{"id":16073,"date":"2023-03-13T17:12:27","date_gmt":"2023-03-13T11:42:27","guid":{"rendered":"https:\/\/gstguntur.com\/?p=16073"},"modified":"2023-03-13T17:12:27","modified_gmt":"2023-03-13T11:42:27","slug":"indian-contract-act-1872-indemnity-and-guarantee-ca-inter-law-notes","status":"publish","type":"post","link":"https:\/\/gstguntur.com\/indian-contract-act-1872-indemnity-and-guarantee-ca-inter-law-notes\/","title":{"rendered":"Indian Contract Act, 1872 &#8211; Indemnity and Guarantee \u2013 CA Inter Law Notes"},"content":{"rendered":"<p>Indian Contract Act, 1872 &#8211; Indemnity and Guarantee \u2013 <a href=\"https:\/\/gstguntur.com\/ca-inter-law-notes\/\">CA Inter Law Notes<\/a> is designed strictly as per the latest syllabus and exam pattern.<\/p>\n<h2>Indian Contract Act, 1872 &#8211; Indemnity and Guarantee \u2013 CA Inter Law Notes<\/h2>\n<p><strong>Contract Of Indemnity &#8211; Basic &amp; Definition &#8211; Section 124<\/strong><\/p>\n<p>Meaning:<br \/>\nContract of indemnity is contract where one party promises to save the other party from loss caused to him by:<\/p>\n<ul>\n<li>His conduct; or<\/li>\n<li>Conduct of any person<\/li>\n<\/ul>\n<p>Parties<br \/>\nIndemnifier: The person who promises to make good the loss is called the indemnifier (Promisor)<br \/>\nIndemnity holder: The person whose loss is to be made good is called the indemnified or indemnity-holder (Promisee).<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Indian Contract Act, 1872 - Indemnity and Guarantee \u2013 CA Inter Law Notes\" width=\"123\" height=\"13\" \/><\/p>\n<p>Example:<\/p>\n<ul>\n<li>Mr. A contracts to indemnify Mr. B against the consequences of any proceedings, which Mr. C may take against Mr. B in respect of a certain sum of \u20b9 200. This is a contract of indemnity.<\/li>\n<li>Mr. A is indemnifier or promisor while Mr. B is indemnity holder or promisee.<\/li>\n<\/ul>\n<p><strong>Essential Elements of Contract of Indemnity<\/strong><\/p>\n<p>Following are the essential elements of indemnity contract:<\/p>\n<p>Contract:<\/p>\n<ul>\n<li>Contract of indemnity is special contract. All the general principles of contract are equally applicable to it.<\/li>\n<li>All the essentials of a valid contract must be present in the contract of indemnity.<\/li>\n<li>Contract of indemnity is possible by express or implied manner.<\/li>\n<li>It is class of contingent contract.<\/li>\n<\/ul>\n<p>Loss to One Party:<br \/>\nA person can indemnify another person, if such other person:<\/p>\n<ul>\n<li>incurs some loss; or<\/li>\n<li>is about to incur some loss (i.e., loss of person becomes certain)<\/li>\n<\/ul>\n<p>Indemnity by the Promisor:<br \/>\nThe purpose of contract of indemnity is to protect the indemnity holder from any loss that may be caused to the indemnity holder in future (i.e., such loss has not already been caused to the indemnity holder)<\/p>\n<p>Reason for Loss:<br \/>\nThe contract of indemnity may specify that indemnity holder shall be protected from the loss caused due to:<\/p>\n<ul>\n<li>action of the promisor; or<\/li>\n<li>action of any other person; or<\/li>\n<li>any act, event or accident which is not in the control of parties.<\/li>\n<\/ul>\n<p><strong>Rights of Indemnity Holder &#8211; Section 125<\/strong><\/p>\n<p>The indemnity holder has right to recover the following from the indemnifier by way of compensation:<\/p>\n<p>Right to Recover Damages:<br \/>\nThe indemnity holder is entitled to recover from the indemnifier all the damages, which he is compelled to pay in any suit in respect of any matter covered by the contract of indemnity.<\/p>\n<p>Right to Recover Costs:<br \/>\nThe indemnity holder is entitled to recover from the indemnifier all the costs, which he is compelled to pay, in bringing or defending such suit.<br \/>\nIndemnity holder must act within scope of his authority and while bringing or defending suit he must act as prudent person.<\/p>\n<p>Right to Recover Sums Paid in Compromise:<\/p>\n<ul>\n<li>The indemnity holder is entitled to recover from the indemnifier the entire amount, which he has paid under the terms of a compromise of the suit.<\/li>\n<li>However, he must act within scope of his authority. While compromise, he must act like prudent man.<\/li>\n<\/ul>\n<p>Commencement of Indemnifier\u2019s Liability: If the indemnity holder had incurred an absolute liability, he becomes entitled to call upon the indemnifier to protect.<\/p>\n<p>Important Note: There is no provision in the Indian Contract Act, 1872 about indemnifier\u2019s rights. However, it can be said that indemnifier\u2019s rights are same as those of surety.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Indian Contract Act, 1872 - Indemnity and Guarantee \u2013 CA Inter Law Notes\" width=\"123\" height=\"13\" \/><\/p>\n<p><strong>Contract Of Guarantee &#8211; Section 126<\/strong><\/p>\n<p>What is Contract of Guarantee?<br \/>\nA contract of guarantee\u2019 is a contract to perform the promise or discharge the liability of a third person in case of his default.<\/p>\n<p>Parties:<br \/>\nSurety: Person who gives the guarantee is called the \u2018surety\u2019.<br \/>\nPrincipal debtor: Person in respect of whose loan the guarantee is given is called the \u2018principal debtor\u2019.<br \/>\nCreditor: Person to whom the guarantee is given is called the \u2018creditor\u2019.<\/p>\n<p>Example:<\/p>\n<ul>\n<li>Sagar requests Chetan to lend \u20b9 500 to Paresh and guarantees that if Paresh fails to pay the amount, he will pay.<\/li>\n<li>This is a contract of guarantee.<\/li>\n<li>Sagar, in this case, is the surety, Chetan, the creditor and Paresh, the principal debtor.<\/li>\n<\/ul>\n<p><strong>Essential Elements of Contract of Guarantee or Legal Rules For Valid Contract of Guarantee &#8211; Sections 126-127<\/strong><\/p>\n<p>The essential elements of contract of guarantee are discussed as under:<\/p>\n<p>Tripartite Agreement:<br \/>\nA contract of guarantee is a tripartite agreement, which includes the principal debtor, the creditor, and the surety.<\/p>\n<p>There are three contracts as under:<\/p>\n<ul>\n<li>As between creditor and principal debtor, there is a contract out of which the guaranteed debt arises.<\/li>\n<li>As between surety and creditor, there is a contract by which surety guarantees to pay to creditor, principal debtor\u2019s debt in case of his debtor\u2019s default.<\/li>\n<li>As between surety and principal debtor, there is a contract that debtor shall indemnify Surety in case Surety pays in the event of a default by Principal debtor.<\/li>\n<\/ul>\n<p>Essentials of a Valid Contract:<br \/>\nA contract of guarantee must have all the essential elements of a valid contract like free consent, capacity of parties, lawful object and consideration.<\/p>\n<p>But the following two points should be noted:<\/p>\n<ul>\n<li>All the parties must be capable of entering into a valid contract, though the principal debtor may be a person suffering from incapacity to contract. In such a case, the surety is regarded as the principal debtor and is liable to pay personally even though the principal debtor (e.g., a minor) is not liable to pay.<\/li>\n<li>Consideration received by the principal debtor is sufficient for the surety, and it is not necessary that it must necessarily result in some benefit to the surety himself. It is sufficient if something is done or some promise is made for the benefit of the principal debtor.<\/li>\n<\/ul>\n<p>Consideration &#8211; Section 127:<\/p>\n<ul>\n<li>Contract of guarantee must be supported by consideration.<\/li>\n<li>However, it is not necessary that there should be direct consideration between surety and creditor.<\/li>\n<\/ul>\n<p>Consent of All Parties:<br \/>\nThere must be consent of all the three parties.<\/p>\n<p>Primary liability &#8211; Principal Debtor:<\/p>\n<ul>\n<li>The Principal debtor is primarily liable to pay debt.<\/li>\n<li>Debt should:\n<ul>\n<li>Be enforceable by law<\/li>\n<li>Not be a time barred debt.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>Conditional Liability:<\/p>\n<ul>\n<li>The liability of surety is secondary and conditional.<\/li>\n<li>It means surety is liable to pay if the principal debtor makes a default in payment.<\/li>\n<\/ul>\n<p>No Misrepresentation or Concealment &#8211; Section 142:<br \/>\nThe creditor should disclose all facts that are likely to affect the surety\u2019s liability. If there is misrepresentation or concealment of facts, guarantee will be invalid.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Indian Contract Act, 1872 - Indemnity and Guarantee \u2013 CA Inter Law Notes\" width=\"123\" height=\"13\" \/><\/p>\n<p>Example:<br \/>\nIf a clerk in an office occasionally fails to account for some of the receipts for money collected, he may be asked for surety. In case the person who steps up to be a surety for the clerk in the office is not informed of the occasional lapses on part of the clerk which lead to the requirement of a surety, any guarantee given by him is invalid as something of importance and directly affecting his decision to act as a surety was concealed from him.<\/p>\n<p>Joining by Other Co-sureties:<br \/>\nThe guarantee by surety is not valid if he imposes condition that some other person must also join as a co-surety and such other person does not join as a co-surety.<\/p>\n<p>Oral or Writing:<\/p>\n<ul>\n<li>A contract of guarantee may be either oral or written.<\/li>\n<li>It may be express or implied.<\/li>\n<li>Implied guarantee may be inferred from the conduct of the parties concerned.<\/li>\n<\/ul>\n<p><strong>Types of Guarantee<\/strong><\/p>\n<p>Guarantee can be classified as under:<br \/>\nRetrospective Guarantee: A guarantee given for an existing debt or obligation is called \u2018retrospective guarantee&#8217;.<\/p>\n<p>Prospective:<br \/>\nGuarantee: A guarantee given for a future debt or obligation is called prospective guarantee.<\/p>\n<p>Specific Guarantee:<\/p>\n<ul>\n<li>When guarantee extends to a single transaction or debt it is called a specific.<\/li>\n<li>Specific guarantee is also known as simple guarantee.<\/li>\n<li>On the completion of specific transaction, guarantee is discharge.<\/li>\n<\/ul>\n<p>Continuing Guarantee &#8211; Section 129:<\/p>\n<ul>\n<li>When guarantee extends to a series of transactions, it is called a continuing guarantee.<\/li>\n<li>Continue guarantee does not come to end on the performance of single transaction or discharge of debt but it will be enforceable even for subsequent transactions also.<\/li>\n<li>At the time of giving continuing guarantee, surety can fix either amount or time.<\/li>\n<\/ul>\n<p>Example:<br \/>\nA, in consideration that B will employ C in collection the rents of B\u2019s Zamindari, promises B to be responsible, to the amount of \u20b9 5,000 for the due collection and payment by C of those rents. This is a continuing guarantee.<\/p>\n<p>Important Note:<\/p>\n<ul>\n<li>A guarantee for the faithful discharge of his duties by a person appointed to a place of trust in a bank is not a continuing guarantee. It is a guarantee of appointment.<\/li>\n<li>A guarantee for payment of a certain sum by instalments within a definite time is not a continuing guarantee. It is a guarantee of loan.<\/li>\n<\/ul>\n<p><strong>Revocation of Continuing Guarantee &#8211; Sections 130-131<\/strong><\/p>\n<p>A continuing guarantee can be cancelled in following manner:<\/p>\n<p>By Notice- Section 130: Surety may cancel the continuing guarantee for future transaction at any time.<\/p>\n<p>Example:<br \/>\nA stood surety for B for any amount, which C may lend to B from time to time in the next 24 months up to a maximum of \u20b9 20,000. Afterwards at the end of three months, A gave a notice to C revoking his guarantee, when C had lent to B \u20b9 10,000. This revocation discharges A from any liability to C for any subsequent loans.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Indian Contract Act, 1872 - Indemnity and Guarantee \u2013 CA Inter Law Notes\" width=\"123\" height=\"13\" \/><\/p>\n<p>By Death of surety &#8211; Section 131:<\/p>\n<ul>\n<li>Continuing guarantee is cancelled on death of surety.<\/li>\n<li>In such case, no notice is required to be given to creditor.<\/li>\n<li>However, the contract may provide contrary to the above rule.<\/li>\n<li>On death of surety, guarantee is cancelled but for future transaction.<\/li>\n<li>For past transaction, which has already taken place, surety\u2019s estate will be liable.<\/li>\n<\/ul>\n<p>On Discharge of surety: Continuing guarantee is revoked when surety is discharged from liability.<\/p>\n<p>Important Note:<br \/>\nEffect of revocation of continuing guarantee<\/p>\n<ul>\n<li>On the revocation of continuing guarantee, surety\u2019s liability comes to end for future transactions.<\/li>\n<li>However, surety is liable for previous transactions.<\/li>\n<\/ul>\n<p><strong>Nature And Extent Of Surety&#8217;s Liability &#8211; Section 128<\/strong><\/p>\n<p>The nature and extend of surety\u2019s liability may be discussed as under:<\/p>\n<p>Secondary and Conditional Liability:<\/p>\n<ul>\n<li>The surety is liable to the creditor only when the principal debtor makes default.<\/li>\n<li>Creditor can sue the surety without suing the principal debtor.<\/li>\n<li>As soon as the debtor has made default in payment of debt, the surety is immediately liable.<\/li>\n<li>But until default, the creditor cannot call upon surety to pay. In this way, the nature of surety&#8217;s liability is secondary.<\/li>\n<li>If the principal debtor performs the contract in part, the surety shall be liable only in respect of that part of the contract, which has not been performed by the principal.<\/li>\n<\/ul>\n<p>Liability is Co-extensive:<\/p>\n<ul>\n<li>The liability of the surety is co-extensive with that of the principal debtor.<\/li>\n<li>It means surety is liable for all the debts payable by the principal debtor to the creditor.<\/li>\n<li>Whatever amount of money (ie. interest, damages, costs) creditor can realize from principal debtor, the same amount can be recovered from surety. However, the contract of guarantee may provide otherwise, ie., the surety has a right to limit his liability.<\/li>\n<\/ul>\n<p>Example:<br \/>\nAmar guarantees to Balram the payment of a bill of exchange by Chetan, the acceptor. Chetan dishonours the bill. Amar is liable not only for the amount of the bills but also for any interest and charges, which may have become due on it.<\/p>\n<ul>\n<li>The principal debtor and surety are jointly and severally liable.<\/li>\n<li>If the principal debtor is not liable on the principal debt, the surety also shall not be liable.<\/li>\n<li>If the principal debt is illegal or is unenforceable, the principal debtor as well as surety shall not be liable.<\/li>\n<li>If the principal debtor is discharged by creditor\u2019s breach, the surety shall also be discharged.<\/li>\n<\/ul>\n<p>Surety\u2019s Liability may be Limited:<\/p>\n<ul>\n<li>Generally, the liability of the surety is same as that of the principal debtor.<\/li>\n<li>However, the surety may limit his liability by express provision in the contract of guarantee.<\/li>\n<\/ul>\n<p>Thus, the contract of guarantee may provide that the surety shall not be liable:<\/p>\n<ul>\n<li>Beyond a fixed amount (where guarantee is fixed on amount)<\/li>\n<li>For any amount due after a fixed date (where guarantee is given with reference to time period may be fixed during which the guarantee shall remain effective)<\/li>\n<\/ul>\n<p><strong>Rights of Surety<\/strong><\/p>\n<p>Rights of surety can be discussed as under:<\/p>\n<ul>\n<li>Rights of surety against principal debtor<\/li>\n<li>Rights of surety against creditor<\/li>\n<li>Rights of surety against co-sureties.<\/li>\n<\/ul>\n<p>Rights of surety against principal debtor &#8211; Sections 140 &amp; 145:<\/p>\n<p>Right of Subrogation &#8211; Section 140:<\/p>\n<ul>\n<li>Subrogation means substitution of one person for another. Right of subrogation is also known as right to stand in the shoes of creditor.<\/li>\n<li>According to this right, when the surety has paid debt or discharge the performance of debtor to creditor, he is vested with all the rights, which the creditor had against the principal debtor.<\/li>\n<li>The surety is entitled to the benefit of all security made available to the creditor by the principal debtor whether the surety was aware of its existence or not.<\/li>\n<\/ul>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Indian Contract Act, 1872 - Indemnity and Guarantee \u2013 CA Inter Law Notes\" width=\"123\" height=\"13\" \/><\/p>\n<p>Right of Indemnify &#8211; Section 145:<\/p>\n<ul>\n<li>The surety is entitled to recover from the principal debtor all sums he has rightfully paid.<\/li>\n<li>Amount includes loan, interest and other cost if any paid to creditor.<\/li>\n<li>Surety can also claim for any special damages, which he has suffered while discharging his duties.<\/li>\n<li>Where person becomes surety without the knowledge of principal debtor, he is entitled for all the rights against the principal debtor but not the right to claim an indemnity against the principal debtor.<\/li>\n<li>However, amount wrongfully paid cannot be recovered.<\/li>\n<\/ul>\n<p>Rights of surety against creditor:<br \/>\nRight to Claim Securities &#8211; Section 141:<\/p>\n<ul>\n<li>Surety is entitled for all securities, which the debtor has provided to creditor whether surety is aware of it or not on payment of debt or discharge of payment to creditor.<\/li>\n<li>Where a creditor loses any of the securities by default or negligence the liability of the surety reduces proportionately.<\/li>\n<li>If a creditor does not handover the securities to surety, he can be compelled to do so.<\/li>\n<\/ul>\n<p>Example:<br \/>\nC advances to B his tenant \u20b9 2,000 on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of B&#8217;s furniture. C cancels the mortgage. B becomes insolvent, and C sues A on his guarantee. A is discharged from liability to the amount of the value of the furniture.<\/p>\n<p>Right to Set off:<\/p>\n<ul>\n<li>Set off means deductions from the amount of loan.<\/li>\n<li>If there is any sum of money, which is recoverable from creditor, then it may be claimed as deduction.<\/li>\n<\/ul>\n<p>Rights of surety against co-sureties:<\/p>\n<ul>\n<li>When two or more persons give guarantee for same debt, they are termed as co-sureties.<\/li>\n<li>All co-sureties are equally liable to creditor in absence of any contrary contract.<\/li>\n<li>The rights of co-sureties are discussed as under:<\/li>\n<\/ul>\n<p>Right to Contribution &#8211; Sections 146-147:<\/p>\n<ul>\n<li>When one co-surety pays entire debt, he can recover equal contribution from the other co-sureties.<\/li>\n<li>However, under the contract, they may fix limits on their respective liabilities.<\/li>\n<\/ul>\n<p>Example:<br \/>\nA, B and C are sureties to D for the sum of \u20b9 3,000 lent to E. E makes default in payment. A, B and C are liable, as between themselves, to pay \u20b9 1,000 each.<\/p>\n<p>Example:<br \/>\nAmar has borrowed \u20b9 1000 from bank. Mr. Ram and Balram have guaranteed for repayment of loan in ratio of 3:1. On default of Amar, Ram is liable to pay \u20b9 750 and Balram is liable to pay \u20b9 250.<\/p>\n<ul>\n<li>It is important to note that where the co-sureties have agreed to guarantee different sums of one single debt to the principal debtor, even then they are liable to contribute equally subject to the maximum limit fixed by them.<\/li>\n<li>Thus, within the maximum limit fixed by the co-sureties, they are liable to contribute equal amount.<\/li>\n<\/ul>\n<p>Example:<br \/>\nA, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of 10,000 rupees, B in that of \u20b9 20,000, C in that of \u20b9 40,000, conditioned for D\u2019s duty accounting to E. D makes default to the extent of \u20b9 30,000. A, B and C are each liable to pay t 10,000.<\/p>\n<p>Example:<br \/>\nA, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of \u20b9 10,000, B in that of \u20b9 20,000, C in that of \u20b9 40,000, conditioned for D\u2019s duly accounting to E. D makes default to the extent of \u20b9 40,000. A is liable to pay \u20b9 10,000, and B and C \u20b9 15,000 each.<\/p>\n<p>Example:<br \/>\nA, B and C, as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of \u20b9 10,000, B in that of \u20b9 20,000, C in that of \u20b9 40,000, conditioned for D\u2019s duly accounting to E. D makes default to the extent of \u20b9 70,000. A, B and C have to pay each the fully penalty of his bond.<\/p>\n<p>Right to Share the Benefit of Securities: If the one co-surety receives any security from principal debtor or from the creditor, all other co-sureties are entitled to share the benefit of the securities on discharge of debt.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Indian Contract Act, 1872 - Indemnity and Guarantee \u2013 CA Inter Law Notes\" width=\"123\" height=\"13\" \/><\/p>\n<p><strong>Discharge of Surety:<\/strong><\/p>\n<p>A surety may be discharged from liability under the following circumstances:<\/p>\n<p>By Revocation- Section 130:<\/p>\n<p>By Death of Surety &#8211; Section 131:<\/p>\n<p>By Variance in Terms &#8211; Section 133:<br \/>\nAny variance made without surety\u2019s consent, in the terms of the contract between the principal (debtor) and the creditor, discharges the surety as to transactions subsequent to the variance.<\/p>\n<p>Example:<br \/>\nA becomes surety to C for B\u2019s conduct as a manager in C\u2019s bank. Afterwards, B and C contract, without A\u2019s consent, that B\u2019s salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss.<\/p>\n<p>Example:<br \/>\nA guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the office is materially altered. Afterwards, B misconducts himself. A is discharged by the change from future liability under his guarantee, though the misconduct of B is in respect of a duty not affected by the later Act.<\/p>\n<p>Release or Dis-charge of Principal Debtor &#8211; Section 134:<br \/>\nThe surety is discharged if:<\/p>\n<ul>\n<li>principal debtor is relieved from his liability by way of fresh contract; or<\/li>\n<li>creditor does any act or omission, which discharge principal debtor.<\/li>\n<\/ul>\n<p>Example:<br \/>\nA contract with B for a fixed price to build a house for B within a stipulated time, B supplying the necessary timber. C guarantees A\u2019sperformance of the contract. B omits to supply the timber. C is discharged from his suretyship.<\/p>\n<p>However, where creditor fails to sue the principal debtor within the limitation period, the surety is not discharged.<\/p>\n<p>Composition or Extension of Time &#8211; Sections 135 &amp; 136:<br \/>\nThe surety is discharged if creditor makes composition or extends time limit for repayment of debt by principal debtor or not to sue principal debtor without obtaining consent of surety.<\/p>\n<p>However, if a contract of giving time is entered with any third party, then surety will not be discharged.<\/p>\n<p>Act Inconsistent with Rights of Surety- Section 139:<br \/>\nSurety is discharged, if creditor does any act in a manner inconsistent with right of surety and impairs the eventual remedy of the surety.<\/p>\n<p>Example:<br \/>\nB contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain stages. A becomes surety to C for B\u2019s due performance of the contract. C, without the knowledge of A, prepays to B the last two instalments. A discharged by this prepayment.<\/p>\n<p>Example:<br \/>\n\u2018A\u2019 puts &#8216;M&#8217; as the cashier under B and agrees to stand as surety provided \u2018B\u2019 check the cash every month. \u2018M\u2019 embezzles cash. \u2018A\u2019 was not held to be responsible as B failed to verify the cash every month.<\/p>\n<p>Release or Lose of Security by Creditor &#8211; Section 141:<\/p>\n<ul>\n<li>The surety is discharged to the extent of the value of security lost by creditor unless surety consented to release of security.<\/li>\n<li>It is immaterial whether the surety was or is aware of such security or not.<\/li>\n<\/ul>\n<p>Invalidation of Contract of Guarantee:<br \/>\nSurety is liable under the contract of guarantee if the contract is valid. But in the following circumstances guarantee contract is treated as invalid:<\/p>\n<ul>\n<li>When the guarantee has been obtained by means of misrepresentation.<\/li>\n<li>When the guarantee is obtained by concealment of facts or by remaining silence as to material circumstances.<\/li>\n<li>When surety gives the guarantee on condition that creditor shall not act until co-surety join and co-surety fails to join.<\/li>\n<\/ul>\n<p>Example:<br \/>\nA engages B as clerk to collect money for him and B fails to account for some of his receipts. Thereupon, A calls upon B to furnish security for his duly accounting the receipts. C gives the required guarantee. A does not inform C of the fact of a previous defalcation by B and thereafter B again makes a default. The guarantee would be invalid.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Indian Contract Act, 1872 - Indemnity and Guarantee \u2013 CA Inter Law Notes\" width=\"123\" height=\"13\" \/><\/p>\n<p><strong>Difference Between Contract of Indemnity and Contract of Guarantee<\/strong><\/p>\n<table border=\"2\">\n<tbody>\n<tr>\n<td>Basis of Comparison<\/td>\n<td>Contract of Indemnity &#8211; Section 124<\/td>\n<td>Contract of Guarantee &#8211; Section 126<\/td>\n<\/tr>\n<tr>\n<td>Meaning<\/td>\n<td>A contract in which one party promises to another that he will compensate him for any loss suffered by him by the act of the promisor or the third party.<\/td>\n<td>A contract in which a part}\u2019 promises to another party that he will perform the contract or compensate the loss, in case of the default of the person, it is the contract of guarantee.<\/td>\n<\/tr>\n<tr>\n<td>Parties<\/td>\n<td>There are two parties to the contract:<br \/>\nIndemnifier (promisor); and<br \/>\nIndemnity holder (promi\u00adsee)<\/td>\n<td>There are three parties to the contract:<br \/>\nCreditor;<br \/>\nPrincipal debtor; and<br \/>\nSurety<\/td>\n<\/tr>\n<tr>\n<td>Number of Contracts<\/td>\n<td>There is only one contract.<br \/>\n(Between the indemnifier and the indemnity holder)<\/td>\n<td>There are three contracts. (Between principal debtor and creditor; between creditor and the surety and between surety and principal debtor)<\/td>\n<\/tr>\n<tr>\n<td>Nature of Liability<\/td>\n<td>The liability of indemnifier is primary and independent.<\/td>\n<td>The liability of the surety is secondary and conditional.<\/td>\n<\/tr>\n<tr>\n<td>Purpose<\/td>\n<td>To compensate for loss<\/td>\n<td>To give assurance to promisee<\/td>\n<\/tr>\n<tr>\n<td>Can sue third party?<\/td>\n<td>An indemniher cannot sue a third party for loss in his own name, because there is no privity of contract. He can do so only if there is an assignment in his favour.<\/td>\n<td>A surety, on discharging the debt due by the principal debtor, steps into the shoes of the creditor. He can proceed against the principal debtor in his own right.<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><strong>Practice Questions<\/strong><\/p>\n<p>Question 1.<br \/>\nBEE owes \u20b9 10,000 to CEE. Amount was guaranteed by GEE. Said debt becomes payable on 25th October, 2017. CEE does not sue BEE. Hence, due to delay GEE is automatically discharged from his suretyship. Comment.<br \/>\nAnswer:<br \/>\nSection 137 &#8211; GEE is not discharge from suretyship.<\/p>\n<p>Question 2.<br \/>\n\u2018A\u2019 executed a guarantee in favour of State Bank of India as security for a loan to \u2018B\u2019. Later \u2018A\u2019 contended that the guarantee was not enforceable, as it was not supported by consideration, as he was not paid guarantee commission. Is \u2018A\u2019s stand correct in law?<br \/>\nAnswer:<br \/>\nSection 127 &#8211; A\u2019s stand that the guarantee was not enforceable as it was not supported by consideration is not correct.<\/p>\n<p>Question 3.<br \/>\nMr. Ray made a contract with Mr. Basu to grow vegetables on Mr. Ray\u2019s land and to deliver to Mr. Basu at a fixed rate. Mr. Karmakar guarantees Mr. Ray\u2019s performance of this contract. Mr. Basu diverts stream of water, which is necessary for production thereby prevented Mr. Ray to grow vegetables. Mr. Ray fails to supply as per contract. Hence, Mr. Basu sues Mr. Karmakar (Guarantor), for non-performance. Advice.<br \/>\nAnswer:<br \/>\nSection 139 &#8211; Mr. Basu is discharged from his duties.<\/p>\n<p>Question 4.<br \/>\nMr. Barick owes banker a debt guaranteed by both Mr. Arora and Mr. Bora. The banker releases Mr. Arora one of the co-sureties. Hence the remaining i.e. other surety (Mr. Bora) is also released automatically. Advise.<br \/>\nAnswer:<br \/>\nSection 138 &#8211; Mr. Bora is not released from liability.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Indian Contract Act, 1872 - Indemnity and Guarantee \u2013 CA Inter Law Notes\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 5.<br \/>\nStatement publishes at the request of Mr. D.D. a libel upon Mr. S.S. Mr. D.D. agree to indemnify the statement the consequence of the publication if any. Mr. S.S. sued statesman to pay damage. Statesman paid ? 2,00,000 to Mr. S.S. and demanded the amount from D.D. who refused. State legal provisions.<br \/>\nAnswer:<br \/>\nMr. D.D. is not liable.<\/p>\n<p>Question 6.<br \/>\nIs Contract of Guarantee a contract of uberrimae fidei?<br \/>\nAnswer:<br \/>\nContract of partnership, insurance contract are contract of \u2018uberrimae- \/ fidei\u2019They are contract of utmost good faith. In the case of contract of uberrimae fidei \u2018fraud\u2019 on the part of any party to the contract gives another party to set aside the contract.<\/p>\n<p>In the case of contract of guarantee\u2019 fraud on the part of the principal debtor is not enough to set aside the contract unless the surety shows that the creditor or his agent knew of the fraud and was party to it.<\/p>\n<p>In the case of National Provincial Bank of England vs. Glanusk, A guaranteed the account of B with the bank. Afterwards B drew on this account and paid off an overdraft he had with another bank. It was held the fact that bank was suspicious that B was defrauding A and did not communicate its suspicions to A did not discharge the guarantee.<\/p>\n<p>Question 7.<br \/>\nX took a loan of \u20b9 60,000 from B to be paid with interest @10% p.a. to be paid within one year. C stood a guarantor for X. What is the extent of liability of C in the instant case?<br \/>\nAnswer:<br \/>\nC is liable to pay principal amount of \u20b9 60,000 plus interest @10% for the period the debt remained unpaid in the event of X&#8217;s failure to pay the debt. B cannot demand the payment from C unless claiming the amount from X. However, he can sue C without suing the principal debtor X.<\/p>\n<p><strong>Past Examination Questions<\/strong><\/p>\n<p>Question 1.<br \/>\n\u2018A\u2019 stands surety for \u2018B\u2019 for any amount, which \u2018C\u2019 may lend to B from<br \/>\ntime to time during the next three months subject to a maximum of \u20b9 50,000. One month later, A revokes the guarantee, when C had lent to B \u20b9 5,000. Referring to the provisions of the Indian Contract Act, 1872 decide whether \u2018A\u2019 is discharged from all the liabilities to \u2018C\u2019 for any subsequent loan. What would be your answer in case \u2018B\u2019 makes a default in paying back to \u2018C\u2019 the money already borrowed i.e. \u20b9 5,000? (CA November 2002)<br \/>\nOr<br \/>\nAmit stands surety for \u2018Bikram\u2019 for any amount which \u2018Chander\u2019 may lend to \u2018Bikram\u2019 from time to time during the next three months subject to a maximum amount of \u20b9 1,00,000 (one lakh only). One month later \u2018Amit\u2019 revokes the surety, when \u2018Chander\u2019 had already lent to \u2018Bikram\u2019 \u20b9 10,000 (ten thousand). Referring to the provisions of the Indian Contract Act, 1872. Decide:<br \/>\n(i) Whether \u2018Amit\u2019 is discharged from all the liabilities to \u2018Chander\u2019 for any subsequent loan given to \u2018Bikram\u2019?<br \/>\n(ii) What would be your answer in case \u2018Bikram\u2019 makes a default in paying back to \u2018Chander\u2019 the already borrowed amount of \u20b9 10,000? (CA November 2015)<br \/>\nAnswer:<br \/>\nAs per section 130, continuing guarantee can be revoked:<\/p>\n<ul>\n<li>By giving notice at any time by surety as to future transaction; or<\/li>\n<li>On death of surety, except contract provides any contrary provisions.<\/li>\n<\/ul>\n<p>On revocation of contract of guarantee, surety is discharged from all future transactions but his liability for previous transactions remain continues.<\/p>\n<p>Applying the above provisions in the given case, A is discharged from all the liabilities to C for any subsequent loan. Answer in the second case would differ i.e. A is liable to C for \u20b9 5,000 on default of B since the loan was taken before the notice of revocation was given to C.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Indian Contract Act, 1872 - Indemnity and Guarantee \u2013 CA Inter Law Notes\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 2.<br \/>\nDistinguish between contract of indemnity and contract of guarantee. (CA November 2004)<br \/>\nAnswer:<\/p>\n<p>Question 3.<br \/>\nRavi becomes guarantor for Ashok for the amount which may be given to him by Nalin within six months. The maximum limit of the said amount is \u20b9 1 lakh. After two months, Ravi withdraws his guarantee. Upto the time of revocation of guarantee, Nalim had given to Ashok \u20b9 20,000.<br \/>\n(i) Whether Ravi is discharged from his liabilities to Nalin for any subsequent loan?<br \/>\n(ii) Whether Ravi is liable if Ashok fails to pay the amount of \u20b9 20,000 to Nalin? (CA May 2006)<br \/>\nAnswer:<br \/>\nAs per section 130 of the Indian Contract Act, 1872 a specific guarantee cannot be revoked by the surety if the liability has already accrued. The surety, may at any time, revoke a continuing guarantee as to future transactions, by notice to the creditor, but the surety remains liable for transactions already entered into.<\/p>\n<p>As per the above provisions (i) Yes, Ravi is discharged from all subsequent loan because it is a case of continuing guarantee, (ii) Ravi is liable for payment of \u20b9 20,000 to Nalin because the transaction has already completed.<\/p>\n<p>Question 4.<br \/>\nExplaining the provisions of the Indian Contract Act, 1872, answer the following:<br \/>\n(i) A contracts with B for a fixed price to construct a house for B within a stipulated time. B would supply the necessary material to be used in the construction. C guarantees A\u2019s performance of the contract. B does not supply the material as per the agreement. Is C discharged from his liability?<br \/>\n(ii) C, the holder of an overdue bill of exchange drawn by A as surety for B, and accepted by B, contracts with X to give time to B. Is A discharged from his liabiIity?(CA November 2006)<br \/>\nAnswer:<br \/>\n(i) According to section 134of the Indian Contract Act, 1872, the surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released or by any act or omission for the creditor, the legal consequence of which is the discharge of the principal debtor. In the given case, the B omits to supply the timber. Hence, C is discharged from his liability.<\/p>\n<p>(ii) According to section 136 of the Indian Contract Act, 1872, where a contract to give time to the principal debtor is made by the creditor with a third person and not with the principal debtor, the surety is not discharged. In the given question, the contract to give time to the principal debtor is made by the creditor with X who is a third person. X is not the principal debtor. Hence, A is not discharged.<\/p>\n<p>Question 5.<br \/>\nState whether the following statement is correct or incorrect: Where there are co-sureties, a release by the creditor of one of them does not discharge the others. (CA November 2007)<br \/>\nAnswer:<br \/>\nStatement is correct.<\/p>\n<p>Question 6.<br \/>\nState whether the following statement is correct or incorrect: In a contract of guarantee, forbearance by the creditor to sue the principal debtor discharges the surety. (CA May 2008)<br \/>\nAnswer:<br \/>\nStatement is not correct. Section 137 of Indian Contract Act, 1872, provides that any forbearance by the creditor to sue the principal debtor does not discharge the surety.<\/p>\n<p>Question 7.<br \/>\nState whether the following statement is correct or incorrect: The contract of insurance is not fully covered under the contract of indemnity. (CA November 2008)<br \/>\nAnswer:<br \/>\nStatement is correct. Contract of indemnity includes loss occurred due to act of promisor or some other person but it does not include loss occurred due to act of god. Whereas contract of insurance covers loss occurred due to act of god also.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Indian Contract Act, 1872 - Indemnity and Guarantee \u2013 CA Inter Law Notes\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 8.<br \/>\nB owes C a debt guaranteed by A. C does not sue B for a year after the debt has become payable. In the meantime, B becomes insolvent. Is A discharged? Decide with reference to the provisions of the Indian Contract Act, 1872. (CA November 2008)<br \/>\nAnswer:<br \/>\nThe problem is based on the provisions of section 137 of the Indian Contract Act, 1872 relating to discharge of surety. The section states that mere forbearance on the part of the creditor to sue the principal debtor and\/ or to enforce any other remedy against him would not, in the absence of any provision in the guarantee to the contrary, discharge the surety. In view of these provisions, A is not discharged from his liability as a surety<\/p>\n<p>Question 9.<br \/>\nA gives to C a continuing guarantee to the extent of \u20b9 5000 for the vegetables to be supplied by C to B from time to time on credit. Afterwards, B became embarrassed, and without the knowledge of A, B and C contract that C shall continue to supply B with vegetables for ready money, and that the payments shall be applied to the then existing debts between B and C. Examining the provision of the Indian Contract Act, 1872, decide whether A is liable on his guarantee given to C. (CA November 2008)<br \/>\nAnswer:<br \/>\nThe problem as asked in the question is based on the provisions of the Indian Contract Act, 1872 as contained in section 133. The section provides that any variance made without the surety\u2019s consent in the terms of the contract between the principal debtor and the creditor, discharge the surety as to transactions subsequent to the variance.<\/p>\n<p>In the given problem, all the above requirements are fulfilled. Therefore, A is not liable on his guarantee for the vegetable supplied after these new arrangements. The reason for such a discharge is that the surety agreed to be liable for a contract, which is no more there, and he is not liable on the altered contract because it is different from the contract made by him.<\/p>\n<p>Question 10.<br \/>\nState whether the following statement is correct or incorrect: Any variation in terms of contract made between principal debtor and a creditor without the consent of surety, automatically discharges the liability of the surety. (CA May 2009)<br \/>\nAnswer:<br \/>\nStatement is incorrect. Surety\u2019s liability will be discharged if any variance is made without his consent in terms of contract between principal debtor and creditor. &#8211; Section 133<\/p>\n<p>Question 11.<br \/>\nState whether the following statement is correct or incorrect: In contract of guarantee, there are three contracts. (CA November 2013)<br \/>\nAnswer:<br \/>\nStatement is correct. There are three contracts in the contract of guarantee, one between principal debtor and creditor, second between principal debtor and surely and third between surety and the creditor.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Indian Contract Act, 1872 &#8211; Indemnity and Guarantee \u2013 CA Inter Law Notes is designed strictly as per the latest syllabus and exam pattern. Indian Contract Act, 1872 &#8211; Indemnity and Guarantee \u2013 CA Inter Law Notes Contract Of Indemnity &#8211; Basic &amp; Definition &#8211; Section 124 Meaning: Contract of indemnity is contract where one &hellip;<\/p>\n<p class=\"read-more\"> <a class=\"\" href=\"https:\/\/gstguntur.com\/indian-contract-act-1872-indemnity-and-guarantee-ca-inter-law-notes\/\"> <span class=\"screen-reader-text\">Indian Contract Act, 1872 &#8211; Indemnity and Guarantee \u2013 CA Inter Law Notes<\/span> Read More &raquo;<\/a><\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"spay_email":"","footnotes":""},"categories":[167],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/16073"}],"collection":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/comments?post=16073"}],"version-history":[{"count":3,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/16073\/revisions"}],"predecessor-version":[{"id":16080,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/16073\/revisions\/16080"}],"wp:attachment":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/media?parent=16073"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/categories?post=16073"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/tags?post=16073"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}