United India Insurance Company v m/s Aman Singh

 Cover note stipulated delivery to the consigner. Goods

on its way to destination were stored in a godown and
thereafter to be carried to destination.
 Goods were destroyed by fire in godown.
 It was held that the goods were destroyed during transit,
and the insurer was liable as per the insurance contract.
Sec-125.Rights of indemnity holder when sued. 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 of indemnity 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
authorised 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 compro-
mise was not contrary to the orders of the promisor;
and was one which it would have been prudent for the
promisee to make in the absence of any contract of
indemnity, or if the promisor authorised him to
compromise the suit.'
 There is no provision for the right of promisor

 Rights of Surety Sec 141

Based on the natural equity where promisor’s right would
also be of surety Refer Sec 141
Simpson v. Thomson (1878) 3 AC 279
“Where one person has agreed to indemnify another, 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.”
 Rules:

 1. The maxim of the law was ‘you must be

damnified before you can claim to be
indemnified’.

 But the law is now different.

 2. According to Court of equity it was not
necessary for the indemnity holder to be
damnified before he could be indemnified.
In Gajanan Morashwar v Moreshwar Madan
It was laid down– liability of the indemnifier commences as soon as the
loss of the indemnified becomes absolute.

 Bombay HC held - ‘it is true that under English common law no action could be
maintained until actual loss had been incurred. It was very soon realized that an
indemnity might be worth very little indeed if the indemnified could not enforce
his indemnity till he had paid the loss. If the suit was filed against him he had to
actually wait till judgment was pronounced and it was only after he had
satisfied the judgment he could sue on his indemnity. It is clear that this might
under certain circumstances throw an intolerable burden upon indemnity
holder. He might not be in a position to satisfy the judgment and yet he could
not avail himself of his indemnity till he had done so. Therefore the court of
equity stepped in and mitigated the rigour of the common law. The court of
equity held that if his liability has become absolute then he was entitled either
to get the indemnifier pay off the claim or pay into the court sufficient money
which would constitute a fund for paying off the claim whenever it was made.’
 DIFFERENCE IN VIEW

Re Rechardson, Ex Parte The Governors of St. Thomas Hospital in

the present case Barkley J. observed indemnity is not necessarily given
by repayment after payment. Indemnity requires that the party to be
indemnified shall never be called upon to pay.

This was upheld in the case Osmal Jamal & Sons Ltd. V. Gopal
Purushottam (1929) Cal 208
The plaintiff company procured goods at the request of defendants from a
third party (Maliram Ramji Das). Defendants failed to accept the goods
hence third party demanded the compensation from Plaintiff Co. In
the meantime plaintiff co. went into liquidation hence official
liquidator demanded indemnity from defendants.
It was held official liquidator could recover the amount even though the
co. had not actually paid the vendor.
 HC of Bombay & Nagpur have held that indemnity
holder should first discharge liability to pay the actual
loss, then only can claim indemnity from the
indemnifier

 HC of Calcutta, Madras,Allahabad & Patna have held

that when asked to meet a liability ,indemnity holder
can compel the indemnifier to make good his loss even
before discharging the liability.
 INDEMNITY BOND- An indemnity bond which
permits an employee to leave the employment
earlier then the minimum agreed period only at
the cost of the forfeiture of his bond money is
valid provided both the period of restriction and
the bond money are reasonable
 Law Commission of India in its 13th Report,1958 on
Indian Contract Act has recommended the
amendment of Section 124.
 It talks about expansion to include cases of loss caused
by any events which may or may not depend upon the
conduct of any person.
 It should also provide that promise may be implied.
Section-126
A guarantee is a contract to perform the
promise or discharge the liability, of a third
person in case of his default.

It may be either oral or written.

 Tripartite agreement
 PARTIES:

 SURETY-The person who gives the guarantee is

called the surety.

 PRINCIPAL DEBTOR- The person in respect of

whose default the guarantee is given is called the
principal debtor.

 CREDITOR-The person to whom the guarantee is

given is called the creditor
Example: A takes a loan from Bank.
A promises to repay the loan.
B also makes a promise to the bank saying that if A
does not repay the loan then ‘I will pay’.
In this case A is the principal debtor who undertakes
to repay the loan B is the surety, whose liability is
secondary.
The bank in whose favour promise has been made is
the creditor.
A
Principal Debtor Bank(creditor)

Surety
B
In Guarantee there are three Contracts:

 1. PD ------------- Creditor

 2. Creditor --------Surety

 3. PD ------------- Surety
 PRINCIPAL DEBT

 CONSIDERATION [sec 127]

 THERE SHOULD BE NO MISREPRESENTATION

OR CONCEALMENT [ sec 142-143]

 WRITING NOT NECESSARY

 PRINCIPAL DEBT

Swan v Bank of Scotland

- the payment of overdraft of a bankers customer was guaranteed

by the defendant. The overdraft were contrary to the statute,
which not only imposed penalty upon the parties to such drafts
but also made them void.
The customer having defaulted,the surety was sued for the loss.
But he was held not liable since the debt itself was void and
ineffectual.
 Section 127 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 to section 127

 Guarantee for past debt
 Gulam Hussain v Faiyaz Ali

 Decision given in this case was criticized by

Pollock and Mulla.it was observed-
 - this seems to attribute an unnatural meaning to
the word, which ,it is submitted and rest of the
section shows, refers to an executed as
distinguished from executory consideration.
 Guarantee for a past as well as future debt is
enforceable provided
 - some future debt is incurred.
 -clear undertaking by the surety to be liable
for a past debt.
 142. 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.

 143. Guarantee obtained by concealment, invalid

 Any guarantee which the creditor has obtained by means of
keeping silence as to material circumstances, is invalid.
 Illustrations
 (a) A engages B as clerk to collect money for him. B fails to account for
some of his receipts, and A in consequence calls upon him to furnish
security for his duly accounting. C gives his guarantee for B’s duly
accounting. A does not acquaint C with B’s previous conduct. B
afterwards makes default. The guarantee is invalid.
 (b) A guarantees to C payment for iron to be supplied by him to B to
the amount of 2,000 tons. B and C have privately agreed that B should
pay five rupees per ton beyond the market price, such excess to be
applied in liquidation of an old debt. This agreement is concealed from
A. A is not liable as a surety
 London General Omnibus Co. v. Holloway
 Surety’s liability is co-extensive

 The co-extensive liability of the surety is subject to

contract to contrary and thus surety may limit his
liability.
 Contract to Contrary- The co-extensive
liability of the surety is subject to contract to
contrary and thus surety may limit his
liability.
 Fulfillment of Condition Precedent

 A partial recognition is found in sec 144

 144. 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 that
other person does not join.

 National Provincial Bank of England v Brackenbury-

 Creditor can sue the Surety without exhausting
remedies against the Principal Debtor

 Bank of Bihar v Damodar Prasad

 State Bank of India v Indexport Registered
 Ram Bahadur Singh v Tehsildar Bisli
 Aditya Narayan Chaurasia v Bank of India
 State Bank of India v G.J Herman
 Union Bank of India v Manku Narsayan
 Yarlagadda v Devata China Yerakayya
Kinds of Guarantee :

SPECIFIC GUARANTEE or FIXED

GUARANTEE

CONTINUING GUARANTEE-Section 129

 Continuing guarantee
 A guarantee which extends to a series of transaction, is
called, a “continuing guarantee”.

 Illustrations
 (a) A, in consideration that B will employ C in collecting
the rents of B’s 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, a tea-dealer, to the amount of £ 100, for
any tea he may from time to time supply to C. B supplies C with tea of
above the value of £ 100, and C pays B for it. Afterwards, B supplies C
with tea of the value of £ 200. C fails to pay. The guarantee given by A
was a continuing guarantee, and he is accordingly liable to B to the
extent of £ 100.
 (c) 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 not 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.
 Difference between guarantee and continuing
guarantee-
 The difference between an ordinary guarantee
and a continuing guarantee is that under the
former the surety is liable only in respect to a
single transaction, whereas under the latter
the surety is prima facie liable in respect of
any of the successive transaction which comes
within its scope.
 By Revocation By death of the
[sec 130] surety [sec131]

Composition ,
extension of DISCHARGE By variance
time & promise OF SURETY [sec 133]
not to sue [sec135]

By creditors Act Release or discharge

or Omission of Principal Debtor
[sec 134]
[sec 139]
 Section 130-A continuing guarantee may at any time be
revoked by the surety, as to future transactions, by
notice to the creditor

 Revocation only in case of Continuing Guarantee

 That too only for future transactions
 With the notice to the Creditor
 By Death of Surety S.131

 The death of the surety operates, in the absence

of any contract to the contrary, as a revocation of
continuing guarantee, so far as regards future
transactions
 By Variance: S.133
 Any variance made without the surety’s consent, in the
terms of the contract between the principal [debtor] and
the creditor, discharges the surety as to transactions
subsequent to the variance.

 Bonar v Mcdonald
 M.S.Aniruthan v Thomco’s Bank Ltd- It was held by majority that the
surety was not discharged.
 Release of Principal Debt0r
 Sec 134- 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.
 135. 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 make a composition
with, or promises to give time, or not to sue, the
principal debtor, discharges the surety, unless the
surety assents to such contract.
 The section provides for three modes of discharge
from liability :
 (1) Composition-it involves variation of the original
contract without consulting the surety, the surety will
be discharged.

 (2) Promise to give time.

 (3) Promise not to sue the principal Debtor

 Section 137-Creditors forbearance to sue does not
discharge surety.

 Mere forbearance on the part of the creditor to sue the

principal debtor or to enforce any remedy against him
does not, in the absence of any provision in the
guarantee to the contrary, discharge the surety.
 By creditors Act or Omission Sec-139

 If the creditor does any act which is inconsistent with

the rights of the surety, or omits to do any act which his
duty to the surety requires him to do, and the eventual
remedy of the surety himself against the principal
debtor is thereby impaired, the surety is discharged.
 • - SUBROGATION
AGAINST S140
PRINCIPAL
DEBTOR
• - INDEMNITY
• S145

RIGHTS OF AGAINST • - SECURITIES S.141

CREDITOR • - RIGHT TO SET OFF
SURETY

• - CONTRIBUTION
S.146-147
AGAINST
• - EFFECT OF
CO-
SURETY
RELEASING A
SURETY
• S.138
 Guarantee Indemnity

 - 3 Parties  - 2 Parties
 - 3 Contracts  - One Contract
 - Primary liability of  - Liability of
Debtor Indemnifier
 - aim of guarantee is  - Aim is reimbursement
security of loss
 -liability is subsisting  - Liability is contingent