Trigger Condition Pact

UNIT – 4
Contract of Indemnity and Guarantee: Contract of Indemnity and Contract of Guarantee –
Extent of Surety’s Liability, kinds of guarantee, Rights of Surety, Discharge of Surety, Bailment
and Pledge – Bailment – Concept – Essentials and Kinds – Classification of Bailments – Duties
and Rights of Bailor and Bailee – Law of Pledge – Meaning – Essentials of Valid pledge, Pledge
and Lien , Rights of Pawner and pawnee.
Contract of Indemnity
Definition:
A contract of indemnity is a contract in which one party promises to compensate the
other party for any loss or damage that occurs due to a specific event or circumstance.
Key Elements:
1. Promise to compensate: One party promises to indemnify (compensate) the other for any
loss or liability incurred.
2. Loss or damage: The indemnity is typically offered when the indemnified party faces a
loss due to some specified event or action.
3. Unilateral contract: Generally, the contract of indemnity is unilateral, as only one party
(the indemnifier) is liable to compensate the other party.
Examples:
 Insurance contracts where the insurer agrees to compensate the insured for certain types
of loss.
 Indemnity agreements in business transactions where one party agrees to cover losses
caused by breaches or negligence.
Legal Provisions:
 Section 124 of the Indian Contract Act, 1872 defines a contract of indemnity.
 The indemnifier must compensate the indemnity holder for any loss that arises from a
specified event.
Types:
 Express Indemnity: Clearly stated in a written agreement.
 Implied Indemnity: Implied by the actions or circumstances, though not explicitly
written.



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,2. Contract of Guarantee
Definition:
A contract of guarantee is a contract in which one party (the guarantor) agrees to take
responsibility for the debt or obligation of another party (the principal debtor) in case of default.
Key Elements:
 Principal Debtor: The person who has the primary obligation or debt.
 Creditor: The person or entity to whom the principal debtor owes the debt or obligation.
 Guarantor: The person who agrees to pay the debt or fulfill the obligation if the principal
debtor defaults.
Types:
 Simple Guarantee: A guarantee where the guarantor’s liability arises only when the
principal debtor defaults.
 Continuing Guarantee: A guarantee that covers a series of transactions or obligations
(e.g., a line of credit or a loan).
Example:
A bank guarantee where a third party guarantees that a borrower will repay a loan. If the
borrower defaults, the bank guarantees the repayment.
Legal Provisions:
 Section 126 of the Indian Contract Act, 1872 defines a contract of guarantee.
The guarantee can be:
 Specific: Only covers one particular transaction.
 Continuing: Covers multiple transactions over time.
Key Differences between Indemnity and Guarantee:
Parties Involved:
 In an indemnity, there are two parties: the indemnifier and the indemnity holder.
 In a guarantee, there are three parties: the principal debtor, the creditor, and the guarantor.
Nature of Liability:
 In indemnity, liability is primarily to compensate for loss.
 In guarantee, liability is contingent on the default of the principal debtor.
Nature of the Contract:
 An indemnity is typically a unilateral contract (one party's obligation to pay the other).

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,  A guarantee is a contract of secondary liability (the guarantor is liable only if the
principal debtor defaults).
Distinction in Practice:
 Indemnity: No need for a default to trigger liability.
 Guarantee: Liability is triggered by the default of the principal debtor.
EXTENT OF SURETY’S LIABILITY
A surety is a person who agrees to take responsibility for the debt or obligation of another
(the principal debtor) in the event of default. The extent of a surety's liability refers to the scope
or limit of the surety's obligations under the contract of guarantee.
Under the Indian Contract Act, 1872, the extent of the surety's liability is governed by the
terms of the guarantee and the following general principles:
1. Scope of Surety’s Liability (Section 128 of the Indian Contract Act)
Primary Liability of the Principal Debtor: The surety's liability is secondary and arises
only when the principal debtor defaults. The surety becomes liable only after the principal debtor
has failed to fulfill the contractual obligation.
Extent of Liability:
The surety's liability can be limited or extended based on the terms of the contract of
guarantee. If the contract specifies a fixed amount or a particular condition, the surety is only
liable to the extent of that amount or condition. If no limit is specified, the surety’s liability could
be as extensive as the debt or obligation the principal debtor owes to the creditor.
2. Liability Extends to the Whole Debt
General Rule: In the absence of any specific limitations in the contract, the surety is liable
for the full amount of the debt owed by the principal debtor to the creditor. This means that the
creditor can recover the entire debt from the surety if the principal debtor defaults.
Example: If a person (principal debtor) borrows ₹50,000 from a bank and the surety
agrees to guarantee the loan, the surety can be held liable for the entire ₹50,000 if the borrower
defaults.
3. Limitation of Liability (Section 128 of the Indian Contract Act)
Specific Agreement: The liability of the surety can be limited by an express agreement
between the creditor, surety, and the principal debtor. For example, the surety might only
guarantee up to a certain amount, a specific transaction, or under particular conditions.

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