Unit I — Indemnity & Guarantee

“The surety is a favoured debtor; he is discharged the moment his bargain is altered without his consent.” — principle behind Sections 133–139

Contract of Indemnity & Guarantee

A contract of indemnity (S.124) is a contract by which one party (the indemnifier) promises to save the other (the indemnity-holder) from loss caused by the conduct of the promisor himself or of any other person (an insurance policy is the classic example). A contract of guarantee (S.126) is a contract to perform the promise, or discharge the liability, of a third person in case of his default — it involves three parties (the principal debtor, the creditor, and the surety) and three contracts.

In Simple Terms: indemnity = “I’ll cover your loss”; guarantee = “if he doesn’t pay, I will.” The surety’s liability is co-extensive with the principal debtor’s (S.128) unless the contract provides otherwise.

Rights & Discharge of the Surety

flowchart TD
    A["Surety"]:::root
    A --> B["Rights against the PRINCIPAL DEBTOR<br/>(subrogation S.140, indemnity S.145)"]:::leaf
    A --> C["Rights against the CREDITOR<br/>(securities S.141)"]:::leaf
    A --> D["Rights against CO-SURETIES<br/>(contribution Ss.146-147)"]:::leaf
    A --> E["DISCHARGED by: variance (S.133),<br/>release of debtor (S.134), creditor's<br/>arrangement (S.135), loss of security (S.141)"]:::no

    classDef root fill:#FFF8DC,stroke:#333,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    classDef no fill:#FFE6E6,stroke:#8A1E1E,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

On paying the debt the surety steps into the creditor’s shoes (subrogation, S.140) and may claim indemnity from the principal debtor (S.145) and the benefit of the creditor’s securities (S.141). He is discharged by: revocation (for future transactions in a continuing guarantee — S.130); the principal debtor’s death; variance in the terms without his consent (S.133 — Bonar v. Macdonald); release or discharge of the principal debtor (S.134); the creditor’s composition, promise to give time, or promise not to sue the debtor (S.135); and the creditor’s act impairing the surety’s eventual remedy or losing a security (S.139, S.141). A continuing guarantee (S.129) covers a series of transactions and may be revoked as to future ones by notice (S.130). Co-sureties are liable to contribute equally (S.146), or in proportion to limits agreed (S.147).

✏️ Sample Solved Problem (IRAC Method)

Problem: A advances a loan to B, a minor, on the guarantee of C; B refuses to repay, pleading minority. Can A recover from C?

I — Issue

Whether a surety is liable when the principal debtor’s agreement is void because he is a minor.

R — Rule

• Ordinarily the surety’s liability is co-extensive with the principal debtor’s (S.128), so where the debtor is not liable, the surety would not be either.
• But a minor’s agreement is void ab initio (Mohori Bibee); the better view, on the facts of Kashiba v. Shripat and the construction of such guarantees, is that where the creditor lends to a minor on a guarantee, the surety is treated as a principal debtor — the guarantee is, in substance, an undertaking by C to repay if the minor does not, and C cannot escape merely because the minor is not bound.

A — Analysis

The decoy is the co-extensiveness rule — it tempts the conclusion that, since the minor is not liable, C cannot be either. But that rule assumes a valid principal debt; here the parties knew (or the law presumes) that the minor could not be bound, so the real security A bargained for was C’s own promise. To let C off because the minor is immune would destroy the very purpose of taking a guarantee for a minor’s loan. C’s undertaking therefore operates as a primary liability, akin to an indemnity.

C — Conclusion

A can recover from C. Where a loan is advanced to a minor against a surety, the surety is liable as a principal debtor; C cannot escape by pointing to the minor’s incapacity.

📄 The full bundle (₹199) has the complete Unit I — indemnity, guarantee, all the surety’s rights and modes of discharge, and continuing guarantee with blueprints — plus the Question Bank’s model answers to the bank-employee-misconduct, give-time and co-surety problems. Get Notes + Question Bank — ₹199