CHAPTER 8. OF INDEMNITY AND GUARANTEE



124.
"Contract of indemnity" defined.
124."Contract of indemnity" defined.-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, is called a " contract of indemnity".
Illustration
A contracts to indemnify B against the consequences of any
proceedings which C may take against B in respect of a certain sum of
200 rupees. This is a contract of indemnity.
125.
Rights of indemnityholder when sued.
125.Rights of indemnityholder when sued. The promisee in a
contract of indemnity, acting within the scope of his authority, is
entitled to recover from the promisor-
(1) all damages which he may be compelled to pay in any
suit in respect of any matter to which the promise to
indemnify applies
(2) all costs which he may be compelled to pay in any such
suit if, in bringing or defending it, he did not contravene
the orders of the promisor, and acted as it would have been
prudent for him to act in the absence of any contract of
indemnity, or if the promisor authorized him to bring or
defend the suit ;
(3) all sums which he may have paid under the terms of any
compromise of any such suit, if the compromise was not
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contrary to the orders of the promisor, and was one which it
would have been prudent for the promisee to make in the
absence of any contract of indemnity, or if the promisor
authorized him to compromise the suit.
126.
"Contract of guarantee", "surety", principal debtor" and "creditor".
126."Contract of guarantee", "surety", principal debtor" and
"creditor".-A "contract of guarantee " is a contract to perform the
promise, or discharge the liability, of a third person in case of his
default. The person who gives the guarantee is called the " surety";
the person in respect of whose default the guarantee is given is
called the " principal debtor ", and the person to whom the guarantee
is given is called the " creditor ". A guarantee may be either oral
or written.
127.
Consideration for guarantee.
127.Consideration for guarantee.-Anything done, or any promise
made, for the benefit of the principal debtor, may be a sufficient
consideration to the surety for giving the guarantee.
Illustrations
(a) B requests A to sell and deliver to him goods on credit. A
agrees to do so, provided C will guarantee the payment of the price of
the goods. C promises to guarantee the payment in consideration of
A's promise to deliver the goods. This is a sufficient consideration
for C's promise.
(b) A sells and delivers goods to B. C afterwards requests A to
forbear to sue B for the debt for a year, and promises that, if he
does so, C will pay for them in default of payment by B. A agrees to
forbear as requested. This is a sufficient consideration for C's
promise.
(c) A sells and delivers goods to B. C afterwards, without
consideration, agrees to pay for them in default of B. The agreement
is void.
128.
Surety's liability.
128.Surety's liability.-The liability of the surety is coextensive
with that of the principal debtor, unless it is otherwise
provided by the contract.
Illustration
A guarantees to B the payment of a bill of exchange by C, the
acceptor. The bill is dishonoured by C. A is liable not only for the
amount of the bill but also for any interest and charges which may
have become due on it.
129.
"Continuing guarantee".
129."Continuing guarantee".-A guarantee which extends to a series
series of transactions is called a "continuing guarantee".
Illustrations
(a) A, in consideration that B will employ C in collecting the
rent of B's zamindari, promises B to be responsible, to the amount of
5,000 rupees, for the due collection and payment by C of those rents.
This is a continuing guarantee.
(b) A guarantees payment to B, a tea-dealer, to the amount of
pound 100, for any tea he may from time to time supply to C. B
supplies C with tea to above the value of pound 100, and C pays B for
it. Afterwards B supplies C with tea to the value of pound 200. C
fails to pay. The guarantee given by A was a continuing guarantee,
and he is accordingly liable to B to the extent of pound 100.
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(c) A guarantees payment to B of the price of five sacks of
flour to be delivered by B to C and to be paid for in a month. B
delivers five sacks to C. C pays for them. Afterwards B delivers four
sacks to C, which C does riot pay for. The guarantee given by A was
not a continuing guarantee, and accordingly he is not liable for the
price of the four sacks.
130.
Revocation of continuing guarantee.
130.Revocation of continuing guarantee.-A continuing guarantee
may at any time be revoked by the surety,as to future transactions, by
notice to the creditor.
Illustrations
(a) A, in consideration of B's discounting, at A's request,
bills of exchange for C, guarantees to B, for twelve months, the due
payment of all such bills to the extent of 5,000 rupees. B
discounts bills for C to the extent of 2,000 rupees. Afterwards, at
the end of three months, A revokes the guarantee. This revocation
discharges A from all liability to B for any subsequent discount. But
A is liable to B for the 2,000 rupees, on default of C.
(b) A guarantees to B, to the extent of 10,000 rupees, that C
shall pay all the bills that B shall draw upon him. B draws upon C. C
accepts the bill. A gives notice of revocation. C dishonours the
bill at maturity. A is liable upon his guarantee.
131.
Revocation of continuing guarantee by surety's death.
131.Revocation of continuing guarantee by surety's death.-The
death of the surety operates, in the absence of any contract to the
contrary, as a revocation of a continuing guarantee, so far as regards
future transactions.
132.
Liability of two persons, primarily liable, not affected by
arrangement between them that one shall be surety on other's default.
132. Liability of two persons, primarily liable, not affected by
arrangement between them that one shall be surety on other's default.-
Where two persons contract with a third person to undertake a certain
liability, and also contract with each other that one of them shall be
liable only on the default of the other, the third person not being a
party to such contract, the liability of each of such two persons to
the third person under the first contract is not affected by the
existence of the second contract, although such third person may have
been aware of its existence.
Illustration
A and B make a joint and several promissory note to C. A makes
it, in fact, as surety for B, and C knows this at the time when the
note is made. The fact that A, to the knowledge of C, made the note
as surety for B, is no answer to a suit by C against A upon the note.
133.
Discharge of surety by variance in terms of contract.
133.Discharge of surety by variance in terms of contract.-Any
variance, made without the surety's consent, in the terms of the
contract between the principal 1[debtor] and the creditor, discharges
the surety as to transactions subsequent to the variance.
Illustrations
(a) A becomes surety to C for B's conduct as a manager in C's
bank. Afterwards B and C contract, without A's consent, that B's
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
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1 Ins. by Act 24 of 1917, s. 2 and Sch. I.
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discharged from his suretyship by the variance made without his
consent, and is not liable to make good this loss.
(b) A 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.
(c) C agrees to appoint B as his clerk to sell goods at a yearly
salary, upon A's becoming surety to C for B's duly accounting for
moneys received by him as such clerk. Afterwards, without A's
knowledge or consent, C and B agree that B should be paid by a
commission on the goods sold by him and not by a fixed salary. A is
not liable for subsequent misconduct of B.
(d) A gives to C a continuing guarantee to the extent of 3,000
rupees for any oil supplied by C to B on credit. Afterwards B becomes
embarrassed, and, without the knowledge of A, B and C contract that C
shall continue to supply B with oil for ready money, and that the
payments shall be applied to the then existing debts between B and C.
A is not liable on his guarantee for any goods supplied after :this
new arrangement.
(e) C contracts to lend B 5,000 rupees on the 1st March. A
guarantees repayment. C pays the 5,000 rupees to B on the 1st
January. A is discharged from his liability, as the contract has been
varied, inasmuch as C might sue B for the money before the 1st of
March.
134.
Discharge of surety by release or discharge of principal debtor.
134.Discharge of surety by release or discharge of principal
debtor.-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 of the creditor, the legal consequence of which
is the discharge of the principal debtor.
Illustrations
(a) A gives a guarantee to C for goods to be supplied by C to B.
C supplies goods to B, and afterwards B becomes embarrassed and
contracts with his creditors (including C) to assign to them his
property in consideration of their releasing him from their demands.
Here B is released from his debt by the contract with C, and A is
discharged from his suretyship.
(b) A contracts with B to grow a crop of indigo an A's land and
to deliver it to B at a fixed rate, and C guarantees A's performance
of this contract. B diverts a stream of water which is necessary for
irrigation of A's land and thereby prevents him from raising the
indigo. C is no longer liable on his guarantee.
(c) A contracts with B for a fixed price to build a house for B
within a stipulated time, B supplying the necessary timber. C
guarantees A's performance of the contract. B omits to supply the
timber. C is discharged from his suretyship.
135.
Discharge of surety when creditor compounds with, gives time to, or
agrees not to sue, principal debtor.
135. Discharge of surety when creditor compounds with, gives
time to, or agrees not to sue, principal debtor.-A contract between
the creditor and the principal debtor, by which the creditor makes a
composition with, or promises to give time to, or not to sue, the
principal debtor, discharges the surety, unless the surety assents to
such contract.
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136.
Surety not discharged when agreement made with third person to give
time to principal debtor.
136. Surety not discharged when agreement made with third person
to give time to principal debtor. 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.
Illustration
C, the holder of an overdue bill of exchange drawn by A as surety
for B, and accepted by B, contracts with M to give time to B. A is not
discharged.
137.
Creditor's forbearance to sue does not discharge surety.
137. Creditor's forbearance to sue does not discharge surety.-
Mere forbearance on the part of the creditor to sue the principal
debtor or to enforce any other remedy against him does not, in the
absence of any provision in the guarantee to the contrary, discharge
the surety.
Illustration
B owes to C a debt guaranteed by A. The debt becomes payable. C
does not sue B for a year after the debt has become payable. A is not
discharged from his suretyship.
138.
Release of one co-surety does not discharge others.
138.Release of one co-surety does not discharge others.-Where
there are co-sureties, a release by the creditor of one of them does
not discharge the others; neither does it free the surety so released
from his responsibility to the other sureties1.
139.
Discharge of surety by creditor's act or omission impairing surety's
eventual remedy.
139. Discharge of surety by creditor's act or omission impairing
surety's eventual remedy.-If the creditor does any act which is
inconsistent with the rights of the surety, or omits to do any act
which his duty to the surety requires him to do, and the eventual
remedy of the surety himself against the principal debtor is thereby
impaired, the surety is discharged.
Illustrations
(a) B 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's due performance of the contract. C, without the
knowledge of A, prepays to B the last two instalments. A is
discharged by this prepayment.
(b) C lends money to B on the security of a joint and several
promissory note made in C's favour by B, and by A as surety for B,
together with a bill of sale of B's furniture, which gives power to C
to sell the furniture, and apply the proceeds in discharge of the
note. Subsequently, C sells the furniture, but, owing to his
misconduct and wilful negligence, only a small price is realized. A
is discharged from liability on the note.
(c) A puts M as apprentice to B, and gives a guarantee to B for
M's fidelity. B promises on his part that he will, at least once a
month, see M make up the
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1 See s. 44, supra.
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cash. B omits to see this done as promised, and M embezzles. A is
not liable to B on his guarantee.
140.
Rights of surety on payment or performance.
140.Rights of surety on payment or performance. Where a
guaranteed debt has become due, or default of the principal debtor to
perform a guaranteed duty has taken place, the surety, upon payment or
performance of all that he is liable for, is invested with all the
rights which the creditor had against the principal debtor.
141.
Surety's right to benefit of creditor's securities.
141.Surety's right to benefit of creditor's securities.-A surety
is entitled to the benefit of every security which the creditor has
against the principal debtor at the time when the contract of
suretyship is entered into, whether the surety knows of the existence
of such security or not ; and, if the creditor loses, or, without the
consent of the surety, parts with such security, the surety is
discharged to the extent of the value of the security.
Illustrations
(a)C advances to B, his tenant, 2,000 rupees on the guarantee of
A. C has also a further security for the 2,000 rupees by a mortgage of
B'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.
(b)C, a creditor, whose advance to B is secured by a decree,
receives also a guarantee for that advance from A. C afterwards takes
B's goods in execution under the decree, and then, without the
knowledge of A, withdraws the execution. A is discharged.
(c)A, as surety for B, makes a bond jointly with B to C, to
secure a loan from C to B. Afterwards, C obtains from B a further
security for the same debt. Subsequently, C gives up the further
security. A is not discharged.
142.
Guarantee obtained by misrepresentation invalid.
142.Guarantee obtained by misrepresentation invalid. Any
guarantee which has been obtained by means of misrepresentation made
by the creditor, or with his knowledge and assent, concerning a
material part of the transaction, is invalid.
143.
Guarantee obtained by concealment invalid.
143. Guarantee obtained by concealment invalid.-Any guarantee
which the creditor has obtained by means of keeping silence as to
material circumstances is invalid.
Illustrations
(a)A engages B as clerk to collect money for him. B fails to
account for some of his receipts, and A in consequence calls upon him
to furnish security for his duly accounting. C gives his guarantee
for B's duly accounting. A does not acquaint C with B's previous
conduct. B afterwards makes default. The guarantee is invalid.
(b)A guarantees to C payment for iron to be supplied by him to B
to the amount of 2,000 tons. B and C have privately agreed that B
should pay five rupees per ton beyond the market price, such excess to
be applied in liquidation of an old debt. This agreement is concealed
from A. A is not liable as a surety.
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144.
Guarantee on contract that creditor shall not act on it until cosurety
joins.
144. Guarantee on contract that creditor shall not act on it
until co-surety joins.-Where a person gives a guarantee upon a
contract that the creditor shall not act upon it until another person
has joined in it as co-surety, the guarantee is not valid if that
other person does not join.
145.
implid promise to indemnify surety.
145.implid promise to indemnify surety.-In every contract of
guarantee there is an implied promise by the principal debtor to
indemnify the surety; and the surety is entitled to recover from the
principal debtor whatever sum he has rightfully paid under the
guarantee, but, no sums which he has paid wrongfully.
Illustrations
(a)B is indebted to C, and A is surety for the debt. C demands
payment from A, and on his refusal sues him for the amount. A defends
the suit, having reasonable grounds for doing so, but is compelled to
pay the amount of the debt with costs. He can recover from B the
amount paid by him for costs, as well as the principal debt.
(b)C lends B a sum of money, and A, at the request of B, accepts
a bill of exchange drawn by B upon A to secure the amount. C, the
holder of the bill, demands payment of it from A, and, on A's refusal
to pay, sues him upon the bill. A, not having reasonable grounds for
so doing, defends the suit, and has to pay the amount of the bill and
costs. He can recover from B the amount of the bill, but not the sum
paid for costs, as there was no real ground for defending the action.
(c)A guarantees to C, to the extent of 2,000 rupees, payment for
rice to be supplied by C to B. C supplies to B rice to a less amount
than 2,000 rupees, but obtains from A payment of the sum of 2,000
rupees in respect of the rice supplied. A cannot recover from B more
than the price of the rice actually supplied.
146.
Co-sureties liable to contribute equally.
146. Co-sureties liable to contribute equally. Where two or more
persons are CO-sureties for the same debt or duty, either jointly or
severally, and whether under the same or different contracts, and
whether with or without the knowledge of each other, the co-sureties,
in the absence of any contract to the contrary, are liable, as between
themselves, to pay each an equal share of the whole debt, or of that
part of it which remains unpaid by the principal debtor1*.
Illustraticns
(a)A, B and C are sureties to D for the sum of 3,000 rupees lent
to E. E makes default in payment. A, la and C are liable, as between
them selves, to pay 1,000 rupees each.
(b)A, B and C are sureties to D for the sum of 1,000 rupees lent
to E, and there is a contract between A, B and C that A is to be
responsible to the extent of one-quarter, B to the extent of onequarter,
and C to the extent of
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1 See s. 43 supra.
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one-half. E makes default in payment. As between the sureties,
A is liable to pay 250 rupees, B 250 rupees, and C 500 rupees.
147.
Liability of co-sureties bound in different sums.
147.Liability of co-sureties bound in different sums.-Co-sureties
who are bound in different sums are liable to pay equally as far as
the limits of their respective obligations permit.
Illustrations
(a)A, 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 20,000 rupees, C in that of 40,000 rupees,
conditioned for D's duly accounting to E. D makes default to the
extent of 30,000 rupees. A, B and C are liable to pay 10,000 rupees.
(b)A, 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 20,000 rupees, C in that of 40,000 rupees,
conditioned for D's duly accounting to E. D makes default to the
extent of 40,000 rupees. A is liable to pay 10,000 rupees, and B and
C 15,000 rupees each.
(c)A, 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 20,000 rupees, C in that of 40,000 rupees,
conditioned for D's duly accounting to E. D makes default to the
extent of 70,000 rupees. A, B and C have to pay each the full penalty
of his bond.


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