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NOTES|Some Basic QnA Related To Indian Contract Act,1872 That Might Be Important To You

Q .| What are the essential elements of a contract of Indemnity?

A.| Under section 124 of the Indian Contract Act,1872, it is stated that a Contract whereby 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 called a contract of indemnity.

The essential elements of a contract of Indemnity are stated as follows:

1. There must be a loss.

2. The loss must be caused either by the promisor or by any other person.

3. Indemnifier is liable only for the loss.

Illustration –

A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

Q.| What are the rights of Indemnity holder?

A. | Under section 125 of the Indian Contract Act 1872, the rights of indemnity holder are given which are stated as follows:

1. Right to recover damages – he is entitled to recover all damages which he might have been compelled to pay in any suit in respect of any matter covered by the contract.

2. Right to recover costs – He is entitled to recover all costs incidental to the institution and defending of the suit.

3. Right to recover sums paid under compromise – he is entitled to recover all amounts which he had paid under the terms of the compromise of such suit. However, the compensation must not be against the directions of the indemnifier. It must be prudent and authorized by the indemnifier.

4. Right to sue for specific performance – he is entitled to sue for specific performance if he has incurred absolute liability and the contract covers such liability. The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor-

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies

(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit ;

(3) all sums which he may have paid under the terms of any compromise of any such suit if the compromise was not.

Q. | What do you mean by continuing to guarantee? How is such a guarantee revoked?

A. | Under section 129 of the Indian Contract Act1872, defines continuing guarantee as, “a guarantee which extends to a series of transactions.” Generally, indefinite numbers of transactions are dealt with in the continuing guarantee. Such a guarantee may be in respect of a future transaction during a fixed period for example for one year. A continuing guarantee can be revoked in any of the following ways:

1. By notice: A continuing guarantee may at any time be revoked by the surety as to future transactions by notice to the creditor.

Illustrations -

(1) A gives a loan of Rs. 1,000 to B on the guarantee of C. C cannot revoke his guarantee.

(2) A stands surety for any credit purchases up to Rs. 1,000 to be made by B from a shop¬keeper. After the shop-keeper has supplied goods worth Rs. 500, A gives a notice to the shop-keeper not to sell goods to B in the future. A is liable for the purchases already made. However, he will not be liable for any purchases made after the notice of revocation.

2. By death: The death of a surety operates in the absence of a contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions. However, it should be noted that the notice of death is not necessary.

Q. | What do you understand by the surety, principal debtor and creditor?

A. | Under section 126 of Indian Contract Act,1872, a ‘contract of guarantee’ is a contact to perform a promise, or discharge a liability, of a third person in case of his default. The person by whom the guarantee is given is called the ‘surety’, the person in whose respect the default the guarantee is given is known as the ‘principal debtor’, and the person to whom the guarantee is given is known and called as the ‘creditor’. A guarantee can either be an oral or a written one.

Q. | What amounts to sufficient consideration for giving a guarantee?

A.| Anything did, or any promise made, for the benefit of the principal debtor may be a sufficient consideration to the surety for giving the guarantee. In other words, something is done or any promise made for the benefit of the principal debtor is presumed by law to be sufficient consideration in the contract of guarantee. It is not necessary that there should be some benefit to the surety himself. It is immaterial whether there is or not any apparent benefit to the surety. The consideration received by the principal debtor is taken to be sufficient consideration for the surety. A contract of guarantee without consideration is void. Past consideration is sufficient consideration for a contract of guarantee. For example, where after a lease is executed and a person becomes surety for the payment of the rent due to the lessee, the contract of surety is for consideration. Anything done for the benefit of the principal debtor before the guarantee was given is a good consideration.


1. B requests A to sell and deliver to him goods on credit. A agrees to do so provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This is sufficient consideration for C’s promise.

2. A sells and delivers goods to B. C afterward requests A to forbear to sue B for the debt for a year, and promises that if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is sufficient consideration for C’s promise.

3. A sells and delivers goods to B, C afterward without consideration, agrees to pay for them in default of B. The agreement is a void.

Q. | What do you understand by a discharge of surety?

A. | When the liability of the surety is extinguished, he is said to be discharged; a surety may be discharged:

1. by the revocation.

2. by the act or conduct of the creditor.

3. by the invalidation of the contract of guarantee.

Q. | What is a lawful consideration? When would a consideration or object of an agreement be considered lawful?

A. | Under Section 2(d) of Indian Contract Act 1872, it is stated that when, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a lawful consideration for the promise. According to Section 23 of the Indian Contract Act,1872, a consideration or an object of an agreement is lawful unless,

1. it is prohibited by law.

2. it is of such nature that, if permitted, defeats the provisions of law.

3. it is fraudulent.

4. it involves or implies injury to another person or property of another.

5. it is immoral or against public policy.

Illustrations -

(a) A promises, for a certain sum paid to him by B, to make good to B the value of his ship if it is wrecked on a certain voyage. Here A's promise is the consideration for B's payment and B's payment is the consideration for A's promise and these are lawful considerations.

(b) A promises to maintain B's child and B's promises to pay A 1,000 Taka yearly for the purpose. Here the promise of each party is the consideration for the promise of the other party. They are lawful considerations.

(c) A, B and C enter into an agreement for the division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as its object is unlawful.

(d) A promises to obtain for B an employment in the public service and B promises to pay 1,000 Taka to A. The agreement is void, as the consideration for it is unlawful.

(e) A, being an agent for a landed proprietor, agrees for money, without the knowledge of his principal, to obtain for B a lease of land belonging to his principal. The agreement between A and B is void, as it implies a fraud by concealment by A, on his principal.

Relevant Cases –

• Mannalal Khetan vs Kedar nath Khetan - If the intention of the law is to forbid something in public interest, an agreement that contravenes it is void. However, if the intention is to merely regulate something, the contract may not be void even if the parties have to pay a penalty.

• Regazzoni vs K C Sethia - Two parties made an agreement that one will supply jute to another in an African country so that it can then be resold in another country to which export of jute bags was prohibited. One party sued the other for breach of contract. Agreement was held void.

Q. | What is meant by a specific performance of a contract? What contracts can be specifically enforced? What contracts cannot be specifically enforced?

A. | A contract is an agreement upon sufficient consideration to do or not to do a particular act. The party on whom this contractual obligation rests must not fail to discharge such obligation. In case of his failure, the other party will have a right sue for performance of the contract. This is called ‘Specific Performance’. According to section 10 of the Act, the specific performance of a contract can be enforced in the following cases:-

1. If there exists no standard for ascertaining the actual damage caused by the non-performance of the act which agreed to be done

2. When pecuniary compensation for its non-performance would not afford adequate relief.

3. When it is probable that pecuniary compensation cannot be got for the non-performance of the act agreed to be done.

Whereas, under section 14 of the Act, the following contracts cannot be enforced:

1. Contracts in which compensation in money is an adequate relief.

2. Contracts involving personal service.

3. Contracts with uncertain terms.

4. Contracts in its nature determinable.

5. Contracts which or not valid in law.

6. Contracts involving continuous supervision of the Court.

7. Contracts to build or repair works.

8. The Contract by Hindu parent or guardian to give a child in marriage cannot be specifically enforced.

The Defendant may set up any one of the following defences in a suit for the specific performance of the contract.

1. Compensation in money would be adequate relief.

2. The plaintiff’s unperformed part is large.

3. Contract depends on the personal qualifications or volition of parties.

4. Wanting title.

5. Wanting in mutuality.

6. The contract is devoid of consideration.

7. An essential part of the contract has ceased to exist.

8. The performance of a contract would involve hardship to the defendant than the plaintiff.

9. The performance of contract involves continuous duty over three years.

10. Uncertainty in terms of the contract.

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