★ Must-know
The indemnifier is the party who promises to compensate for the loss, while the indemnified or indemnity-holder is the party whose loss is to be made good.
Under the statutory definition, loss caused by an accident without human conduct or by an act of God is not covered by a contract of indemnity.
Further detail
A contract of indemnity may be express or implied and must satisfy the essentials of a valid contract.
Fire insurance and marine insurance are contracts of indemnity, whereas life insurance is not a contract of indemnity.
Loss caused by conduct leads to compensation
★ Must-know
An indemnity-holder acting within the scope of authority may recover all damages that the holder is compelled to pay in a suit.
An indemnity-holder may recover all costs that the holder is compelled to pay in bringing or defending the suit.
📌 The indemnifier’s liability commences when the indemnity-holder’s liability becomes absolute and certain, although the Act is silent on the commencement time.
Further detail
★ Must-know
The surety gives the guarantee, the principal debtor is the person whose default is guaranteed, and the creditor is the person to whom the guarantee is given.
A contract of guarantee is a tripartite agreement containing a principal contract between debtor and creditor, a secondary contract between creditor and surety, and an implied indemnity contract between surety and debtor.
Further detail
📌 A guarantee must have consideration, and consideration received by the principal debtor is sufficient consideration for the surety’s promise under Section 127.
📌 A guarantee may remain valid when the principal debtor is incompetent to contract, but it is void when the surety is incompetent to contract.
📌 A guarantee may be oral or written, but it is invalid if the creditor obtains it through material misrepresentation, concealment of material circumstances, or failure of a required co-surety to join.
📌 A specific guarantee covers one debt or transaction and ends when that debt is discharged or that promise is performed, whereas a continuing guarantee covers a series of transactions until revoked.
★ Must-know
📌 An indemnity has two parties, the indemnifier and indemnity-holder, whereas a guarantee has three parties, the creditor, principal debtor, and surety.
📌 The indemnifier’s liability is primary and unconditional, whereas the surety’s liability is secondary and conditional on the principal debtor’s default.
📌 Indemnity reimburses loss, whereas guarantee secures the creditor against non-performance or non-payment by the principal debtor.
Further detail
📌 The surety may proceed against the principal debtor in the surety’s own right after payment because the surety obtains the creditor’s rights, whereas an indemnifier cannot sue a third party without an assignment.
Two parties and primary liability versus three parties and secondary liability
★ Must-know
📌 Under Section 128, the surety’s liability is co-extensive with the principal debtor’s liability unless the contract provides otherwise.
📌 The surety’s liability is secondary because it ordinarily arises only when the principal debtor defaults, but the creditor may proceed against the surety first unless the parties agreed otherwise.
Further detail
📌 If the principal debtor cannot be held liable because of a defect in the document, the surety’s liability also ceases.
★ Must-know
📌 Unless the contract provides otherwise, the death of a surety revokes a continuing guarantee for future transactions, while the surety’s estate remains liable for prior transactions.
Further detail
📌 A surety is discharged by novation when a fresh contract replaces the original contract and mutually discharges the old contract.
📌 A specific guarantee can be revoked only if liability to the principal debtor has not accrued.
★ Must-know
📌 The surety is discharged when the creditor releases or discharges the principal debtor through a new contract or an act or omission having that legal consequence.
📌 A creditor’s composition with, promise to give time to, or promise not to sue the principal debtor discharges the surety unless the surety assents.
📌 A guarantee is invalid when obtained through material misrepresentation, concealment of material circumstances, or a condition requiring a co-surety who does not join.
Further detail
★ Must-know
After paying all that the surety is liable for, the surety is subrogated to every right that the creditor had against the principal debtor under Section 140.
The principal debtor has an implied promise to indemnify the surety, who may recover sums rightfully paid under the guarantee but not sums paid wrongfully.
📌 The surety is entitled to every security held by the creditor against the principal debtor when the guarantee is made, and loss or unauthorised surrender of the security discharges the surety to its value.
📌 Unless otherwise agreed, co-sureties must contribute equally toward the whole debt or the unpaid part of it, while co-sureties bound in different sums contribute equally only within their respective maximum limits.
Further detail
📌 The surety may claim the principal debtor’s set-off against the creditor and may claim proportionate reduction when the principal debtor’s insolvency produces a partial realisation.
| Dimension | Indemnity | Guarantee |
|---|---|---|
| Parties | Indemnifier and indemnity-holder | Creditor, principal debtor, and surety |
| Liability | Primary and unconditional | Secondary and conditional on default |
| Purpose | Reimbursement of loss | Security for creditor |
| Right against third party | Requires assignment | Surety obtains creditor’s rights after payment |
| Feature | Specific Guarantee | Continuing Guarantee |
|---|---|---|
| Coverage | Single debt or transaction | Series of transactions |
| End of liability | Discharge of guaranteed debt or performance | Revocation or other discharge event |
| Revocation | Only before liability accrues | Notice or death ends future transactions |
Test your knowledge on Contracts of Indemnity and Guarantee with 28 multiple-choice questions with detailed corrections.
1. Which situation falls within the statutory definition of a contract of indemnity?
2. In a contract of indemnity, who is responsible for promising compensation, and who receives protection against the loss?
Memorize the key concepts of Contracts of Indemnity and Guarantee with 62 interactive flashcards.
What is a contract of indemnity?
A contract where one party promises to save the other from loss caused by the promisor or others under Section 124.
Who is the indemnifier in a contract of indemnity?
The party who promises to compensate for the loss.
Who is the indemnity-holder in a contract of indemnity?
The party whose loss is to be made good.
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