Unit 7 - Indemnity & Guarantee

• Indemnity


  To make good or compensate the loss incurred by another party who has suffered losses
• As per English law, Indemnity means promise to save another harmless from the loss
• Indemnifier


  Person who promises to compensate for the loss
• Indemnified


  Person to whom the promise is made or whose loss is to be made good
• Expressed Indemnity


  When a person expressly promises to compensate the other from loss
• Implied Indemnity


  When the contract is to be inferred from the conduct of the parties or from the circumstances of the case
• The contract of indemnity must specify that the loss is caused due to the action of the promisor himself, action of any other person which is not an event or accident, or any act beyond the control of the parties
• Essentials for Valid Contract of Guarantee

  • Principle Debt

  1. Existence of a liability
  2. Consideration
  3. No misrepresentation or concealment
  4. Written or oral
  5. Joining of other co-sureties (Sec. 144)
• Specific Guarantee


  Guarantee which extends to a single debt/specific transaction
• Continuing Guarantee


  Guarantee which extends to a series of transactions
• Nature and Extent of Surety's Liability (Sec. 128)


  The liability of surety is co-extensive with that of principal debtor
• Modes of Discharge of Surety

  • Revocation

  1. By conduct
  2. By notice
  3. By surety's death
  4. By release or discharge of principal debtor
  5. By composition with principal debtor
  6. By impairing surety's remedy
• Revocation of Specific Guarantee

  A specific guarantee cannot be revoked once it is incurred
• Revocation of Continuing Guarantee

  A continuing guarantee can be revoked with respect to future transactions
• Discharge by Novation


  When an old guarantee is substituted by a new one, the old guarantee is automatically discharged
• Discharge by Variance in Terms of Contract (Sec. 133)

  If any variation is made in the terms and conditions of the contract of guarantee without the consent of the surety, then the surety shall be released for the transactions that take place after such variations
• Discharge by Release or Discharge of Principal Debtor (Sec. 134, 138)


  The surety is discharged if the creditor enters into a fresh/new contract with the principal debtor by which the principal debtor is released, or does any act or omission in consequence of which the legal discharge of the principal debtor takes place
• Discharge by Composition with Principal Debtor (Sec. 135)


  The surety is discharged if the creditor makes a composition with, or agrees not to sue, the principal debtor without the consent of the surety
• Exceptions where Surety is not Discharged

  1. Agreement made with a third person to give time to principal debtor (Sec. 136)
  2. Creditor's forbearance to sue does not discharge surety (Sec. 137)
• Discharge by Impairing Surety's Remedy (Sec. 139)


  If the creditor fails to protect the surety's rights, the surety is discharged
• Discharge on Invalidation of Contract of Guarantee

  1. Guarantee obtained by misrepresentation (Sec. 142)
  2. Guarantee obtained by concealment (Sec. 143)
  3. Guarantee where creditor shall not act until co-surety joins (Sec. 144)
• Rights of a Surety

  • Against Principal Debtor:

  1. Right of subrogation
  2. Right to indemnity

  Against Creditors:

  1. Right to security
  2. Right to set off
  3. Right to share reduction

  Against Co-sureties:

  1. Right to claim contribution equally
  2. Right to claim contribution only for agreed sum