Section 124
According to Section 124 of the Indian Contract Act, indemnity refers to a contractual promise made by one party to another party. This promise aims to protect the parties involved in the contract from any losses resulting from the actions or conduct of another party.
In a contract of indemnity, there are two parties involved: the indemnifier and the indemnity holder.
The parties involved in a contract of indemnity are:
An indemnifier is a someone who pledges to reimburse or safeguard another individual from a financial loss. An individual with this role is commonly referred to as an Indemnifier or alternatively, they may be referred to as the promisor.
- Indemnity: An indemnity holder is an individual who receives protection from any damage, whether inflicted by the indemnifier or a third party. The individual in question is commonly referred to as the indemnity holder, or alternatively, they may be referred to as the promisee.
- Indemnifier: The indemnifier pledges to provide compensation to the indemnity holder in the event that the indemnity holder incurs any losses as a result of the indemnifier’s actions or behavior.
For instance, Kalpana entered into a contract with Sagar, in which Kalpana agreed to compensate Sagar for any negative outcomes resulting from legal actions taken by Akash against Sagar. If Sagarl is required to pay 1 lakh as a result of these actions, Kalpana will be obligated to pay that sum since he has committed to indemnify Sagar.
The Contract of Indemnity must be either explicitly stated or inferred. Expressed contracts refer to agreements that are explicitly stated, either in written or verbal form. On the other hand, implicit contracts are based on the events and context surrounding the agreement. An implied contract is evident based on the surrounding circumstances.
A contract of indemnification is similar to any other contract and must satisfy all the necessary elements of a valid contract, including:
- Free consent
- consideration
- An object that is in accordance with the law
- Party competencies
The essential principles of a contract of indemnity are:
- A commitment has been made to provide reparation for any harm or detriment inflicted against a third party.
- This is a comprehensive agreement that encompasses both insurance and guarantee contracts. This does not constitute a collateral contract.
- It is primarily utilized by parties to allocate contingent obligations associated with risk.
- The parties should ensure that indemnity clauses are unambiguous and explicit, taking into account any scenarios that may emerge and the corresponding damages that would be required to be paid in the event of revocation of these clauses.
Section 125
Section 125 of the Indian Contract Act grants the indemnity holder the authority to seek compensation for losses and damages from the indemnifier. If an indemnifier fails to fulfill a promise or causes harm to the indemnity holder due to a specific action, it is considered a breach of contract. This occurs when the indemnifier is unable to uphold their commitment.
The following are some of the rights:
- The Indemnifier will recover any damages that the indemnity holder is obligated to pay or has already paid under the contract, in any legal proceedings, in accordance with their indemnification agreement.
- The Indemnifier will be responsible for reimbursing all legal costs and expenses incurred by the indemnity holder during the case processes.
- The indemnity holder will be able to collect any cash paid under a compromise agreement during a lawsuit from the indemnifier, as long as the commitments made were not in conflict with the indemnifier’s obligations.
Therefore, the party who has the indemnity is eligible to seek compensation for their losses based on their legal entitlements, which empower them to take action within the limits of their authorized powers. The indemnity holder can exercise these rights only if they work within the scope of their power. However, if they act outside their authority or engage in prohibited actions, they will not be able to access these rights under the Indian Contract Act.
Section 125
Section 125 of the Indian Contract Act grants the indemnity holder the authority to seek compensation for losses and damages from the indemnifier. If an indemnifier fails to fulfill a promise or causes harm to the indemnity holder due to a specific action, it is considered a breach of contract. This occurs when the indemnifier is unable to uphold their commitment.
The following are some of the rights:
- The Indemnifier will recover any damages that the indemnity holder is obligated to pay or has already paid under the contract, in any legal proceedings, in accordance with their indemnification agreement.
- The Indemnifier will be responsible for reimbursing all legal costs and expenses incurred by the indemnity holder during the case processes.
- The indemnity holder will be able to collect any cash paid under a compromise agreement during a lawsuit from the indemnifier, as long as the commitments made were not in conflict with the indemnifier’s obligations.
Therefore, the party who has the indemnity is eligible to seek compensation for their losses based on their legal entitlements, which empower them to take action within the limits of their authorized powers. The indemnity holder can exercise these rights only if they work within the scope of their power. However, if they act outside their authority or engage in prohibited actions, they will not be able to access these rights under the Indian Contract Act.
Section 126
Contract of Guarantee
Section 126 of the Indian Contract Act of 1872 specifically defines a guarantee contract. According to this section, a guarantee contract is one that requires an individual or a group of individuals to carry out a promise made or to discharge their liability under the contract if the third party to the contract fails to fulfill their share of the promise. This guarantee may be oral or written.
A guarantee agreement requires three parties: the major debtor, the creditor, and the surety. The major debtor or borrower is the person to whom the guarantee must be paid in the event of nonpayment; the creditor is the person who receives the guarantee; and the surety is the person who delivers the guarantee.
Surety promises to the creditor that if the principal debtor defaults, they would discharge the third party’s liability or fulfill the commitment made by the principal debtor. As a result, the surety provides assurance to the creditor regarding the principal debtor’s actions.
The responsibility of the surety can be construed as collateral for the major debtor’s liability. In the event that the principal debtor defaults, the surety is bound by a conditional guarantee to be held accountable.
A guarantee contract has three key features:
- Consideration: Consideration is an essential component of a guarantee agreement. The consideration can take the form of money, a future act, personal property, or anything else that benefits the major debtor.
- Not made in good faith:A guarantee contract is not an uberrimae fides contract, which means it is made in good faith. However, there is an obligation to disclose all material facts to the surety so that he may make an educated decision. Therefore, a guarantee obtained by concealment or misrepresentation is invalid.
- Either oral or written: The contract might be oral or written, according to Section 126 of the Indian Contract Act of 1872.
The Act strives to safeguard all three parties involved in a guarantee contract, with a focus on the surety’s interests.
Section 127 of the Indian Contract Act.
This section focuses mostly on the consideration in a guarantee contract. The consideration for the surety’s promise may be transferred from either the creditor or the principal debtor. The consideration may benefit the surety, but this is not required in the guarantee contract. This section refers to the consideration, which is any advantage received by the principal debtor or creditor at the surety’s request.
In this part, the phrase “done” refers to the major debtor’s prior benefit, which can be deemed positive consideration.
Section 128
Section 128 of the Indian Contract Act, 1872, specifies that the surety’s liability is coextensive. It has the same size as the major debtor. It highlights the utmost degree and scope of the surety’s liability.
Coextensive
The term “coextensive” refers to the amount or magnitude of the principle obligation. This section solely discusses the scope of the surety’s commitment when no limitation has been imposed on the validity of the principal debtor’s obligation.
The Section goes on to clarify how the guarantor may, in the agreement, establish specific limits on the scope of his liability when engaging into a particular contract. They can make a statement and set a limit or restriction on their liability.
Unless clearly stated in the contract provisions, the creditor cannot hold the surety liable or sue him until the principal debtor defaults. As a result, the surety’s liability is considered secondary or peripheral.
It is reassuring to note that even before the Indian Contract Act of 1872 was enacted, Indian courts recognized the notion of co-extensiveness. In the case of Lachman Joharimal v. Bapu Khandu and Another (1869), the Bombay High Court explained that the creditor is not need to exhaust all remedies before prosecuting the major debtor. A decree obtained against the surety may be upheld in the same manner as a declaration or decree for any obligation of the party or any unpaid debt.
Section 129
Continuing Guarantee: “Continuing guarantee” refers to a guarantee that extends throughout multiple transactions.
Illustrations
(a) A agrees to hire C to collect rent for B’s zamindari in exchange for 5,000 rupees in compensation. This is a continual promise.
(c) A guarantees payment to c, a tea trader, in the amount of Rs. 1000 for any tea that B may supply to C from time to time. B supplies C with tea worth more than Rs. 1000, and C pays B for it. Afterwards, B gives C Rs. 2000 worth of tea. C fails to pay. A’s assurance was a continuing guarantee, hence he is liable to B in the amount of Rs. 1000 .
(c) A guarantees payment to B for the price of five bags of flour to be delivered by B to C and paid for within a month. B delivers 5 bags to C. C pays for them. Afterwards, B delivers four bags to C, for which C pays riot. A’s guarantee was not ongoing, so he is not responsible for the four bags’ price.
Section 132
Liability of two persons, mainly liable, is not changed by an agreement between them that one will be surety for the other’s default.—Where two people contract with a third person to assume a certain liability and also contract with each other that one of them will be liable only if the other fails, and the third person is not a party to such contract, the existence of the second contract has no bearing on the liability of each of the two people to the third person under the first contract, even if the third person is aware of its existence.
Illustration
A and B issue a joint and many promissory note to C. A makes it as a surety for B, and C is aware of this at the time the note is issued. The fact that A, to the knowledge of C, made the note as guarantee for B is insufficient to defend A from an action based on the note.
Section 133
Section 133 addresses the discharge of a surety due to a contract deviation.Any change in the terms of the contract between the main [debtor] and the creditor that occurs without the surety’s approval dismisses the guarantor for transactions that occur after the change.
Illustrations
(a) A guarantees B’s conduct as a manager at C’s bank. B and C then agree, without A’s approval, to increase B’s income and make him liable for one-fourth of the overdraft losses. B allows a customer to overdraw, resulting in a loss for the bank. The variance made without A’s consent releases him from his suretyship, and he is not obligated to compensate for the loss.
(b) A assures C against B’s wrongdoing in an office to which B has been appointed by C and whose duties are established by a legislative act. A subsequent Act significantly alters the nature of the post. B then behaves inappropriately. The modification relieves A of future liability under his promise, despite the fact that B’s wrongdoing relates to a duty that is unaffected by the later Act.
(c) C agrees to appoint B as his clerk to sell products for an annual wage, in exchange for A becoming guarantee to C for B’s proper accounting of moneys earned as such clerk. Afterwards, without A’s knowledge or approval, C and B agree that B should be compensated by a commission on the goods sold by him rather than a fixed wage. A is not accountable for B’s subsequent misbehavior.
(d) A grants C a continued guarantee of 3,000 rupees for any oil delivered to B on credit. Afterwards, B becomes humiliated, and without A’s knowledge, B and C agree that C will continue to supply B with oil in exchange for ready money, and that the payments will be applied to B and C’s then-existing obligations. A is not liable under his guarantee for any goods supplied following this new agreement.
(f) C agrees to lend B 5,000 rupees on March 1st. A assures repayment. C pays 5,000 rupees to B on January 1st. A is released from liability because the contract has been modified, allowing C to suit B for the money before March 1st.
Section 134
Surety discharge occurs when the principal debtor is released or discharged.The surety is discharged by any contract between the creditor and the principal debtor that releases the principal debtor, or by the creditor’s act or omission that results in the principal debtor’s discharge.
Illustrations
(a) A guarantees that C will supply items to B. C supplies products to B, and B becomes embarrassed and agrees with his creditors (including C) to assign his property in exchange for them releasing him from their demands. The deal with C releases B from his debt, and A from his suretyship.
(a) A contracts with a to grow an indigo crop on A’s land and deliver it to B at a predetermined price, and C guarantees A’s performance under this contract. B diverts a stream of water required for irrigation of A’s farm, preventing him from raising indigo. C is no longer accountable under his promise.
(c) A contracts with B for a predetermined price to construct a house for B within a specified time frame, with B providing the necessary timber. C ensures A’s performance of the deal. B fails to supply the timber. C is released from his suretyship.
Section 135
Discharge of surety occurs when a creditor combines with, grants time to, or agrees not to sue the major debtor.A contract between the creditor and the major debtor in which the creditor forms a composition with, or pledges to grant time to, or not to suit, the principal debtor releases the surety, unless the surety assents to the agreement.
According to Section 136, a third-party agreement to give time to the principal debtor does not discharge the surety.—The surety is not discharged if the creditor enters into a contract to provide the principal debtor time with a third party rather than the principle debtor himself.
In this illustration, C, the holder of an overdue bill of exchange prepared by A as security for B and accepted by B, enters into a contract with M to give time to B. A is not freed.
Section 137
The creditor’s refusal to suit does not discharge the surety.—The creditor’s mere refusal to sue the major debtor or enforce any other remedy against him does not, in the absence of any provision in the guarantee to the contrary, release the surety.
Illustration
B owes C a debt guaranteed by A. The debt becomes payable. C does not sue B for one year after the loan has become due. A is not released from his suretyship.
Section 138
The release of one co-surety does not discharge the others.—Where there are co-sureties, a release by the creditor of one of them does not dismiss the others; nor does it free the surety so released of his responsibility to the other sureties.
Section 139
Discharge of surety due to creditor’s act or omission, which impairs surety’s eventual remedy.If the creditor violates the surety’s rights or fails to perform any act that his obligation to the surety requires him to perform, and the surety’s eventual remedy against the principal debtor is therefore impaired, the surety is discharged.
Illustrations
(a) B agrees to build a ship for C for a certain price, which will be paid in instalments as the job progresses. A becomes surety to C for B’s timely completion of the contract. Without A’s knowledge, C prepays the final two installments to B. This prepayment discharges A.
(b) C lends money to B on the security of a joint and several promissory note signed by B and A as surety for B, as well as a bill of sale for B’s furniture, which authorizes C to sell the furniture and use the proceeds to the note’s discharge. C then sells the furniture, but due to his malfeasance and willful negligence, just a modest sum is realized. A is released from obligation for the note.
(c) A appoints M as an apprentice to B and guarantees M’s faithfulness. B says that he would see M at least once a month to make up the cash. B fails to see this through as promised, and M embezzles. A is not accountable to B under his guarantee.
Section 40
Section 140 addresses surety rights for payment or performance.When a guaranteed debt becomes due or the principle debtor fails to perform a guaranteed duty, the surety upon payment or performance of all that he is liable for acquires all of the creditor’s rights against the principal debtor.
Section 41
Section 141 grants sureties the right to benefit from creditor securities.A surety is entitled to the benefit of any security that the creditor has against the principal debtor at the time the contract of suretyship is entered into, whether the surety is aware of its existence or not; and if the creditor loses or parts with such security without the surety’s consent, the surety is discharged to the extent of the security’s value.
Illustrations
(a)C advances 2,000 rupees to his tenant, B, on the guarantee of A. C has additional security for the 2,000 rupees through a mortgage on B’s furniture. C cancels his mortgage. B goes bankrupt, and C sues A on his guarantee. A is released from liability for the value of the furniture.
(b)C, a creditor whose advance to B is secured by a decree, receives a guarantee of that advance from A. C then executes the decree on B’s goods before withdrawing the execution without A’s knowledge. A has been discharged.
(c)A, as surety for B, creates a bond with B to C to secure a loan from C to B. Following that, B provides C with more security for the same debt. C then gives up the additional security. A was not dismissed.
Section 142
Guarantee gained through misrepresentation is invalid.—Any guarantee received by the creditor’s misrepresentation, or with his knowledge and consent, regarding a material aspect of the transaction is invalid.
