Contracts II

JGLS
 While the concept of indemnity and guarantee
differ on several issues, they both remain modes
of compensation with overlapping principles
 Some points of difference:
1. Number of Parties
2. Number of Contracts
3. Nature of Liability
4. Modes of recovery, etc.
(These will be discussed in detail later)
 Theterm ‘indemnity’ is usually used to
denote an original and independent
obligation to indemnify

 Guarantee is a collateral contract where

promisor undertakes to address the
default of another person who is
primarily liable to the promisee
 Inan indemnity, there are two parties
(indemnifier and indemnified) and one
contract between them

 In
a guarantee, there are three parties
(principal-debtor, surety, and creditor)
and three contracts inter se
 An indemnity is an original and direct
contract which creates primary liability
for indemnifier towards the indemnity-
holder (but not against the creditor)

 In
a guarantee, the surety’s liability is
secondary and does not get triggered
unless the principal-debtor is liable
 Whileboth indemnity and guarantee are
species of contingent contracts (Sec. 31), the
contingency in the case of indemnity is the
possibility/risk of potential loss to the
indemnifier, whereas…

 Ina guarantee, there is an existing debt or

duty, so the contingency relates to the risk
of the principal-debtor defaulting, which is
guaranteed by the surety
 In a wider sense, the word “Indemnity” includes promises to save
the promisee harmless from loss caused by events or accidents
which do not or may not depend on the conduct of any person.
 In a wider sense, in fact, contracts of indemnity may include all
contracts of insurance, all contracts of guarantee etc.
 However, in the Indian Contract Act, the expression “contract of
indemnity” has been used in a very narrow sense.
 The 13th Report of the Law Commission of India, 1958
recommended that this definition be expanded to include cases of
loss caused by events which may or may not depend on the
conduct of any person, as well as to provide clearly that the
promise may be implied.
 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”
 Simply speaking, a contract of indemnity is a promise by one
party to save the other from loss, caused either by the
conduct of the promisor or any other person;
 The person who is to be indemnified is the indemnity-
holder.
 The person who promises to indemnify is the indemnifier.
 Example: On February 1, 2020, A (a shopkeeper) and
B (a customer) enter into a contract for the sale of a
TV which had to be delivered to B on 25th February,
2020. However, on February 2, 2020, C (another
customer) came to A and insisted on selling the
exact same TV to him (C). C promised to compensate
A for any loss faced by him due to selling the TV to
him (C).
 In the above example, the contract between A and C
is an indemnity contract, where C is the indemnifier
and A is the indemnity holder.
 The subject of contracts of indemnity is much wider than what is
given in this section. This section deals only with one particular
kind of indemnity which arises from a promise made by the
indemnifier to save the indemnified from the loss caused to him by
the conduct of any other person.
 A right to indemnify may arise from either an express contract or
an implied one. It may also arise by the operation of law (i.e. if it is
provided in a legislation)
 Example: A (an auctioneer) was given a diamond by B to be sold
at an auction. A followed B’s instructions and sold the diamond.
But, as it turns out, B was not the real owner of the diamond. The
real owner of the diamond sued A for damages. A in turn sued B to
be indemnified for the loss that he suffered. Can A succeed in his
action against B?
 In the earlier example, A is likely to succeed provided of
course he is able to show his due diligence in the matter.
 However, it is a set rule of law that whenever an act is done
by one person at the request of another, which act in itself is
not manifestly illegal/tortious to the knowledge of the
person doing it, and such act turns out to be injurious to the
rights of a third party, the person doing it is entitled to be
indemnified by the person that requested that said act
should be done.
 The Law Commission of India in its 13th Report
recommended that a section reading “When contract of
indemnity can be implied” be added to the ICA. However,
nothing has been done till date.
 Now, Section 124 provides the following
essential elements for a contract of
indemnity:
(1) Indemnifier promises the indemnity-
holder to save him/her from loss
(1) There must be a loss (Does this mean actual
loss?)
(1) The loss must be caused either by the
promisor or by any other person
 Gajanan Moreshwar v. Moreshwar Madan AIR 1942 Bom 302
Facts:
 In 1934, Plaintiff entered into an agreement with Municipal
Corporation of Bombay for the lease of a plot of land for 99 years
 After sometime, Defendant requested that the benefit of lease be
transferred to him. Plaintiff did so.
 Accordingly, Defendant got possession of this plot of land and
started construction on it.
 One Mr. Keshavdas was the materials supplier for all the
construction going on the plot of land.
 Defendant now owes Rs. 5000 to Mr. Keshavdas. However,
Defendant has no money to pay to him.
 Defendant requests the Plaintiff for help (he suggests
mortgaging the plot of land with Mr. Keshavdas). Plaintiff
obliges and deposits the deeds for the plot of land with Mr.
Keshavdas, for an agreement signed on January 14, 1937 to
pay all his debts by January 14, 1938.
 Further Rs. 5000 become payable by the Defendant to Mr.
Keshavdas. Again the Defendant requests the Plaintiff for
putting a further charge on the said property. Plaintiff again
obliges and another agreement is entered into with the
payment date of January 14, 1938. However, this time, the
Defendant gave in writing to Plaintiff that he will be liable...
 ... for discharging all mortgages / charges on the plot of land
officially leased out to the Plaintiff and accordingly, he would
execute another deed releasing Plaintiff of all claims from
Mr. Keshavdas.
 On July 30, 1939, Plaintiff (on the request of the Defendant),
wrote to the Municipal Corporation of Bombay asking them
to transfer the lease of the said plot to the Defendant. This
change is approved by the MCB, but no formal lease is
drawn up.
 Thereafter, Plaintiff asked the Defendant to secure his
release from all claims that Mr. Keshavdas has, but, the
Defendant failed to do so. Accordingly, Plaintiff sues the
Defendant for release.
Argument of the Defendant:
 Defendant argues that there is no cause of action yet and the
suit is premature. He insists that unless and until the
indemnity-holder (Plaintiff) has suffered a loss, he is not
entitled to sue the indemnifier (Defendant).
 The argument is simply that under Section 124, the promisor
promises to save the promisee from the loss caused to him
and not the loss which may be caused to him.
 The argument is expanded further by saying that until Mr.
Keshavdas files a suit against the Plaintiff and obtains a
judgment which the Plaintiff is compelled to satisfy, the
Plaintiff is not entitled to sue the Defendant.
Issue:
 Whether or not the indemnity-holder needs to suffer actual
loss before he could sue on his indemnity?
Decision:
 The Court held in favour of the Plaintiff.
Rationale:
 If the indemnity-holder is to wait till a judgment is
pronounced, and it was only after he had satisfied the
judgment that he could sue on his indemnity, it is clear that
this might under certain circumstances, throw an intolerable
burden upon the indemnity-holder.
 Accordingly, if the liability of the indemnity-
holder has become absolute, then he is entitled
either to get the indemnifier to pay off the claim
or to pay into Court sufficient money which
would constitute a fund for paying off the claim
whenever it was made.

 Sections 124 and 125 of ICA are not exhaustive of

the whole law of indemnity. And equitable
principles applicable in the Courts of England
will apply in this case.
Abdul Hussain Jambawalla v. Bombay Metal Syndicate,
AIR 1972 Bom 252
Facts:
 In 1957, the Plaintiffs had sold to the Defendants certain
goods, the price of which was recovered.
 Immediately thereafter, Defendants executed a note in
favour of the Plaintiff, which reads, “We do hereby indemnify
you against any amount of sales tax that may be levied by the
authorities...”
 Sales Tax Authorities asked Plaintiff to pay Rs. 3400 in
respect of the goods sold.
 Plaintiff called the Defendant to pay up. Defendant did not pay.
 Plaintiff appealed the decision of the authorities and exhausted all
appeals by July, 1963.
 Before filing these appeals, sometime between April and July of
1963, the Plaintiff deposited all the amount demanded by the
authorities.
 Present suit was filed on April 13, 1966.
Argument of the Defendant:
 The suit is barred by the Limitation Act. (Article 113 of the
Schedule to the Limitation Act provides that a suit for which no
period of limitation is provided, the limitation period will be 3
years from the time when the right to sue accrues.)
 The Defendant argues that “the right to sue accrued”
to the Plaintiff on February 28, 1963 (when for the first
time the authorities directed the Plaintiff to pay up the
sales tax.)
 The Plaintiff argues that “the right to sue accrued” to
the Plaintiff in April, 1963 (when payment to
authorities was actually made).
Issue:
 Whether the right to sue accrued to the Plaintiff when
he actually paid to the authorities or when he was
first ordered to pay?
Decision:
 The Court held in favour of the Plaintiff.
Rationale:
 The Court relied on Section 22 of the Limitation Act which
reads, “In the case of a continuing breach of contract... a
fresh period of limitation begins to run at every moment of
the time during such breach...”
 Relying on the above, the Court held that there was a
continuing breach by the Defendant starting from the point
when the Plaintiff first requested the Defendant to pay, up
until, when the actual loss occurred to the Plaintiff.
Read:

 Shanti
Swarup v. Munshi Singh, AIR
1967 SC 1315