INDEMNITY

 Dictionary meaning

◦ Protection against the loss

◦ To make good the loss

 Definition S. 124

◦ A ‘Contract’

◦ Promise to ‘save from loss’

◦ Caused by

 Conduct of promisor HIMSELF; OR

 Conduct of any other PERSON

Note: LOSS caused by human Agency.

 Parties

 INDEMNIFIER (Promisor)

 The Person who makes the promise

 INDEMNITY HOLDER (Promisee)

 The person whose loss is to be made good

 Illustration

 Railway receipt of certain goods is lost by A. A & B both claim the goods. Railway Co.
Agrees to hand over the goods to A only if he gives an indemnity bond. Later on B
(real owner) sues the railway Co. and gets a decree against the Co.Railway Co. can
claim indemnity from A.

 RIGHTS OF INDEMNITY HOLDER S. 125

 When sued indemnity holder has following rights

◦ Recover all damages

◦ Recover all cost

◦ Recover all sums paid under compromise

CONDITION:

 Within authority of the indemnifier

 Acted prudently

 COMMENCEMNT OF LIABILITY

 When to indemnify ?????

◦ BEFORE the indemnity holder suffers loss OR AFTER

 English law

 No action could be brought against the indemnifier until the

indemnity holder had suffered actual loss

 Great hardship for indemnity holder

 Court of equity – not necessary for indemnity holder to be

damnified before he could be indemnified

 Indian law

 Contract law is silent

 Judiciary

 Chand Bibi v Santosh Kumar Pal 1933

 Osmal Jamal & Sons Ltd. v Gopal Purushotham

 Gajanan Moreshwar v Moreshwar Madan (1942) 44 BOMLR

703

“Indemnity requires that the party to be indemnified shall never be called upon to pay”

TIME: As soon as the liability of the indemnity holder to pay becomes clear and certain

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 GUARANTEE

 DEFINITION S.126

◦ A Contract

◦ to perform the promise or discharge the liability

◦ of third party

◦ in case of his (third party’s) default

 Illustration

 Parties

◦ Surety (C)

 Who gives guarantee

◦ Principal debtor (B)

 For whom guarantee is given

◦ Creditor (A)

 To whom guarantee is given

 3 Contracts

◦ Principal debtor – Creditor

◦ Surety – Creditor

◦ Principal debtor - Surety

 Features

◦ Oral or written (English law - written)

◦ There should be a principal debt

◦ Benefit to the principal debtor is sufficient consideration (S.127)

◦ Consent of surety should not be obtained by misrepresentation (S.142) or

concealment (S.143)

 Difference between Indemnity & Guarantee

◦ Number of parties

◦ Number of contracts

◦ Object of contract

◦ Nature of liability

◦ Request

◦ Recovery of payments

 Liability of surety S.128

◦ Co – extensive with that of principal debtor

◦ Exactly the same as that of principal debtor

 Recover everything that could be recovered from Principal debtor ( PA +

interest + expenses)

 If liability is reduced of principal debtor then surety’s liability is also reduced.

 Narayan Singh v. Chattarsingh

 If principal debtors liability is affected by illegality then surety’s liability also

does not arise

◦ Jointly and severally liable with Principal Debtor

 Surety’s liability is immediate

 Creditor can sue the surety even though he has not exhausted his remedies
against the principal debtor

◦ Limit on surety’s liability

 Provided by contract

 Aditya Narayan Chauresia v. Bank of India AIR 2004

 Continuing Guarantee S.129

◦ Extends to a series of transaction

◦ Illustration

 B -----Supplies Tea -----C

 A ------ guarantees -----B the payment for any tea which C may buy from time
to time.

 Revocation of Continuing Guarantee S.130

◦ By giving notice to creditor

◦ Revocation of guarantee for future transactions

 Discharge of Surety’s liability

◦ Revocation by the surety S.130

◦ By surety’s death S.131

 Exception – contract to the contrary

◦ By variance in terms of contract S.133

 Variance in terms of contract between Principal Debtor & Creditor

 Without the consent of the Surety

 Surety’s Liability is discharged for subsequent variance.

 If alteration is not detrimental – surety is liable

 Anirudhan v. Thomco’ Bank

◦ By release or discharge of principal debtor S. 134

 By any contract between creditor & principal Debtor which releases the PD

 By any act / omission which discharges the PD

 The legal consequence of the act / omission is that it discharges the PD

 If discharge or release is after the decree is passed - Surety is liable

 Charan Singh v. Security finance Pvt. Ltd.

◦ When creditor compounds, gives time or agrees not to sue the Principal debtor
S.135

 Without the consent of surety

  Compounding

 A borrows Rs. 10,000/- from B . C Stands as surety for the loan. Later
on A and B agree that Rs. 5000/- may be repaid. C is discharged from
liability

 Promise to give time (extension of time)

 Payment in installments instead of lump sum.

(Amrit Lal v. State Bank of Travancore , AIR 1968 SC 1432)

 Exception S.136

Contract to give time is between creditor and third party.

 Creditor promises not to sue

 Mere neglect to sue does not discharge S.137

 By creditor’s act /omission which impairs surety’s remedy S.139

◦ Though not having the legal consequence of discharging the PD, impair the eventual
remedy of the surety

◦ State of M.P v. Kaluram AIR 1967 S.C. 1105

◦ M.R. Chakrapani v. Canara Bank AIR 1997

◦ By loss of the security by the creditor S.141

◦ Creditor loses the security

 Carelessness or negligence

 Exception – lost due to Act of God/Enemy/unavoidable

circumstances

◦ Parts with the security without the consent of the surety

◦ Surety discharged to the extent of the value of the security

 Rights of Surety

◦ Against Principal Debtor

◦ Right of subrogation S.140

 On default of Principal Debtor

 After Surety makes all necessary payments

  Surety is vested with all the rights which creditor has against the principal
debtor

 Surety may claim securities , if any

◦ Right to claim indemnity S. 145

 Only in respect of the payments rightfully made

 Right against the creditor

◦ Right to securities S.141

◦ Surety entitled to the benefit of every security

◦ Given at the time of entering the contract of guarantee

◦ Irrespective of the knowledge of the surety

 Right against co-surety

 Right of contribution S.146

◦ The duty of the co-surety is to contribute equally

◦ Exception – contract to the contrary

 Certain other proportions

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