1.

Define a Contract of Indemnity and answer the following question— A contract to

indemnify B against any legal proceedings initiated by C concerning a specific sum of
money. Subsequently, C obtains a court judgment against B for this amount. Without
making any payments towards the judgment, B sues A for the full amount. Will B be
successful in recovering the sum from A?

Indemnity means protection or security. It is a protection from loss. Indemnity contract is defined
under section 124 of the Indian Contract Act, of 1872.
A contract of indemnity is- 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.
Essentials of contract of indemnity-
Valid contract, loss occurred, reasons for loss
Parties to contract- 2

● Indemnifier: A person who promises to indemnify or pay for the losses is known as
an indemnifier.
● Indemnified: A person for whom such a promise is made is known as an indemnified
or indemnity holder.

Here according to the question, A is an indemnifier to B as he promises B to protect him from

any loss that will be concerning a specific sum of money. So if we see section 125 of the Indian
Contract Act, 1872. The rights of the indemnity holder are given- 125(1)- right against all
damages

125(2)- right against all costs

125(3)- right against all sums

So, yes B can claim protection against the recovery of the sum for full amount from A.

2. A entered into a purchase agreement with B for the purchase of a motor vehicle,
agreeing to pay monthly installments of Rs. 10,000. C provided a guarantee for these
payments. A defaulted on several installments. Subsequently, A and B agreed to a
revised payment schedule, whereby A would pay Rs. 2,000 immediately and the
remaining arrears at the end of the month.

Section 126 of Indian Contract Act defines Contract of Guarantee as “ It’s a contract to perform
or discharge the liability of a third person in
case of his default ”
As per the same section, the legal role are as follows:
1. Surety- The person who gives the guarantee is called the surety. In this case, c is the surety.
2. Principal Debtor - The person in respect of whose default the guarantee is given is called the
Principal Debtor. In this case, A is the PD.
3. Creditor- The person to whom the guarantee is given is called the Creditor. In this case, B is
the creditor.

This is known as continuing guarantee. Defined (u/s 129) as a guarantee which extends to a
series of transactions is called as continuing guarantee.
The liability of the surety extends to all the transactions contemplated until the revocation of the
guarantee.
The creditor and principal debtor revised their payment schedule without the knowledge of the
surety. Thereby discharging his liability as per Section 133.
By variance in the terms of the Contract - A surety is liable for what he has undertaken in the
contract. When the terms of the contract between the principal debtor and the creditor are varied
without the surety’s consent, the surety is discharged as to the transactions subsequent to the
variance.

3. The assertion that a surety enjoys a “privileged status as a favored debtor” suggests that a
surety holds certain advantages or protections not typically afforded to an ordinary
debtor. A comprehensive evaluation of this assertion requires examining the surety’s role,
rights, and liabilities in the context of debt law.

Liabilities of surety :
• Secondary Liability: A surety is only liable if the principal debtor defaults. The creditor
must first demand performance from the principal debtor before seeking repayment from the
surety.
• Co-Extensive Liability: The surety’s liability is usually co-extensive with that of
the principal debtor. This means the surety cannot be held liable for more than the debtor’s
obligation. However, if the principal debtor partially pays the debt, the surety’s liability is
reduced accordingly.

Rights of Surety
1. Rights against Principal Debtor
i) Right of Indemnity(Protection against future loss)(Legal exemption from liability for
damages)(A sum of money paid in compensation for loss or injury) (u/s 145) - There is an
implied promise by the principal debtor to indemnify the surety. The surety is entitled to claim
all the sums from the principal debtor which he has rightfully paid to the creditor.
ii) Right of Subrogation((law) the act of substituting{Working as a substitute for someone} of
one creditor for another) (u/s 140) - On payment of a debt, the surety shall be entitled to all the
rights which the creditor could claim against the principal debtor.

2.Rights against Creditor

i) Right to claim securities (u/s 141) -The surety can claim all the securities which the creditor
had at the time of the giving of guarantee.
ii) Right to set off- Any amount recoverable by the principal debtor or surety may be claimed as
deduction.(An amount or percentage deducted)

3. Rights against Co-sureties

i) Right to contribution (u/s 146 and 147) - When a debt is guaranteed by two or more sureties,
they are called co-sureties. All the co-sureties shall contribute equally or in different sums
towards the guaranteed debt. When one of the co-sureties makes payment to the creditor, he has
a right to claim contribution from the other co-surety or co-sureties.
For example, A, B and C are sureties to Z for the sum of Rs 30,000 lent to D. D makes default in
payment. A, B and C are liable, as between themselves, to pay Rs. 10,000 each.
ii) Right to share benefit of securities- If one co-surety receives any security, all the other
co-sureties are entitled to share the benefit of such security.

4. Differentiate between a Contract of Bailment and a Contract of

Pledge. Explain why Pledge is a Special kind of a bailment.

Difference between:
A pledge is a special type of bailment where goods are delivered by the bailor (called the
pawnor) to the bailee (called the pawnee) as security for the repayment of a debt or the
fulfillment of a promise. Unlike regular bailment, in a pledge, the goods are transferred to secure
an obligation, and the pawnee has a right to sell the goods if the pawnor defaults. Legal
provisions governing pledge are found in Sections 172-176 of the Indian Contract Act, 1872,
emphasizing its unique purpose of securing debts or promises, distinguishing it from ordinary
bailment.
5. Explain the concept of Pledge by Non-owners. Under what circumstances such a pledge can
be a valid pledge? Explain with relevant legal provisions.
Pledge by Non- Owners
1.Pledge by mercantile agent [Section 178]: Where a mercantile agent is,with the consent of the owner, in
possession of goods or the documents of title to goods, any pledge made by him, when acting in the
ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorised by
the owner of the goods to make the same; provided that the pawnee acts in good faith and has not at the
time of the pledge notice that the Pawnor has no authority to pledge.
The necessary conditions of validity under the section 178 are as follows: (i) The person pledging the
goods must be a mercantile agent, (ii) Mercantile agent must be in possession either of the goods or the
documents of title to goods, (iii) Such possession must be with the consent of the owner. If possession has
been obtained dishonestly or by a trick, a valid pledge cannot be effected (iv) Pledge must have been
made by the mercantile agent, when acting in the ordinary course of business of a mercantile agent, (v)
The pledgee must act in good faith; (vi) The pledgee should have no notice of the pledger's defect of title.
If the pledgee knows that the pledger has a defective title, the pledge
will not be valid.

2. Pledge by person in possession under voidable contract [Section 178A]: When the pawnor has obtained
possession of the goods pledged by him under a contract voidable under section 19 or section 19A, but the
contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods,
provided he acts in good faith and without notice of the pawnor’s defect of title.

3. Pledge where pawnor has only a limited interest [Section 179]: Where a person pledges goods in which
he has only a limited interest, the pledge is valid to the extent of that interest.