Indemnity, Guarantee and Contract of Agency: Important JAIIB Questions

Published on January 14, 2017

What do you mean by Contract of Indemnity?

  • The word Indemnity is derived from the Latin root Indemnity, meaning “Security or exemption against damage, loss etc” or “unhurt, undamaged or without loss.”
  • To sum up, Indemnity is a contract by which one party promises the other party to compensate the loss or damage caused either by the promisor himself or by any third party. The promisor is the Indemnifier while the one whose loss is compensated is the indemnified. Indian law doesn’t cover the losses occurred by fire or sea peril. It states that the loss should be caused only by some human agency.

For example, A person Ram asks Shyam to invest in share market and promises to indemnify Shyam. Shyam does so and incurs a loss of Rs. 5000. This loss will be compensated by Ram.

What are the rights of Indemnity holder or Indemnified?

Under the Contract of Indemnity, Indemnified has the right to recover all costs or all sums that he was compelled to pay in any suit relating to the matter to which Indemnifier has promised to insure him against. It is subjected to a condition that the Indemnified should follow the instructions of the promisor.

What is a Contract of Guarantee?

The word ‘guarantee’ means a promise or assurance that something is of specified quality, content, benefit etc; or it is something that assures a particular outcome or condition.
Contract of Guarantee includes three parties:
  • The creditor
  • The principal debtor
  • The surety or the guarantor
The surety or the guarantor promises the creditor to perform the contract or discharge the liability if the principal debtor fails to do so.

For example, Ram takes a loan from bank and Shyam gives a guarantee that he will pay the amount if Ram defaults.

Differentiate between Indemnity and Guarantee.

It refers to reimbursement of loss.It is merely a security to Creditor.
It is explained in Section 124 of Indian Contract act, 1872.It comes under Section 126 of Indian Contract Act, 1872.
Only two parties i.e. Indemnifier and Indemnified.Includes three parties- surety, principal debtor and creditor.
Only 1 contract is done.Includes 3 contracts between the 3 parties.
Primary liability.Secondary liability

What are Contingent Contracts?

Contracts can be classified into two groups namely, Absolute contract and Contingent Contract. In the Absolute contract, there is no condition, it has to be performed under all circumstances. While Contingent Contracts are conditional contracts which mean that its performance depends upon the happening or non-happening of a certain event.

Life insurance contract does not resemble a Contract of Indemnity. Why?

In life insurance contract, an insured person pays a premium to the insurer and in the case of death of insured person, the amount is given to his representatives. As the loss of a life can’t be estimated in money and hence can’t be compensated, it does not resemble an indemnity contract.

Briefly explain Indian Contract Act, 1872.

Indian Contract Act came into force on the first of September, 1872. It extends to the whole of India except Jammu and Kashmir. It deals with the enforcement of rights and duties of the parties involved in a contract. It illustrates the conditions to be fulfilled for a valid contract along with exception as well as the remedies for the parties in case the contract has been breached or has been considered as void.

What is Contract of Agency?

It is defined in Section 182 of the Indian Contract Act 1872 in terms of Agent and Principal. An agent is a person who is employed to perform some action or to deal with a third person in place of the Principal. A Contract of Agency establishes a legal relationship and specifies the rights as well as duties of both Agent and Principal.

What are the duties and rights of an Agent?


  • To conduct the business according to the principal’s directions. 
  • Use his skill and diligence in conducting business activities. 
  • Should render proper account information if the principal demands as well as pay all sums received by doing anything on principal’s account. 
  • To get back the expenses done by his pocket in course of business. 
  • To receive remuneration fixed under the contract. 
  • Hold a lien on the goods of the principal for his dues. 

What are the duties of Principal?

  • To indemnify the agent against consequences of all lawful acts relating to the contract. 
  • To compensate for any injury. 
  • To provide agent the remuneration promised under the contract. 

Who is a Sub-Agent?

Sub-Agent is a person appointed by the original agent for conducting some business work. He works under the agent.

Under what circumstances, the Agency Contract can be terminated?

  • By the mutual agreement between principal and agent
  • After the expiry of a particular time period or fulfilment of the objective for which it was formed
  • If the agent or principal dies or become insane
  • If the principal becomes insolvent or he revokes the contract
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