INDEMNITY AND GUARANTEE

Table of Contents

INDEMNITY

Section 124 of the Indian Contract Act, 1872 defines a Contract of Indemnity as:

This means when one person agrees to compensate another for any loss suffered due to the actions of the promisor or a third party, such an agreement is known as a contract of indemnity.

RIGHTS OF THE INDEMNITY HOLDER

Section 125 of the Indian Contract Act, 1872 secures certain important rights for the indemnity holder (i.e., the person protected under the contract). These rights are granted to ensure that the indemnity holder is fully safeguarded in the event of a loss.

GUARANTEE

Section 126 of the Indian Contract Act, 1872 defines the following:

• Contract of Guarantee: It is a contract to perform the promise, or discharge the liability, of a third person in case of his default.
• Surety: The person who gives guarantee.
• Principal Debtor: The person in respect of whose default guarantee has been given.
• Creditor: The person to whom guarantee is given.
• Guarantee: May be written or oral.

Sufficient Consideration- Section 127 of the Indian Contract Act, 1872 provides that anything done or any promise made for the benefit of principal debtor, may be a sufficient consideration for the surety.

Liability of Surety- Section 128 of the Indian Contract Act, 1872 provides that the liability of surety is same as that of principal debtor unless it is otherwise provided by contract

DISCHARGE OF SURETY FROM LIABILITY

Under the Indian Contract Act, 1872, a surety is not permanently bound to the guarantee. Several provisions allow the surety to be discharged from liability, ensuring fairness and protecting their interests. Below are the situations in which a surety can be discharged:

1. Revocation by the Surety – Section 130

• This section applies to continuing guarantees only.
• As per this section revocation is possible as regards future transactions only.
• Case: Sita Ram Gupta vs Punjab National Bank (AIR 2008 SC 2416) – The Supreme Court held that a valid agreement can override the statutory provisions of Section 130 if not unlawful.

2. Death of Surety- Section 131

This section provides that death of a surety leads to automatic revocation of a continuing guarantee, but only for future transactions.

3. By Variance in terms of Contract – Section 133

This section provides that if the terms of the contract between the principal debtor and the creditor are varied without the surety’s consent, the surety is discharged.

• Case: Amrit Lal vs State Bank of Travancore (AIR 1968 SC 1432) – The credit limit of the debtor, which has been fixed at Rs. 1,00,000 was first reduced to Rs. 50,000 and then again raised to 1,00,000. It was held that in this case there was no variation as per section 133.

4. By Release of Principal Debtor – Section 134

This section provides that if the creditor discharges the principal debtor from liability, the surety is also discharged.

5. When Creditor Deals with Principal Debtor – Section 135

This section provides that the surety is discharged if the creditor, without the surety’s consent, agrees to any of the following with the principal debtor:

• Makes a composition or settlement,
• Promises to give additional time to debtor, or
• Promises not to sue the principal debtor.

6. By Creditor’s Act or Omission – Section 139

This section provides that when the creditor’s actions or omissions negatively affect the surety’s rights or remedies against the principal debtor, the surety is discharged.

7. By Loss of Security – Section 141

The surety has a right to all securities held by the creditor against the principal debtor at the time of the contract. If the creditor loses or parts with such security without the surety’s consent, the surety is discharged to the extent of the value of the lost security.

These legal provisions offer crucial protection to sureties, especially in financial agreements. They prevent undue hardship and ensure fairness when the guarantee arrangement changes beyond the control or consent of the surety

RIGHTS OF SURETY

The Indian Contract Act, 1872 confers several legal rights on a surety to ensure fairness and protection. These rights are categorized based on the parties involved — principal debtor, creditor, and co-sureties.

Rights of Surety Against Principal Debtor

• Right of Subrogation – Section 140 provides that when the surety pays the debt or performs the obligation of the principal debtor, he steps into the shoes of the creditor. This means the surety acquires all the rights the creditor had against the principal debtor. Now, the debtor must pay the surety.
• Right to Indemnity – Section 145 provides that the principal debtor has an implied duty to indemnify the surety. The surety can recover from the principal debtor all the amounts he has rightfully paid under the contract of guarantee.

Rights of Surety Against Creditor

• Right to Securities – Section 141 provides that the surety is entitled to every security the creditor held against the principal debtor at the time the suretyship contract was made. If the creditor loses or gives up any such security without the surety’s consent, the surety is discharged to that extent.

Rights of Surety Against Co-Sureties

• Right of Contribution –Section 146 provides that the duty of the co-sureties is to contribute equally. This is so when they are co-sureties for the same debt immaterial of the fact, that they know each other or not.
• 2. Co-sureties Bound in Different Sums – Section 147 provides that when co-sureties fix different limits of liability, their contributions will be based on their respective agreed limits. For example, if one surety agrees to ₹50,000 and another to ₹1,00,000, their liabilities are apportioned accordingly.

References:

1. Indian Contract Act, 1872
2. Law of Contract-II by Dr. R.K. Bangia