Business law .pdf

Business law.
indemnity &
guarantee
Presentation - 2024
by
keshav 298
Ritik dhayal 306
vivek raj 317
tanisha gupta 338
Topics Covered:
Introduction to Indemnity and Guarantee
Definitions under the Indian Contract Act,

1872
Features of Indemnity and Guarantee
Differences between Indemnity and

Guarantee
Rights and Duties of Parties
Case Laws and Examples

Introduction to Indemnity and Guarantee.
Indemnity
Indemnity is a contract where one party (indemnifier) promises to compensate the
other (indemnified) for losses caused by the indemnifier’s actions or a third party’s
conduct. Defined under Section 124 of the Indian Contract Act, 1872, it aims to protect
against financial harm. For example, if A promises to compensate B for damages to
goods during transport, it is a contract of indemnity.
Guarantee
A contract of guarantee ensures the fulfillment of a third party’s obligation. One party
(surety) assures the creditor to discharge the liability of another (principal debtor) if
they default. Defined under Section 126, the surety’s liability is secondary and arises
only on the principal debtor’s failure. For instance, Z guarantees repayment of a loan
taken by X from Y. If X defaults, Z must repay.
Definition of
Indemnity:
Legal Definition (Section 124, Indian Contract Act, 1872):

“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.”
This definition establishes indemnity as a protective arrangement to compensate for specific losses or
damages.
Examples:
1. Insurance Business Employment Construction

Contracts: Contracts: Agreements: Contracts:
• In a car insurance • A logistics company • An employer indemnifies A contractor agrees to
policy, the insurance promises to indemnify a an employee for legal indemnify a property
company promises to client if goods are costs incurred while owner if a third party
indemnify the damaged during performing their job duties. sues for damages
policyholder for losses shipment. For instance, if an caused during
caused by accidents or • If goods worth ₹50,000 employee is sued for construction, such as
theft. are lost, the logistics actions taken in good faith debris damaging nearby
• If the insured vehicle is company compensates on behalf of the employer, property.
damaged, the insurer the client for the loss. the employer bears the
compensates for the legal expenses.
repair or replacement.
Features of Indemnity:
Involves Two Parties:
A contract of indemnity is between the indemnifier, who promises to compensate, and the
indemnified, who is protected against loss. For example, in a fire insurance contract, the
insurance company is the indemnifier, and the policyholder is the indemnified party.
Covers Actual Loss:

Indemnity applies only when the indemnified suffers a real and measurable loss or
damage. Compensation is provided only for losses specified in the contract,
ensuring the indemnified is restored to their original position.
Arises from a Specific Event:

Indemnity contracts are triggered by events mentioned explicitly in the agreement.
For instance, a marine insurance policy will cover damages to goods during sea
transit but not for other unrelated losses unless stated.
Primary Liability of Indemnifier:

The indemnifier has primary liability, meaning their obligation to compensate
arises immediately when the indemnified incurs a loss. The indemnified does not
need to prove further responsibility.
Can be Express or Implied:

An indemnity contract can be created explicitly (in writing or verbally) or implied by
the nature of the relationship or circumstances. For example, a contractor may
implicitly agree to indemnify a property owner for damages caused by construction
activities.
Definition of
Guarantee:
Legal Definition (Section 126 of the Indian Contract Act, 1872):

“A contract to perform the promise, or discharge the liability, of a third person in case of his default.”
A contract of guarantee is a legal agreement where one party (the surety) promises to ensure the
fulfillment of an obligation or repayment of a debt owed by a third party (the principal debtor) to the
creditor. It provides an additional layer of security to the creditor by holding the surety liable if the
principal debtor defaults.
Example:
• X lends money to Y, and Z gives a guarantee to X that Y will
repay the loan. If Y defaults, Z will repay.
Features of Guarantee:
Three Parties Involved:
The contract involves the Principal Debtor (who owes the
obligation), the Creditor (to whom the obligation is owed), and
the Surety (who guarantees the debt or performance).
Secondary Liability of Surety:

The surety’s liability is secondary, meaning they are only liable
if the principal debtor defaults.
Co-extensive Liability:
The surety’s liability is co-extensive with that of the principal
debtor, meaning they are responsible for the full amount of the
debt, unless stated otherwise in the agreement.
Contingent Liability:
The surety’s liability is contingent, arising only if the principal
debtor fails to meet the obligation.
Clear Terms:
The terms of the guarantee should be clearly expressed,
outlining the surety’s responsibilities and any limitations on
their liability.
Difference Between
Indemnity and Guarantee
Parties Involved:
Indemnity: Involves two parties – the Indemnifier (who promises to compensate) and
the Indemnified (who is protected).
Guarantee: Involves three parties – the Principal Debtor (who owes the obligation),
the Creditor (to whom the obligation is owed), and the Surety (who guarantees the
debt).
Nature of Liability:
Indemnity: The indemnifier’s liability is primary and arises immediately upon the
occurrence of the specified loss or damage.
Guarantee: The surety’s liability is secondary and arises only if the principal debtor
defaults.
Purpose:
Indemnity: Aims to compensate for a loss or damage suffered by the indemnified
party.
Guarantee: Aims to ensure the fulfillment of a promise or obligation by the principal
debtor to the creditor.
Difference Between
Indemnity and Guarantee
Scope of Liability:
Indemnity: The indemnifier is liable to cover all losses incurred by the indemnified,
subject to the contract terms.
Guarantee: The surety’s liability is limited to the principal debtor’s debt or

performance, as agreed.
Example:
Indemnity: An insurance policy where the insurer compensates for damage to
property.
Guarantee: A loan guarantee where a surety promises to pay if the borrower defaults.
Rights of Indemnity Holder:
Right to Recover Right to Recover Costs Incurred Right to Recover Sums Paid
Damages: in Defending a Lawsuit: Under Compromise:
The indemnity holder can recover The indemnity holder can recover legal The indemnity holder can recover any
damages suffered due to an event costs, including attorney fees, if they incur amounts paid to settle a legal claim or
covered by the indemnity agreement, expenses defending a lawsuit related to dispute, as long as it is covered by the
such as loss or damage. the indemnified event. indemnity agreement.
Rights and Liabilities of
Surety
Rights of Surety:
• Right to Subrogation:
After fulfilling the debt, the surety has the right to claim the creditor’s position and seek recovery
from the principal debtor or their assets.
• Right to Indemnity and Securities:

The surety can seek reimbursement from the principal debtor for the amount paid. Additionally,
they have the right to claim any securities held by the creditor for the debt.
• Co-extensive Liability:
Liabilities of Surety:
The surety is liable for the same amount and scope as the principal debtor, meaning they must
fulfill the entire obligation if the debtor defaults.
• Discharge of Liability:
The surety’s liability can be discharged if the guarantee is revoked, the creditor changes terms
without the surety’s consent, or by agreement between the parties.
Case Laws and Examples:
Indemnity Guarantee
Case Law: Case Law:
Adamson v. Jarvis (1827): Bank of Bihar v. Damodar

Prasad (1969):
This case established that an indemnity holder has the This case clarified that the surety’s liability is co-
right to compensation when acting on the promisor’s extensive with that of the principal debtor. The court
instructions. In this case, Adamson, an auctioneer, followed held that the creditor is not obligated to exhaust
the instructions of Jarvis to sell cattle, which later turned remedies against the principal debtor before
out to belong to someone else. Adamson was sued for proceeding against the surety. This reinforces the
damages and successfully claimed indemnity from Jarvis,
principle that a surety is equally liable for the debt or
as he acted under Jarvis’s direction.
obligation once the debtor defaults.
Conclusion:
The concepts of indemnity and guarantee under the Indian
Contract Act, 1872, play a crucial role in managing risks and
ensuring trust in commercial and personal transactions. A
contract of indemnity focuses on compensating for losses caused
by specified events, offering financial protection to the
indemnified party. On the other hand, a contract of guarantee
ensures the fulfillment of an obligation or repayment of debt by
holding the surety liable in case of the principal debtor’s default.
Both types of contracts aim to safeguard parties against

unforeseen circumstances but differ in structure, purpose, and
liability. Indemnity involves two parties and addresses loss, while
a guarantee involves three parties and secures performance or
payment. Together, they provide essential tools for financial
security and facilitate smooth economic operations by reducing
risks and building confidence among parties.
Thank You
For Your Attention

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Business law.

Definitions under the Indian Contract Act,

Differences between Indemnity and

Case Laws and Examples

Legal Definition (Section 124, Indian Contract Act, 1872):

1. Insurance Business Employment Construction

Covers Actual Loss:

Arises from a Specific Event:

Primary Liability of Indemnifier:

Can be Express or Implied:

Legal Definition (Section 126 of the Indian Contract Act, 1872):

Secondary Liability of Surety:

Guarantee: The surety’s liability is limited to the principal debtor’s debt or

• Right to Indemnity and Securities:

Adamson v. Jarvis (1827): Bank of Bihar v. Damodar

Both types of contracts aim to safeguard parties against

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