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Mercantile Laws-I

Notes (a) he acted under the authority of the indemnifier or (b) if he did not act in contravention of

orders of the indemnifier and in such a way as a prudent man would act in his own case; (iii)
All sums which may have been paid under the terms of any compromise of any such suit, if the

compromise was not contrary to the orders of the indemnifier and was one which it would have
been prudent for the promisee to make.
7.5.2 Rights of the Indemnifi er

The Act makes no mention of the rights of indemnifier. However, his rights, in such cases, are

similar to the rights of a surety under s.141, viz, he becomes entitled to the benefit of all the
securities which the creditor has against the principal debtor whether he was aware of them or
not.
7.5.3 Commencement of Indemnifi er’s Liability

Indemnity requires that the party to be indemnified shall never be called upon to pay. Indemnity is
not necessarily given by repayment after payment. The indemnified may compel the indemnifi er

to place him in a position to meet liability that may be cast upon him without waiting until the

promisee (indemnified) has actually discharged it.

Task B, the proprietor of a newspaper, publishes at A’s request libel upon C, in the
paper. “A” promises to indemnify B against the consequences of the publication and all
costs and damages of any action in respect thereof. B is sued by C and has to pay damages
and also incur expenses. Is a liable to make the loss to B? [Hint: A is liable].

7.5.4 Distinction between a Contract of Guarantee and a Contract of
Indemnity

L.C. Mather in his book “Securities Acceptable to the Lending Banker” has very briefl y, but
excellently, brought out the distinction between indemnity and guarantee by the following
illustration. A contract in which A says to B, ‘If you lend £20 to C, I will see that your money
comes back’ is an indemnity. On the other hand undertaking in these words, “If you lend £20 to C
and he does not pay you, I will is a guarantee. Thus, in a contract of indemnity, there are only two
parties, indemnifi er and indemnifi ed. In case of a guarantee, on the other hand, there are three
parties, the ‘principal debtor’, the ‘creditor’ and the ‘surety’. Other points of difference are:
Table 7.1: Differences between Contract of Indemnity and Contract of Guarantee

Contract of indemnity Contract of guarantee
A contract of indemnity is a contract by A contract of guarantee is a contract to perform the
which one party promises to save the other promise or discharge the liability of a third person in case
form the loss caused to him by the conduct of his default.
of the promisor or another person.
The liability of the promisor is primary there The liability of principal debtor is primary and the liabil-
is no secondary liability. ity of surety is secondary.

The contract is express and specific. The contract between principal debtor and creditor is
specific and between the principal debtor and surety is

implied.
There are two parties involved and only one There are three parties involved and three agreements.
agreement.
The promisor cannot file the suit against The surety does not require any subrogation for fi ling of

third person untill and unless the promise suit.
subrogates his right for filling a suit.

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