B.A. LL.B. (Five Years) Sem 5 Contract II 2021 Oct Question Paper with Solutions

For full marks, cover: the definition of indemnity in section 124 and its elements; the definition of guarantee in section 126 and its three parties; a decided case on each (Gajanan Moreshwar, Bank of Bihar); the differences, best set out in a table; the minor-debtor point that shows the difference most sharply.

Contract of indemnity

Section 124 of the Indian Contract Act 1872 defines it: "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."

The party who promises is the indemnifier. The party protected is the indemnity holder (also called the indemnified). The illustration to section 124 gives the standard case. A promises to indemnify B against the consequences of any proceedings which C may take against B for a sum of Rs 200.

Its elements are:

When the indemnity holder can claim

Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, AIR 1942 Bom 302, is the leading Indian case. At the defendant's request, the plaintiff mortgaged property for Rs 5,000 and then created a further charge for Rs 5,000. He bound himself personally to pay. The defendant promised in writing to discharge the mortgages but did not. The defendant argued that the plaintiff could not sue until he had actually paid. Chagla J rejected this. He held that sections 124 and 125 are not exhaustive. Once the indemnity holder's liability has become absolute, he can call on the indemnifier to pay it off before he pays anything himself.

This shows the nature of an indemnity. It is a primary promise to protect a person against loss. It does not depend on anyone else's default.

Contract of guarantee

Section 126 defines it: "A 'contract of guarantee' is a contract to perform the promise, or discharge the liability, of a third person in case of his default."

It names three persons:

1. the surety, who gives the guarantee;

Bank of Bihar Ltd. v. Damodar Prasad, AIR 1969 SC 297, explains what this means. A bank lent money to a borrower on the guarantee of a surety. It sued both and got a decree. The trial court told the bank not to execute the decree against the surety until it had exhausted its remedies against the borrower. The Supreme Court set this direction aside. It held that a surety has no right to make the creditor proceed first against the principal debtor. The very object of a guarantee would be defeated otherwise. The surety must pay, and he then steps into the creditor's shoes under section 140.

The differences

In Edavan Kavingal Kelappan Nambiar v. Moolakal Kunhi Raman, AIR 1957 Mad 164, a surety was sued for a minor's debt. The Madras High Court held that the surety's liability is ancillary. It "can rest only on a valid obligation". The minor owed nothing, so there was no default and the surety was not liable.

The court explained the older Bombay case, Kashiba v. Shripat Narshiv (1894) ILR 19 Bom 697. There a father who joined his minor daughter's bond was held liable. The Madras court said his promise was really an indemnity, an independent promise to pay. So the same words of promise can make a person liable or not liable depending on whether they are an indemnity or a guarantee.

Conclusion. A contract of indemnity under section 124 is a two-party, primary promise to save another from loss caused by conduct. The holder can enforce it once his liability becomes absolute, as Gajanan Moreshwar holds. A contract of guarantee under section 126 is a three-party, secondary promise to answer for another's default. The surety's liability is co-extensive with the debtor's under section 128, and the creditor may sue him first, as Bank of Bihar holds. The key test is whether the promisor's liability depends on a third person's default.