Employment Agreement

Contract of Indemnity and Guarantee

The contract of indemnity and guarantee are special circumstances contracts. A contract of guarantee is an agreement to fulfil a third party's promise, and contract of indemnification states one party will pay the other in case of any losses.

Under the Indian contract Act, these are the special type of contracts- The contract of indemnity and contract of guarantee. The contract of guarantee is a type of contract under which three persons have involved creditor, surer and principal debtor. 

Here the 3rd person the surer promises to pay in case of any default by the principal debtor the amount owed by the creditor. On the other hand, the contract of indemnity is all about where one person bears or compensates the loss or amount of another person.

Contract of Indemnity

As mentioned above the loss of one party is compensated by another party under a contract of indemnity. Here the indemnity giver is called the indemnifier and the loss bearer is called indemnified or indemnity holder. The indemnified has the right to pay for all the sued damages in any manner, payment of the cost incurred to defend the suit legally.

· Commencement of Liability

The indemnity is not just provided for post-payment reimbursement. It demands that the party being indemnified never be asked to pay. According to major courts, the indemnity holder has the right to put the indemnifier in a position to fulfil the claims of repayment as soon as the duty to pay is specific and apparent.

· Indemnity Bond

An employee may leave their job before the predetermined period thanks to the indemnification bond. This withdrawal is only eligible at the bond money’s forfeiture cost and is only permitted when the bond money and the restriction period are reasonable. Only the portion of the bond money necessary to cover employer loss is retained.

Contract of Guarantee

Under such a type of special contract, three persons are involved one who gives a guarantee to repay the amount- the surety or surer, one who receives the guarantee- the principal debtor and one who owes the money from the debtor mainly known as the creditor. The guarantee could be in the form of written or oral form. 

Furthermore, the guarantee which extends for the series of transactions is referred to as a continuing guarantee. Also, some rights of surety are discussed, such as right against debtor, creditor and co-sureties. Additionally, the circumstances under which the surer could revoke the contract are illustrated along with some of the salient features of the contract of guarantee.

Salient Features of Guarantee

Principal Debtor- The guarantee is given to secure the debt; therefore, if the debtor is incompetent, the guarantee is valid, but if the surer or surety is incompetent, the contract is not valid as per the Indian contract Act. The contract of guarantee follows all the essentials of a valid contract.

Consideration- It is a vital part of a contract the existence of such is a must to make the contract valid. The consideration of the debtor must be sufficient for the surety to give the guarantee.

Misrepresentation-The contract which is availed from misrepresentation is considered as invalid in the eyes of the law. It could either be from the creditor’s side by keeping the material parts confidential or invalid or from the debtor’s side to mislead the surety. This would eventually lead towards invalid contract formation.

Discharge of Surety from Liability

As the limit of liability of surety ends, the surety is free from the liability owed by him. It takes place through the following circumstances-

Revocation- For future transactions, the surety could revoke the continuation of the guarantee anytime by sending a notice to the creditor.

Death of Surety- In case of surety’s death the continuity of guarantee is revoked for further transactions in future.

Variance in the Contract- The variances made by the debtor and creditor in the contracts sets free the surety from his/her liabilities.

Discharge or Release of Principal Debtor by creditor- In case the principal debtor is discharged from the contract. Eventually the surety is also free from his/her liability. Such discharge of the principle debtor takes place by the omission or act of the creditor against him. This would eventually lead towards the discharge of debtor’s duty or liability.

Composition, Extension of Time, or Promise not to Sue- In case any changes are made in the contract by the debtor or creditor without the knowledge of surety, the surety is free from his/her liability. The changes mentioned are the variances in the originally formed contract.

Forbearance by creditors to charge- The liability of surely does not released in situation of forbearance by creditors to litigate the principal debtor.

A promise made with the third person- A contract with a third party does not release the surety. The agreement is started to provide the major debtor some breathing room. Additionally, the third party and creditor are the only parties to the arrangement.

Impairing surety’s remedy: The surety will be released if the creditor acts inconsistently or fails to act, as this will damage the surety’s ability to hold the principal debtor accountable. Additionally, the creditor must respect the surety’s rights.

Rights of Surety- The rights of the surety are mainly bifurcated in three categories. Following are the categories-

Rights Against Principal Debtor

Rights of Subrogation- The surety has creditor rights over the principal debtor. However, the surety does not acquire these rights until the principal debtor’s default has been paid.

Right to Indemnity- Every guarantee agreement includes an implied obligation from the principal debtor to defend the surety. The major debtor is required to reimburse the surety in full. But the overcharged amount does not have to be reimbursed.

Rights Against Creditor

Right to creditor’s securities: The surely gets benefit of each security that is possessed by the creditor in opposition to the debtor while entering into the contract. Even though he was unaware of the securities’ existence at the time of the transaction, the surety had rights over them. The surety is released to the amount of the value of the security if the creditor forfeits or relinquishes the security.

Right to set-off-If, the creditor sues him, the surety has the right to set that off.

Rights Against Co-Sureties

Release of Co-surety- When there are multiple co-sureties, the release of one co-surety does not release the other. Additionally, it does not release the surety from their obligations to the other sureties.

Right to contribution- If the co-sureties are co-sureties of the same debt, they are each accountable to the other. Additionally, they are required to pay their fair share of any debt the principal debtor fails to pay in full or part. This is true whether the contract at issue is the same. In addition, it doesn’t matter whether the co-sureties are aware of the liability.


Thus, a contract of indemnity and a contract of the guarantee are exceptional circumstances contracts under which the third party promises to pay the debt of one party. Vakilsearch also offers the knowledge and assistance required regarding the contract of indemnity and contract of guarantee.

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