12.5 Contingent Contracts (Ss. 31-36), Indemnity & Guarantee (Ss. 124-147)

12.5 Contingent Contracts, Indemnity & Guarantee

Sections 12.1 to 12.4 dealt with the general law of contract, which runs from Sections 1 to 75. From Section 124 onward the Act turns to special contracts, and the first two — indemnity and guarantee — are the ones a Civil Judge encounters most often, because every bank recovery suit is a suit against a borrower and a surety. Contingent contracts, though placed earlier in the Act, are conceptually adjacent and are usually examined alongside.

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Contingent Contracts (Sections 31-36)

Section 31 — a contingent contract is a contract to do or not to do something if some event, collateral to such contract, does or does not happen.

• The three essentials: (i) the performance depends on a future uncertain event; (ii) the event must be collateral to the contract, not a promise forming part of the consideration; and (iii) the event must not be the mere will of the promisor.
• A contract of insurance and a contract of indemnity or guarantee are the standard illustrations of contingent contracts.

• Contingent contract distinguished from a wagering agreement: a wager (Section 30) is void; a contingent contract is valid. In a wager the parties have no interest in the subject-matter other than the stake, and the reciprocal promises are mutually exclusive — one wins, the other loses. In a contingent contract the promisee has a real interest in the event.

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Contract of Indemnity (Sections 124-125)

Section 124 — 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 a contract of indemnity.

• The statutory narrowness: on the plain text, loss arising from an accident, an act of God, or an event not traceable to human conduct is outside Section 124. Indian courts have nevertheless enforced wider indemnities as valid contracts under the general law, and Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri (AIR 1942 Bom 302) is the classic Bombay authority for the proposition that the indemnity-holder may compel the indemnifier to place him in funds before he actually pays.
• Section 125 — rights of the indemnity-holder when sued: he is entitled to recover from the indemnifier (a) all damages he may be compelled to pay in any suit in respect of a matter to which the promise of indemnity applies; (b) all costs he may be compelled to pay in bringing or defending such a suit, provided he acted prudently or with the indemnifier's authority; and (c) all sums paid under the terms of any compromise of such a suit, if the compromise was prudent or authorised.
• The Act does not expressly state the indemnifier's rights, but on payment he stands in the position of the indemnity-holder and is entitled to the benefit of all securities held.

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Contract of Guarantee (Sections 126-147)

Section 126 — a contract to perform the promise, or discharge the liability, of a third person in case of his default. There are three parties: the surety, the principal debtor and the creditor. The guarantee may be oral or written.

Indemnity Compared with Guarantee

The Core Provisions

• Section 127 — consideration: anything done, or any promise made, for the benefit of the principal debtor is sufficient consideration to the surety for giving the guarantee. The surety need receive nothing himself.
• Section 128 — co-extensive liability: the liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. The creditor may sue the surety without first suing the principal debtor and without exhausting his remedies against him.
• Section 129 — continuing guarantee: a guarantee which extends to a series of transactions.
• Section 130 — a continuing guarantee may at any time be revoked by the surety as to future transactions by notice to the creditor. Section 131 — it is revoked by the death of the surety as to future transactions, in the absence of a contract to the contrary.

Discharge of the Surety — the Closed List

• Sections 136-138 are the exceptions to remember: a surety is not discharged where the creditor contracts with a third person to give time to the principal debtor (Section 136), where the creditor merely forbears to sue (Section 137), or where the creditor releases one co-surety — the released co-surety remains liable to the others for contribution (Section 138).
• Sections 142 and 143 — invalid guarantees: a guarantee obtained by misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid; so is a guarantee obtained by the creditor's keeping silence as to material circumstances.

Rights of the Surety

• Section 140 — right of subrogation: where the guaranteed debt has become due and the surety has paid all he is liable for, he is invested with all the rights which the creditor had against the principal debtor.
• Section 141 — right to the creditor's securities: the 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 or not the surety knew of it. If the creditor loses or parts with the security without the surety's consent, the surety is discharged to the extent of the value of that security.
• Section 145 — implied promise to indemnify: in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, who is entitled to recover from him whatever sum he has rightfully paid, but no sums he has paid wrongfully.
• Sections 146-147 — co-sureties: co-sureties for the same debt are liable, as between themselves, to contribute equally (Section 146); where they are bound in different sums, they contribute equally subject to the limit fixed by their respective bonds (Section 147).