What is a Contract of Indemnity?
A Contract of Indemnity is a special type of contract where one party promises to save the other party from a loss caused to them. The loss could be caused by the promisor’s own conduct or by the conduct of any other person.
- Simple Meaning: It’s a promise to make good the loss or to compensate someone for a loss they have suffered.
- Legal Basis: This is defined under Section 124 of the Indian Contract Act, 1872.
Parties to the Contract
There are two main parties in a Contract of Indemnity:
- Indemnifier: The person who makes the promise to compensate for the loss. This is the person who gives the indemnity.
- Indemnity-holder (or Indemnified): The person whose loss is to be compensated. This is the person who receives the indemnity.
Example of a Contract of Indemnity
Let’s understand this with a very common banking example.
- Scenario: A customer’s Fixed Deposit (FD) receipt is lost. The customer goes to the bank and requests a duplicate FD receipt.
- The Problem: There is a risk that someone might find the original FD receipt and try to fraudulently withdraw the money. This would cause a loss to the bank.
- The Solution: To protect itself from this potential loss, the bank will ask the customer to sign an Indemnity Bond.
- How it works: In this bond, the customer (the Indemnifier) promises the bank (the Indemnity-holder) that if the bank suffers any loss because of the lost original FD receipt, the customer will compensate the bank for that loss.
By signing this bond, the customer is essentially saying, “Go ahead and issue a duplicate receipt. If you suffer any loss because of this, I promise to pay you back.”
Key Features of a Contract of Indemnity
- It is a promise to save another person from loss.
- The loss must be caused by the Indemnifier or a third person.
- It is a contingent contract: The liability of the indemnifier arises only when the indemnity-holder has actually suffered a loss.
- All essentials of a valid contract must be present (like lawful object, consideration, etc.).
Summary
A Contract of Indemnity is a promise to protect someone from a financial loss. The person making the promise is the Indemnifier, and the person who is protected is the Indemnity-holder. A very common example in banking is when a customer loses a Fixed Deposit receipt and signs an Indemnity Bond to get a duplicate. This bond protects the bank from any loss that might arise from the misuse of the original lost receipt. It is a fundamental tool used by banks to manage operational risks.
Quick Revision Points
- Contract of Indemnity: A promise to compensate for a loss.
- Two Parties: Indemnifier (promisor) and Indemnity-holder (the one protected).
- Purpose: To make good the loss.
- Bank Example: Signing an Indemnity Bond for a lost FD receipt or a lost demand draft.
- Liability: The Indemnifier’s liability is contingent; it arises only when a loss actually occurs.
- Governing Law: Section 124 of the Indian Contract Act, 1872.
Of course. Let’s break down the ‘Contract of Guarantee’ in the simple, structured, and exam-focused format you need. This is a very important topic in banking.
What is a Contract of Guarantee?
A Contract of Guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of their default.
- Simple Meaning: It’s a promise made by one person to a lender, saying, “If the borrower doesn’t pay you back, I will.”
- Purpose: It acts as an additional security for the lender (the bank).
- Legal Basis: This is defined under Section 126 of the Indian Contract Act, 1872.
Parties to the Contract
A contract of guarantee is unique because it involves three parties.
- Principal Debtor: The person who takes the loan and is primarily responsible for repaying it. (The main borrower).
- Creditor: The person who gives the loan. (The bank).
- Surety (or Guarantor): The person who gives the guarantee and promises to pay if the Principal Debtor defaults.
Example of a Contract of Guarantee
- Scenario: Ramesh wants to take an education loan of ₹5 lakhs from ABC Bank for his higher studies. Since Ramesh has no income of his own, the bank is hesitant to give the loan.
- The Guarantee: Ramesh’s father, Suresh, agrees to be the guarantor. Suresh signs a contract with ABC Bank, promising that if Ramesh fails to repay the education loan, he (Suresh) will pay it.
- The Parties:
- Principal Debtor: Ramesh
- Creditor: ABC Bank
- Surety/Guarantor: Suresh
Key Features of a Contract of Guarantee
1. Three Parties
As explained above, there are three distinct parties involved.
2. Secondary Liability of the Surety
- The primary liability to repay the loan always lies with the Principal Debtor.
- The liability of the Surety is secondary. It arises only when the Principal Debtor defaults on the payment.
3. Co-extensive Liability
- The liability of the surety is co-extensive with that of the principal debtor.
- This means the surety is liable for the full amount that the principal debtor owes, including any interest and other charges, unless the contract specifies otherwise.
4. Types of Guarantee
- Specific Guarantee: A guarantee given for a single transaction or a specific debt. It ends as soon as that single transaction is complete.
- Continuing Guarantee: A guarantee that extends to a series of transactions. It remains in force until it is revoked by the surety.
- Example: A guarantee given for a Cash Credit (CC) account, where the borrower makes multiple withdrawals and deposits, is a continuing guarantee.
Discharge of a Surety
A surety can be discharged (freed) from their liability under certain circumstances:
- By giving a notice of revocation (only for a continuing guarantee for future transactions).
- On the death of the surety.
- By any variation in the terms of the original loan contract made between the bank and the borrower without the surety’s consent.
- Example: If the bank increases the loan amount or the interest rate without informing the guarantor, the guarantor is discharged from their liability.
Summary
A Contract of Guarantee is a three-party agreement involving a Principal Debtor, a Creditor (the bank), and a Surety. The Surety provides a safety net for the bank by promising to pay the debt if the Principal Debtor defaults. The Surety’s liability is secondary to the borrower’s but is co-extensive, meaning they are liable for the full amount. This is a crucial tool for banks to mitigate credit risk, especially when lending to borrowers with a weak financial standing.
Quick Revision Points
- Guarantee: A promise to pay another person’s debt in case of default.
- Three Parties: Principal Debtor (borrower), Creditor (bank), Surety (guarantor).
- Surety’s Liability: Secondary and Co-extensive.
- Primary Liability: Always rests with the Principal Debtor.
- Continuing Guarantee: For a series of transactions (e.g., a Cash Credit account).
- Discharge of Surety: Can happen if the bank changes the loan terms without the surety’s consent.
- Governing Law: Section 126 of the Indian Contract Act, 1872.
What is Bailment?
Bailment is the act of delivering goods by one person to another for some purpose, upon a contract that the goods shall be returned or otherwise disposed of according to the directions of the person delivering them, when the purpose is accomplished.
- Simple Meaning: It’s the temporary transfer of possession (not ownership) of goods from one person to another for a specific reason.
- Legal Basis: This is defined under Section 148 of the Indian Contract Act, 1872.
Parties to the Contract
There are two parties in a contract of bailment:
- Bailor: The person who delivers the goods.
- Bailee: The person to whom the goods are delivered.
Example of Bailment
- You give your car to a mechanic for repair.
- Bailor: You (the car owner).
- Bailee: The mechanic.
- Purpose: To repair the car.
- Condition: The mechanic must return the car to you after the repair is done.
What is Pledge?
A Pledge is a special kind of bailment where goods are delivered as security for payment of a debt or performance of a promise.
- Simple Meaning: It’s when you hand over an asset to a lender as security for a loan.
- Legal Basis: This is defined under Section 172 of the Indian Contract Act, 1872.
- Key Relationship: Every Pledge is a Bailment, but not every Bailment is a Pledge. Pledge is a subset of Bailment.
Parties to the Contract
- Pledgor (or Pawnor): The person who gives the goods as security. (The borrower).
- Pledgee (or Pawnee): The person to whom the goods are delivered as security. (The bank/lender).
Example of Pledge
- You take a Gold Loan from a bank and hand over your gold jewelry as security.
- Pledgor: You (the borrower).
- Pledgee: The bank (the lender).
- Purpose: To secure the loan.
- Condition: The bank must return your gold jewelry to you after you repay the loan in full.
Key Differences: Bailment vs. Pledge
| Feature | Bailment | Pledge |
| Purpose | Can be for any purpose (e.g., repair, safekeeping). | Only for securing a debt or promise. |
| Right to Sell | The Bailee has no right to sell the goods. They can only retain them (exercise a lien). | The Pledgee has the right to sell the goods if the Pledgor defaults on the payment. |
| Use of Goods | The Bailee may use the goods if the terms of the contract allow. | The Pledgee has no right to use the goods. |
Export to Sheets
Summary
Bailment is the simple, temporary transfer of possession of goods for any purpose, like giving a shirt for dry cleaning. The person receiving the goods (Bailee) must return them once the purpose is complete. Pledge is a specific type of bailment where the purpose is strictly to provide security for a loan. The most important feature of a Pledge is that if the borrower (Pledgor) defaults, the lender (Pledgee) has the right to sell the pledged asset to recover their money. This is why a gold loan is a perfect example of a pledge.
Quick Revision Points
- Bailment: Temporary transfer of possession for a purpose.
- Parties in Bailment: Bailor (giver) and Bailee (receiver).
- Pledge: A special Bailment where the purpose is security for a loan.
- Parties in Pledge: Pledgor (borrower) and Pledgee (lender).
- Key Difference: In a Pledge, the lender has the right to sell the security on default. In a general Bailment, the bailee does not.
- Relationship: All Pledges are Bailments, but not all Bailments are Pledges.