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CHAPTER V
SPECIAL CONTRACTS
CONTRACT OF INDEMNITY: SEC 124
The term indemnity may be defined as an act to compensate or protect against loss. In other
words, to make good the loss. A contract to indemnify or to compensate a person from loss
is known as contract of indemnity .
The term contract of indemnity is defined in Sec 124 of Indian Contract Act which reads as
under:
"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 2 parties involved in contract of indemnity.
1. Indemnifier: The party who gives the indemnity i.e who promises to compensate for
the loss is known as indemnifier.
2. Indemnity-holder: The party for whose protection the indemnity is given Le who is
protected against the loss is known as indemnity-holder or indemnified
Eg: A and B go into shop B says shopkeeper "Let A has the goods, I will see you are paid. This
is contract of indemnity.
Essentials and legal rules of valid contract of indemnity :
1. The contract of indemnity must satisfy the requirements of a valid contract: The
contract of indemnity is a special contract. As such, it must have all the essentials of a
valid contract, such as consideration, free consent, competency of the parties, legality
of object and consideration. Thus when the object of the contract of indemnity is
opposed to public policy, it will not be a valid contract of indemnity.
Eg. A requested B journalist to publish defamatory article against C. and A promised
to indemnify B for any loss which he may suffer by way of damages payable to C It is
not a valid contract of indemnity as it is opposed to public policy.
2. There must be a promise to save the other party from loss: This is most important
element of a contract of indemnity. One party must save the other party from loss
which he may suffer.
Eg. A is appointed as a cashier in B's firm at the request of C, C promised to indemnify
B for any loss that he may suffer due to the dishonesty of A. In this case, the contract
between B and C is the contract of indemnity.
BUSINESS LAW CHAPTER V
ANJALI VIJAY
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3. The loss may be due to the conduct of the promisor himself or any other person
:According to sec 124 of Indian Contract Act, the indemnity may be for the loss which
a party may sustain due to the conduct of the promisor himself or any other persons.
In other words, the losses arising out of accidents or any events which do not depend
on the conduct of human beings are also covered by the contract of indemnity.
Eg. The losses arising from accidental fire, perils of sea etc.
4. The contract of indemnity may be expressed or implied:. The promise to indemnify a
person against the loss suffered by him may be expressed or implied. The express
promise is one where the person promises in expressed terms to compensate the
other from the loss. An implied promise is the one where the conduct of the promisor
shows that he promised to indemnify the other party against the loss suffered by him.
Eg. A transport company was in a possession of certain goods. The goods were claimed
both by A and B .A demanded delivery of goods from the transport company, but the
transport company asked for an indemnity bond A gave no reply for it. However the
company delivers goods to A. subsequently B turned to be the real owner and
recovered compensation from the transport company And the transport company
claimed compensation from A for the loss suffered by it. It was held that A was liable
to pay compensation as there was an implied promise by him to indemnify the
transport co.
CONTRACT OF GUARANTEE
The term guarantee may be defined as an undertaking by one person to pay the amount due
from another person. And a contract to pay the amount due from another person, in case the
latter fails to pay is known as contract of guarantee. The term contract of guarantee is defined
in sec 126 of Indian Contract Act which reads as under:
"A contract of guarantee is a contract to perform the promise, or discharge the liability of
third person in case of his default" So this section shows that the contract of guarantee is a
contract in which a person promises to discharge the liability of the third person in case that
person fails to discharge his own liability. The following 3 parties are involved in a contract of
guarantee.
1. Surety: The party who gives the guarantee is known as surety.
2. Principal debtor: The party on whose behalf the guarantee is given is known as
principal debtor, the party in respect of whose default the guarantee is given.
3. Creditor: The party to whom the guarantee is given.
Thus, a contract of guarantee is agreement between the surety, the principal debtor and the
creditor in which the surety promises to pay the amount of debt to creditor if the principal
debtor fails to pay.
Eg: A advance the loan of rupee 5000 to B at a request of C And C promised to A that if B does
not repay then he (C) will pay. This is contract of guarantee .In this case, B is the principal
debtor and C is the surety.
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ANJALI VIJAY
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Essentials and legal rules of guarantee:
1. The contract of guarantee must satisfy all the requirements of valid contract: A contract
of guarantee is a special kind of contract. As such it must have all the essentials of a valid
contract such as consideration, free consent, competence of the parties, legality of object and
consideration. Eg: A requested to B to give him loan of Rs. 60000 B agreed to give the loan if
C guarantees the repayment of the loan. C refuses to give the guarantee. However the
guarantee of C was obtained by practicing coercion on him. This is not a valid guarantee of
surety as the consent was not free.
2. The contract of guarantee must be supported by consideration: It is not necessary that
there should be a direct consideration between the surety and the creditor, the law presumes
that the consideration received by the principal debtor is the sufficient consideration for the
surety.
3. The contract of guarantee must be made by the parties competent to contract: The
parties to the contract of guarantee must be competent to the contract. The incapacity of the
principal debtor does not affect the validity of the contract of guarantee. Thus the
requirement is that the creditor and the surety must be competent to enter into the valid
contact. The principal debtor may be a minor, the surety is personally liable in that case to
pay the debt and the principal debtor is not liable.
Eg: A requested B to Rs 10000 to C, a minor and A promised that if C failed to repay then he
will pay the amount. In this case, though the principal debtor is a minor but the contract
between A and B is enforceable and B can recover the amount from A.
4. There must be someone primarily liable: It is essential requirement of contract of
guarantee that there must be someone primarily liable other than a surety. If there is no such
primary liability, there can be no contract of guarantee.
5. The promise to pay must be conditional: There must be conditional promise to be liable
on the default of the principal debtor. In other words, the liability of the surety should arise
only when the principal debtor makes the default.
Eg. A and B are two friends, went to C's shop. A brought some goods from the shop. A and B
said that if A fails to pay the price, then he (B) will pay. This is contract of guarantee. In this
case the primary liability to pay the price.
6. There should be no misrepresentation: It is also essential element of a valid guarantee.
The guarantee should not be obtained by misrepresenting the facts to the surety. If the
guarantee is obtained by the misrepresentation of material facts, the guarantee will also be
invalid, if the creditor obtains it by misrepresentation of material facts.
Eg. A purchased certain goods from B, a shopkeeper on credit After the expiry of credit period.
A failed to pay the price of goods. In consequences of this B refused to allow credit in future
unless A furnishes guarantee for payment of price by A At the time of guarantee B informed
C that previously A was making all the payments on due date. In this case the guarantee given
BUSINESS LAW CHAPTER V
ANJALI VIJAY
CHAPTER V
SPECIAL CONTRACTS
CONTRACT OF INDEMNITY: SEC 124
The term indemnity may be defined as an act to compensate or protect against loss. In other
words, to make good the loss. A contract to indemnify or to compensate a person from loss
is known as contract of indemnity .
The term contract of indemnity is defined in Sec 124 of Indian Contract Act which reads as
under:
"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 2 parties involved in contract of indemnity.
1. Indemnifier: The party who gives the indemnity i.e who promises to compensate for
the loss is known as indemnifier.
2. Indemnity-holder: The party for whose protection the indemnity is given Le who is
protected against the loss is known as indemnity-holder or indemnified
Eg: A and B go into shop B says shopkeeper "Let A has the goods, I will see you are paid. This
is contract of indemnity.
Essentials and legal rules of valid contract of indemnity :
1. The contract of indemnity must satisfy the requirements of a valid contract: The
contract of indemnity is a special contract. As such, it must have all the essentials of a
valid contract, such as consideration, free consent, competency of the parties, legality
of object and consideration. Thus when the object of the contract of indemnity is
opposed to public policy, it will not be a valid contract of indemnity.
Eg. A requested B journalist to publish defamatory article against C. and A promised
to indemnify B for any loss which he may suffer by way of damages payable to C It is
not a valid contract of indemnity as it is opposed to public policy.
2. There must be a promise to save the other party from loss: This is most important
element of a contract of indemnity. One party must save the other party from loss
which he may suffer.
Eg. A is appointed as a cashier in B's firm at the request of C, C promised to indemnify
B for any loss that he may suffer due to the dishonesty of A. In this case, the contract
between B and C is the contract of indemnity.
BUSINESS LAW CHAPTER V
ANJALI VIJAY
, P a g e |2
3. The loss may be due to the conduct of the promisor himself or any other person
:According to sec 124 of Indian Contract Act, the indemnity may be for the loss which
a party may sustain due to the conduct of the promisor himself or any other persons.
In other words, the losses arising out of accidents or any events which do not depend
on the conduct of human beings are also covered by the contract of indemnity.
Eg. The losses arising from accidental fire, perils of sea etc.
4. The contract of indemnity may be expressed or implied:. The promise to indemnify a
person against the loss suffered by him may be expressed or implied. The express
promise is one where the person promises in expressed terms to compensate the
other from the loss. An implied promise is the one where the conduct of the promisor
shows that he promised to indemnify the other party against the loss suffered by him.
Eg. A transport company was in a possession of certain goods. The goods were claimed
both by A and B .A demanded delivery of goods from the transport company, but the
transport company asked for an indemnity bond A gave no reply for it. However the
company delivers goods to A. subsequently B turned to be the real owner and
recovered compensation from the transport company And the transport company
claimed compensation from A for the loss suffered by it. It was held that A was liable
to pay compensation as there was an implied promise by him to indemnify the
transport co.
CONTRACT OF GUARANTEE
The term guarantee may be defined as an undertaking by one person to pay the amount due
from another person. And a contract to pay the amount due from another person, in case the
latter fails to pay is known as contract of guarantee. The term contract of guarantee is defined
in sec 126 of Indian Contract Act which reads as under:
"A contract of guarantee is a contract to perform the promise, or discharge the liability of
third person in case of his default" So this section shows that the contract of guarantee is a
contract in which a person promises to discharge the liability of the third person in case that
person fails to discharge his own liability. The following 3 parties are involved in a contract of
guarantee.
1. Surety: The party who gives the guarantee is known as surety.
2. Principal debtor: The party on whose behalf the guarantee is given is known as
principal debtor, the party in respect of whose default the guarantee is given.
3. Creditor: The party to whom the guarantee is given.
Thus, a contract of guarantee is agreement between the surety, the principal debtor and the
creditor in which the surety promises to pay the amount of debt to creditor if the principal
debtor fails to pay.
Eg: A advance the loan of rupee 5000 to B at a request of C And C promised to A that if B does
not repay then he (C) will pay. This is contract of guarantee .In this case, B is the principal
debtor and C is the surety.
BUSINESS LAW CHAPTER V
ANJALI VIJAY
, P a g e |3
Essentials and legal rules of guarantee:
1. The contract of guarantee must satisfy all the requirements of valid contract: A contract
of guarantee is a special kind of contract. As such it must have all the essentials of a valid
contract such as consideration, free consent, competence of the parties, legality of object and
consideration. Eg: A requested to B to give him loan of Rs. 60000 B agreed to give the loan if
C guarantees the repayment of the loan. C refuses to give the guarantee. However the
guarantee of C was obtained by practicing coercion on him. This is not a valid guarantee of
surety as the consent was not free.
2. The contract of guarantee must be supported by consideration: It is not necessary that
there should be a direct consideration between the surety and the creditor, the law presumes
that the consideration received by the principal debtor is the sufficient consideration for the
surety.
3. The contract of guarantee must be made by the parties competent to contract: The
parties to the contract of guarantee must be competent to the contract. The incapacity of the
principal debtor does not affect the validity of the contract of guarantee. Thus the
requirement is that the creditor and the surety must be competent to enter into the valid
contact. The principal debtor may be a minor, the surety is personally liable in that case to
pay the debt and the principal debtor is not liable.
Eg: A requested B to Rs 10000 to C, a minor and A promised that if C failed to repay then he
will pay the amount. In this case, though the principal debtor is a minor but the contract
between A and B is enforceable and B can recover the amount from A.
4. There must be someone primarily liable: It is essential requirement of contract of
guarantee that there must be someone primarily liable other than a surety. If there is no such
primary liability, there can be no contract of guarantee.
5. The promise to pay must be conditional: There must be conditional promise to be liable
on the default of the principal debtor. In other words, the liability of the surety should arise
only when the principal debtor makes the default.
Eg. A and B are two friends, went to C's shop. A brought some goods from the shop. A and B
said that if A fails to pay the price, then he (B) will pay. This is contract of guarantee. In this
case the primary liability to pay the price.
6. There should be no misrepresentation: It is also essential element of a valid guarantee.
The guarantee should not be obtained by misrepresenting the facts to the surety. If the
guarantee is obtained by the misrepresentation of material facts, the guarantee will also be
invalid, if the creditor obtains it by misrepresentation of material facts.
Eg. A purchased certain goods from B, a shopkeeper on credit After the expiry of credit period.
A failed to pay the price of goods. In consequences of this B refused to allow credit in future
unless A furnishes guarantee for payment of price by A At the time of guarantee B informed
C that previously A was making all the payments on due date. In this case the guarantee given
BUSINESS LAW CHAPTER V
ANJALI VIJAY
