ASSOCHAM Workshop on

Drafting and Management of Commercial Contract

and Agreements
11th January, 2008, New Delhi

INDEMNITIES, GUARANTEES AND

WARRANTIES

Sumant Batra
Managing Partner
Kesar Dass B. & Associates
Corporate & Commercial Lawyers
India

PRESENTATION OVERVIEW

o Guarantee
o Indemnity
o Warranty

- Key Fundamentals, Forms and Enforcement

• Main difference between guarantee, indemnity and

warranty

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 GUARANTEE
A (contract) of guarantee is a contract to perform the promise,
or discharge the liability, of a third person in case of his default
default
(Section 126, The Indian Contract Act)

Key Fundamentals

Promise to perform promise of a third party if the third party

breaks the promise. Primary liability of third party must exist.

3 parties – surety (guarantor), principal-

principal-debtor and creditor

Often termed as a “collateral”

collateral” which means “parallel”
parallel”
“additional”
additional”. It is secondary liability as principal-
principal-debtor must be
liable and defaulted. It is “co-
co-extensive”
extensive” to principal-
principal-debtor.
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A guarantee can be continuing. It can also be conditional.

Form

Written or oral, express or implied.

Same/similar contracts

Performance Bond – more like confirmed letter of credit

Surety Bonds to Court – Contract Act does not apply but

principles are similar. Liability may be larger – fraud, etc.

Bank Guarantees – Term does not exist in law. Coined by

courts

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It can be contained in more than one document, which will
have to be read together.

A contract of guarantee may be made by a company under its

common seal or by an authorized person.
A public company is prohibited to give a guarantee on a loan
to any person by a director,etc (Sec 295, Companies Act)

There should be an explicit statement –

“guarantee is absolute and unconditional”.

It should be enforceable.

It should not contain representations which form basis of

fraudulent inducement.

It should be preferably negotiated.

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Enforcement

A guarantee is a contract of Strictissima Juris.

Rule of Equity laid in Craythorne vs. Swinburne applies –

Section 141 of Contract Act.

It is to be enforced according to the terms of the contract.

A creditors right under guarantee are assignable.

Surety’s liability is restricted to the liability of principal debtor.

debtor.

Surety’s liability is not enforceable if original contract is

unenforceable for want of registration.

Surety may sue the principal debtor

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 INDEMNITY
A contract of indemnity is one where one party promises to
save the other from loss or injury caused by the conduct of the
promisor himself or of the third party (Section
(Section 124,
124, Indian
Contract Act)

Key Fundamentals

It is a promise to compensate for or security against

damage, loss or injury.

In wider sense it includes all contracts of insurance, guarantee.

guarantee.

It is not a collateral but an independent contract.

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It is a tool for allocating risks contingent liability.

Form

The obligation to indemnify may arise under contract –

express or implied, from relation of parties viz. employer &
employee, principal & agent, under statutes viz. Companies
Act, Partnership Act, etc.

It should not be too broad or imprecise.

It should provide for extended periods of claims

but for justifiable reasons.

Indemnity should survive period of agreement.

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Enforcement

A contract of indemnity can be enforced according to

its terms.

Claim of Indemnity holder can include: damages, legal costs

of adjudication, amount paid under the terms of compromise

The measure of damages is the extent to which the promisee

has been damnified.

Indemnifier should ideally be informed of the legal proceedings

or should be joined as third party

There is no onus to show breach or actual loss.

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WARRANTY
A warranty is a stipulation collateral to the main purpose of
the contract, the breach of which gives rise to a claim for
damages but not to a right to reject the goods and treat the
contract as repudiated-
repudiated- Section 12, The Sale of Goods
Act, 1930.

Key Fundamentals

Warranty vary in the extent of coverage from case to case.

Form

A warranty has to be generally, express.

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 But there are some implied warranties under Sale of Goods
Act :

• Buyer shall have quiet possession of goods

• Goods shall be free from any charge or encumbrance
• Quality or fitness for particular purpose
• Merchantability of goods

A warranty should cover all the identified risks and include

a disclaimer.

The extent of liability and time limit for claiming losses

should be set.

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It should be appropriate to the activities carried out

It is common to have a warranty clause in sales agreements.

Generally, warranty is included in the price itself however,

separate service agreement containing warranty may also be
entered into.

It is generally detailed and backed by indemnities.

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Enforcement

Claim for damages for personal injury or property damages

can be made. However, there should be direct nexus
between the claim and liability under warranty clause.

Quantification of damages should be according to

estimates, if not specifically provided.

There is an onus to show breach of warranty and

consequential loss.

But the contract is not repudiated by breach of warranty.

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Breach of condition may also be treated as breach of

warranty under certain circumstances.

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 Distinction between Indemnity,
Guarantee & Warranty
Indemnity Guarantee Warranty
• It is a principle • It is a contract • Statement
promise to to perform the about the state
reimburse a promise or of the subject
specific loss. discharge the of contract.
liability of a
third person
• Bilateral • Tripartite • Bilateral
contract (2 contract (3 contract
parties - parties-creditor,
indemnifier & principal debtor
indemnified) surety)
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• Remedy- • Curing of defect • Claim for

Payments or replacement damages
specified in
indemnity bond
• Express or • Express or
• Express &
implied. implied, written
written, unless
or oral.
not implied
under Sale of
Goods Act.

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 Thank you

[email protected]

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