Name: JADHAV SNEHA ROHAN SHEETAL

Sandesh College of Law

Roll No: A-28 (old roll number)

Subject: - Contract II

Assignment

Jaykrishna Trading Co V Kandasamy Wvg Factory & Co.

With help of case study explain the principals. Laid down in case to
distinguished between indemnity and guarantee and the rights of the
promisee in the contract of indemnity.
Contract of Indemnity

Section 124 of the Indian Contract Act, 1872 (hereinafter referred to as 'the Act') which states
that, "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."1 Further, Section
125 provides remedy to the promisee in a contract of indemnity acting within the scope of its
authority.

Indemnity is an undertaking to make good monetary or other loss which may be caused due
to damage.

Indemnity and damages are two closely related words when it comes to contracts and
agreements, yet bearing completely different principle and usage. They are remedies that may
be claimed by the aggrieved party for breach of contract. Damage is provided under Section
74 of the Act, which states that, "When a contract has been broken, if a sum is named in the
contract as the amount to be paid in case of such breach, or if the contract contains any other
stipulation by way of penalty, the party complaining of the breach is entitled, whether or not
actual damage or loss is proved to have been caused thereby, to receive from the party who
has broken the contract reasonable compensation not exceeding the amount so named or, as
the case may be, the penalty stipulated for."

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, is called a “contract
of indemnity.”"

A contracts 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. A
contracts 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."

Section 125 in The Indian Contract Act, 1872

125. Rights of indemnity-holder when sued.—The promisee in a contract of indemnity,

acting within the scope of his authority, is entitled to recover from the promisor— —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 contrary to the orders of the promisor, and was one which it would
have been prudent for the promisee to make in the absence of any contract of indemnity, or if
the promisor authorized him to compromise the suit.

Example of indemnity is the insurance contract where the insurance company promises to
pay for the damages suffered by the policyholder, against the premiums.

Contract of Guarantee

Section 126 in The Indian Contract Act, 1872

‘Contract of guarantee’, ‘surety’, ‘principal debtor’ and ‘creditor’—A ‘contract of guarantee’

is a contract to perform the promise, or discharge the liability, of a third person in case of his
default. The person who gives the guarantee is called the ‘surety’; the person in respect of
whose default the guarantee is given is called the ‘principal debtor’, and the person to whom
the guarantee is given is called the ‘creditor’. A guarantee may be either oral or written. —A
‘contract of guarantee’ is a contract to perform the promise, or discharge the liability, of a
third person in case of his default. The person who gives the guarantee is called the ‘surety’;
the person in respect of whose default the guarantee is given is called the ‘principal debtor’,
and the person to whom the guarantee is given is called the ‘creditor’. A guarantee may be
either oral or written."

A contract of guarantee is a contract is a contract to perform the promise, or discharge the

liability of a third person in case of its default. The person who gives the guarantee is called
the Surety, the person for whom the guarantee is given is called the Principal Debtor; and the
person to whom the guarantee is given is called the ‘Creditor’.

Section 127 in The Indian Contract Act, 1872, Consideration for guarantee - Anything done,
or any promise made, for the benefit of the principal debtor, may be a sufficient consideration
to the surety for giving the guarantee. Anything done, or any promise made, for the benefit of
the principal debtor, may be a sufficient consideration to the surety for giving the guarantee."

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 a sufficient consideration for C’s
promise. (a) 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 a sufficient
consideration for C’s promise."

Difference between Indemnity & Guarantee :

INDEMNITY GUARANTEE

Meaning A contract in which one A contract in which a party

party promises to another promises to another party that he
that he will compensate will perform the contract or
him for any loss suffered compensate the loss, in case of the
by him by the act of the default of a their person, it is the
promisor or the third contract of guarantee.
party.

Defined in Section 124 of Indian Section 126 of Indian Contract

Contract Act, 1872 Act, 1872
Parties Two, i.e. indemnifier and Three, i.e. creditor, principal
indemnified debtor and surety
Number of One Three
Contracts

Degree of liability Primary Secondary

of the promisor
Purpose To compensate for the To give assurance to the promise
loss
Maturity of When the contingency Liability already exists.
occurs.
 Liability

The following are the major differences between indemnity and guarantee:

1. In the contract of indemnity, one party makes a promise to the other that he will
compensate for any loss occurred to the other party because of the act of the promisor
or any other person. In the contract of guarantee, one party makes a promise to the
other party that he will perform the obligation or pay for the liability, in the case of
default by a third party.
2. Indemnity is defined in Section 124 of Indian Contract Act, 1872, while in Section
126, Guarantee is defined
3. In indemnity, there are two parties, indemnifier and indemnified but in the contract of
guarantee, there are three parties i.e. debtor, creditor, and surety.
4. The liability of the indemnifier in the contract of indemnity is primary whereas if we
talk about guarantee the liability of the surety is secondary because the primary
liability is of the debtor.
5. The purpose of the contract of indemnity is to save the other party from suffering loss.
However, in the case of a contract of guarantee, the aim is to assure the creditor that
either the contract will be performed, or liability will be discharged.
6. In the contract of indemnity, the liability arises when the contingency occurs while in
the contract of guarantee, the liability already exists.

CASE STUDY

JAYKRISHNA TRADING CO V.S KANDASMY WVG FACTORY AND CO.

CASE NO.

A.S no. 346 of 1989

ADVOCATES

MR. R. SANKARNARAYAN AND S. RAGHAVAN FOR APPELLANTS

MR. A.G RAJAN FOR MR. R. MUTHKRISHNAN FOR RESPONDENTS

JUDGES

ABDUL HANDI

A.R. LAKSHMANAN, JJ.

ACTS

Section 124 and 125 of the Indian contract act together. 30

Section 124 of the Indian contract act

And other

COURT

Madras High Court

PRINCIPALS LAID DOWN IN CASE TO DISTINGUISHED BETWEEN INDEMNITY

AND GUARANTEE AND THE RIGHT OF PROMISEE IN THE CONTRACT OF
INDEMINITY

1. The unsuccessful defendants 1 to 3 and 6 in OS. No. 145 of 1985 on the file of Sub Court,
Sankari, are the appellants. Defendants 4 and 5 remained ex parte in the suit. The plaintiff is
the sole respondent in this appeal. The respondent filed the suit for recovery the amounts in
respect of goods sold and delivered. It is his case that the 1st defendant partnership firm and
the 2nd defendant acted as agents of the respondent and introduced defendants 4 and 5 (who
are not parties to this appeal) to the respondent and procured orders from the defendants 4
and 5. As per the agreement, the goods were to be supplied and despatched through a named
Lorry Transport and Hundis accepted by defendants 4 and 5 were to be retired through the
Allahabad Bank. Defendant No. 1 was entitled to 2% commission. Defendants 4 and 5
accepted Hundis but failed to make payment to an extent of Rs. 27,600. Therefore, the
plaintiff filed the above suit and claimed interest at 21% per annum. The suit was laid for Rs.
34,425.30 together with future interest.

2. According to the respondent, the respondent is a partnership firm registered under

the Indian Partnership Act carrying on business in the manufacture of grey cloth, stable, fibre
sarees, lungis, etc., at Kumarapalayam. The 1st appellant/1st defendant is a partnership firm
in which appellants 2 and 3/defendants 2 and 3 are partners and they are carrying on business
at New Delhi and at Kumarapalayam in clothes under the name and style of M/s. Jayakrishna
Trading Company. The 5th defendant is carrying on business under the same and style of
M/s. V. Vendana. Defendants 2 and 3 who are the natives of Kumarapalayam represented in
April, 1982 that they would like to have business with the plaintiff firm and accordingly, the
plaintiff/respondent agreed to supply goods to the defendants 1 to 3 as they are well known to
them. The 2nd defendant represented that the 4th defendant is a partner of the 5th defendant-
firm having their business at Gautamnagar, that they will be purchasing the goods in large
quantities and that the plaintiffs will sell them goods on credit and send lorry receipts through
Allahabad Bank by hundis. In fact, the 2nd defendant sent a telegram asking for supply with
detailed particulars saying that the other Mills are offering 56 x 60 at Rs. 6.15 in the market.
The respondent quoted the final offer by telegram at Rs. 6.20 per month including the 2%
commission and sample of goods were sent and delivery by June/July, 30,000 metres. The
5th defendant placed order through the 4th defendant with the plaintiff on 30.8.1982 for
15,000 metres as per the sample approved at Rs. 5.75 per metre. The terms and conditions
regarding the payment was that the document R.R. to be sent through the Allahabad Bank,
New Delhi on 15 days sight of hundi and 500 metres are to be delivered immediately and the
rest of the consignment to be delivered in lots of 5000 metres each after a week. According to
the plaintiff, this deal was confirmed by the 2nd defendant. On 1.9.1982, the 5th defendant
sent a similar order to the plaintiff for 15,000 metres on the same terms and conditions and
the plaintiff also confirmed the order on 17th September, 1982. The goods were despatched
on 20.9.1982 and the relative invoices were also sent. The plaintiff/respondent had drawn
eight hundis payable on 15 days sight and forwarded the same through the Allahabad Bank
New Delhi, and sent a copy of that letter to the 1st defendant. Since defendants 4 and 5 were
strangers to the plaintiff, the 2nd defendant assured that if the amount is not paid, the 1st
defendant would pay the same. The plaintiff had also sent other consignments on 20.9.1982,
23.9.1982, 24.9.1992, 29.9.1982, 1.10.1982 and 6.10.1982 and few other subsequent days.
But, money was not forthcoming for the goods. However, without paying the money, the
defendants cleared the goods. In spite of repeated requests, defendants 4 and 5 did not pay the
amount due to the plaintiff. Finally, the 2nd defendant as the representative of the 1st
defendant wrote a letter on 30.12.1982 that if the defendants 4 and 5 did not pay the amount
due to plaintiff they would pay the same. Therefore, defendants 1 to 3 are made parties to the
suit. They are liable to pay the amount with interest at 21% per annum from the date of
supply of the goods.
3. The third defendant filed a written statement. The said written statement was adopted by
the sixth defendant. They contended inter alia that they were only agents and not liable to the
amount and no interest was payable since there was no contract for payment of interest.
Defendants 1 and 3 pointed out that the 2nd defendant was not a partner of the 1st defendant-
firm and therefore, the 6th defendant who is another appellant was impleaded in the suit.
According to the 3rd defendant, the 2nd defendant is not a partner of the 1st defendant- firm
and one Manickam, the husband of one Prabha, requested the 3rd defendant to assist them in
disposing of their huge stock of the plaintiff and at their request, the 3rd defendant agreed to
act as their agent and to book orders for the plaintiff firm. It is denied that defendants 1 to 3
represented that they will purchase the goods by paying the value within 15 days. It is the
specific case of the 3rd defendant that as a representative of the plaintiff, the 2nd defendant
confirmed the order for the plaintiff and it is incorrect to state that the 2nd defendant
confirmed the order. The letter dated 30.12.1982, cannot in any way, bind the 1st defendant
and its partners, nor can it bind the 2nd defendant. Defendants 1 to 3 are not liable to pay the
suit claim and any interest claimed in the suit. There is no cause of action for the plaintiff to
file the suit against the defendants 1 to 3 and 6. The plaintiff has, with ulterior motive, filed
the suit against the innocent defendants 1 to 3 and that the amounts are payable only by the
defendants 4 and 5.

4. The trial court framed a solitary issue viz., Whether the plaintiff is entitled to the suit
claim.

5. The respondent/plaintiff examined its former Manager as P.W.1 and marked Exs.A-1 to A-
11. On the side of the defendants, the 3rd defendant was examined as D.W.1 the Exs.B-1 to
B-13 were marked. The Trial Court decreed the suit ex parte against defendants 4 and 5 and
decreed the suit against defendants 1 to 3 and 6, the appellants in the appeal. On the reading
of the judgments it is seen that the trial court, after narrating the oral and documentary
evidence analyzed only the following three aspects.

(a) The plea of the defendants that the plaintiff had unsold excess stock and they requested
the defendants to procure orders to dispose of them was unsustainable as even according to
the contesting defendants, the plaintiff supplied fabric for a lesser quantity and hence this
plaintiff did not have surplus stock.

(b) (i) The second defendant had written Ex.A-11 a letter dated 30.12.1992 where he has
accepted to pay the liability.
(ii) Even though defendants denied the letter dated 30.12.1992 (Ex.A-11) D.W.1 had
admitted in cross-examination that 2nd defendant was corresponding in connection with
business transaction.

(iii) 2nd defendant did not enter the witness box. (iv) Ex.A-11 was therefore valid.

(c) Ex.B-1 which is the partnership deed of D-1 clearly disclosed that it was a trading concern
and therefore, defendants 1 to 3 and 6 were not commission agents.

6. The trial court decreed the suit as prayed for with interest at 21% per annum from the date
of the suit till the date of decree and thereafter at 12% per annum till the date of realization.

7. We have carefully gone through the entire pleadings and the evidence tendered by both
parties both oral and documentary. We have heard the arguments of Mr. R. Sankaranarayanan
for the appellants and Mr. A.G. Rajan for the respondent/plaintiff.

8. Mr. R. Sankaranarayanan, learned Counsel appearing for the appellants (defendants 1 to 3

and 6) has argued the following grounds:

(a) The appellants are admittedly agents of the respondent/plaintiff and therefore, the
respondent cannot enforce a contract against third party on the basis of a contract entered into
in the capacity as agent and they cannot be sued by their principal on the basis of such
contract.

(b) The respondent/plaintiff contended in the suit that the appellants/defendants 1 to 3 and 6
also acted as agents for defendants 4 and 5. In such an event, the appellants acted for a
disclosed principal and therefore, they are not liable.

(c) The appellants are more agents and not del credere agents of the respondent plaintiff and
therefore, they cannot be saddled with the liability of the parties from whom the appellants
procured orders.

(d) The basis of the claim against the appellants has not been spelt out in the plaint evidence
or arguments, Hence pleadings are insufficient.

(e) Ex.A-11 ought not to have been marked as exhibit as neither the author of the letter nor
the receipient of the letter was examined and in any event Ex.A-11 was not written to the
respondent.
(f) Ex.A-11 cannot constitute an independent contract between respondent/plaintiff and
appellants/defendants.

(g) Ex.A-11 can at best be construed as a contract of guarantee and the same not being
contemporaneous with the original contract between principal debtors viz., defendants 4 and
5 and respondents/plaintiff is invalid on its own.

(h) Ex.A-11 is not supported by any separate consideration and therefore, it is invalid in law.

(i) Even if Ex.A-11 constituted any liability it could bind only 2nd defendant as against one
Manickam and the respondent/plaintiff.

(j) The undertaking if any given by the 2nd defendant in Ex.A-11 cannot bind either 1st
defendant-firm or third defendant and sixth defendant who are partners of the said firm.

(k) At any rate, the appellants are not liable to pay interest at 21% per annum.

9. The above are the gist of the grounds of attack on the judgment of the trial court, by the
learned Counsel for the appellants, Mr. Sankaranarayanan.

10. We shall now consider the arguments of the learned Counsel for the appellants with
reference to the pleadings and the evidence available on record.

11. The trial court held that the 1st defendant was not a commission agent and it dealt with
respondent/plaintiff as a trading concern. The trial court relied on Ex.B-1 which is a
partnership deed of the 1st defendant firm. The trial court automatically assumed that the firm
has necessarily, to trade and not act as commission agent. This inference, in our opinion, is
illogical. The partnership firm, in our view can carry on business not mentioned in the deed
and the principles applicable to company to act as per the objects clause in Memorandum of
Association, is not applicable to the partnership. In any event, the trading business could
include trading as commission agent also. The inference of the trial court is, therefore,
unsustainable and illogical.

12. Paragraph 6 of the plaint contains the material averments regarding the suit transaction. It
reads as follows:

The plaintiff quoted the final offer by telegram at Rs. 6.20 per metre including the 2%
commission and sample goods were sent and delivery June/July, 30,000 Meters.
13. The above averments disclose the jural relationship between the respondent/plaintiff and
the 1st defendant. It only refers to the final offer made by the respondent/plaintiff at Rs. 6.20
per metre including 2% commission (to the agent).

14. In the written statement, the 3rd defendant has pleaded that they acted as representatives
of the plaintiff. It is useful to extract the relevant passage from the written statement of the
3rd defendant.

As a representative of the plaintiff, the 2nd defendant confirmed the order for the plaintiff.

D.W.1 has also, in his oral evidence, categorically deposed that the 1st defendant acted as the
agent of the respondent/plaintiff. The documents filed by the appellants as well as the
respondent/plaintiff, would prove this point. In this connection, we may refer to Exs.B-3 and
B-6 to B-10. Ex.B-3 is a certificate given by the respondent- plaintiff dated 11.10.1982
stating that the 1st defendant was their agent. The certificate reads as under:

To whom it may concern This is to inform you that we have appointed M/s. Jayakrishna
Trading Company, 41/2972 Beadonpura, Karol Bagh, New Delhi as our Agent to book orders
for Grey Cloth.

15. Exs.B-6 to B-10 are invoices sent by the plaintiff to the defendants 4 and 5. These voices
clearly indicate the legal character of the 1st defendant. The name of the 1st
defendant/Jayakrishna) is referred to in the invoices and is described as "Agent". These
documents are signed by the respondent/plaintiff. The 5th defendant, in the column provided
for customer's signature', has signed. Thus, it is seen from the above documents that there is
unequivocal admission by the respondent/plaintiff that the 1st defendant was their agent. As
stated above. Ex.B-3 is the certificate given by the respondent/plaintiff that the 1st defendant
was their agent. Ex.A-8 filed by the respondent/plaintiff buttresses the case of the defendants.
It could be seen from Ex.A-8 that the defendants were following up the matter with
defendants 4 and 5 on behalf of the respondent/plaintiff. The letter was sent by the 1st
defendant to the plaintiff in the suit. In that letter, they acknowledged the receipt of the
telegram and letters sent by the respondent/plaintiff. The letter also refers to the subject
regarding the clearing of the Bank Hundis by M/s. Vandana (5th defendant). It is stated
therein that the 5th defendant was out of station for the post 15 days and as soon as he returns
from the out station, the defendants shall arrange for clearance of the Hundies at the earlier
and also intimate the same to the respondent/plaintiff. If the 1st defendant is not the agent, he
would not have sent a communication like Ex.A-8.
16. Ex.A-11 which appears to be the sheet anchor of the respondent/plaintiff's case, discloses
that the defendants acted as agents of the respondent/plaintiff. The evidence of P.W.1 also
supports the case of the defendants. Few extracts are given below:

17. The evidence of P.W.1 r ad with the plaint averments that the plaintiff quote the price of
Rs. 6.20 which included 2% commission to the agent, in our view, establishes Jural
Relationship of Principal and Agent, between the plaintiff and 1st defendant. Further, if the
respondent/plaintiff dealt with the 1st defendant on a principal to principal basis, then the suit
would have been filed only against defendants 1 to 3 and 6 and not against defendants 4 and
5. The Hundies marked as Exs.A-3 to A-7 show that the respondent/plaintiff dealt with
defendants 4 and 5 only as principal and the Hundies were accepted by defendants 4 and 5
alone as could be seen from the endorsement made by them all Hundies. Hence, the argument
of the learned Counsel for the respondent that the appellant was not an agent, does not hold
good and we reject the said argument. Let us now come to the legal aspect of the matter.

18. Section 226 of the Contract Act deals with enforcement and consequences of agents'
contracts. It postulates that contracts entered into through an agent and obligations arising
from act done by an agent, may be enforced in the same manner and will have the same legal
consequences as if the contracts had been entered into and the acts done by the Principal in
person.

19. In the instant case, the defendant had acted as agent, entered into contract with defendants
4 and 5. The Principal viz., respondent/plaintiff has to enforce the said contract only against
defendants 4 and 5 who remained ex parte in the suit. The suit filed by the
respondent/plaintiff against agent, in our opinion, would be tantamount to filing a suit by
principal against himself. Even if Ex.A-11 is treated as an independent contract it is also not
supported by any consideration, as rightly contended by the learned Counsel for the
appellants and therefore it is void. Ex.A-11 does not in absolute terms make a promise. The
said letter makes it clear that the 2nd defendant, the author of the letter would be liable only if
defendants 4 and 5 fail to make payment. It further require that the respondent/plaintiff
should take steps against defendants 4 and 5 and keep the 2nd defendant informed about it.
Thus, Ex.A-11, in our opinion, cannot also be construed as an independent contract between
the 2nd defendant and the plaintiff. Hence, no liability can and would arise under Ex.A-11.
20. Therefore, under Section 230 of the Contract Act, no agent can be personally bound by
the contract entered into by him on behalf of principal unless there is a contract to that effect.
It is useful to re-produce Ex.A-11 as under:

Jayakrishna Trading Company ...

41/2972 Beadonpura, Karolbagh, New Delhi 110 005. India.

Phone 575015 30th December, 1982.

21. On a careful and anxious reading of Ex.A-11, in our opinion, it does not constitute such a
contract as the liability if held to be accepted, is conditional and not absolute. The suit, in our
opinion, against the defendants 1 to 3 and 6 is, therefore, not maintainable.

22. The respondent/plaintiff has treated the defendant acting as the agent of the defendants 4
and 5. P.W.1 in his evidence stated that the 1st defendant booked orders on behalf of
defendants 4 and 5. In such a case, the respondent/plaintiff can maintain a suit only against
the 4th defendant and 5th defendant and not against defendants 1, 2, 3 or 6 as they area agents
acting for a disclosed principal viz., defendants 4 and 5.

23. Section 230 of the Contract Act excludes the contract being enforced against the agent
and a special contract can be presumed to exist on the case of undisclosed principal only. In
this connection, Section 230 (2) has to be considered.

24. The law is that the agents are not normally liable for the dues from the creditors. Such
liability would arise only if the agent is a del credere agent. A del credere agent guarantees on
some extra remuneration the solvency of the party with whom he gets the principal to
contract and also indemnifies the principal against any damage arising from the failure of the
other party to fulfil the contract. Therefore, his liability is secondary, arising only on the
insolvency or failure of the other party. But, if the other party refrains due to genuine dispute,
he is not liable.

25. In other words, a del credere agent is one who, in consideration of extra remuneration
called del credere commission; undertakes that persons with whom he enters into contract on
principal's behalf will be in a position to perform that duties. The extra remuneration is
charged for the risk of bad debts. In the instant case, the debt from defendants 4 and 5 became
bad according to the respondent/plaintiff. But, the admitted case is, that a commission of 2%
alone was payable and no del credere commission was payable. Hence, in our opinion, the 1st
defendant is not at liable as del credere agent.

26. The plaint in this case does not state in what capacity the appellants/defendants 1 to 3 and
6 are sought to be made liable. The evidence of P.W.1 suffers from contradictions. P.W.1 at
one breath concedes agency and later repudiates it. The pleadings or evidence do not
discloses a claim or guarantee.

27. Ex.A-11 is a letter by the 2nd defendant to one J.K.S. Manickam, who is not a party to the
proceedings. The said J.K.S. Manickam is the husband of one Swayam Prabha, who is a
partner of the plaintiff-firm. The 2nd defendant is not a partner of the 1st defendant- firm. He
is the husband of the 6th defendant. Ex.A-11 letter had been exchanged between two parties
who in no way have a right to transact business on behalf of both the plaintiffs firm or the 1st
defendant firm.

28. The method of proving a document is set out in the Indian Evidence Act. Section 47 of
the Indian Evidence Act deals with the opinion on handwriting. Ex.A-11 could have been
proved by the method provided under Section 47 of the said Act. As per the said section, if a
document is alleged to be signed or to have been written by any person, a signatures or
handwriting of so much of the documents as alleged to be in his handwriting must be proved
to be in his handwriting. In the instant case, the contentions and signature in Ex.A-11 should
be proved to be in the hand-writing of the 2nd defendant. D.W.3 has challenged the
documents stating that it is not in the handwriting of the 2nd defendant. Ex.A-11 should have
been proved by the plaintiff by first examining the recipient of the document viz., J.K.S.
Manickam. This document is not a document exchanged between the parties to the suit.

29. An objection was taken by the defendants for marking this document in the course of
trial. The examination of the 2nd defendant will arise only if the primary burden of proof of
Ex.A-11 is discharged by the plaintiff. The Court below also has not rendered any finding
with regard to the objection of marking Ex.A-11 either at the time when it was taken Or at the
time when the judgment was delivered. In this connection it is necessary to point out that
when the admissibility of a document is challenged on the ground of method of proof, the
Court should pass an order on the objection then and there. In support of this contention, the
learned Counsel for the appellant relied on he decision reported in A. Devasikamani Gounder
v. M.A. Andamuthu Gounder (1955)1 M.L.J. 457, wherein it has been held as follows:
If an objection is taken to the admissibility of a document for want of stamp and registration,
it is the duty of the Court to decide both the questions at once. If the Court finds that the
document is unregistered, when it requires registration, it has to reject the document itself. It
cannot ask the document to be stamped first and thereafter decide whether it would require
registration.

30. Ex.A-11 cannot be termed as an independent contract as it is not supported by

consideration and the consent, if any, is not free as could be gathered from the discussions in
paragraphs supra in regard to Ex.A-11. It can at best be considered as a contract of guarantee
The contract of guarantee is one where the promiser promises to perform a promise or
discharge a liability of a third person in case of his default. In the instant case, Ex.A-11 is
very clear. The document clearly states that the 2nd defendant had accepted the liability if
defendants 4 and 5 failed to pay the same. This document, therefore, in our view, cannot be
construed in any other fashion other than a guarantee. An indemnity would normally be at the
inception of the contract as the liability is not contingent. Secondly the indemnity is normally
contemplated in matters where the promisee would be exposed to some litigation or expense
or claim on account of the contract of the promise of third person. This is evidenced by
reading Sections 124 and 125 of the Indian Contract Act together.

31. Section 124 of the Indian Contract Act reads as follows:

A contract by which one party promises to Save the other from loss caused to him by the
conduct of the promiser himself, or by the conduct of any other person, is called a 'contract of
indemnity.

Section 125 of the Indian Contract Act reads as follows:

The promises 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 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 suite; a (3) all sums which he may have paid under the terms of any
compromise of any such suit, if the compromise was not contrary to the orders of the
promisor, and was one which it would have been prudent for the promisee to make in the
absence of any contract of indemnity, of if the promisor authorised him to compromise the
suit.

32. Section 125 of the Indian Contract Act deals with the rights of a promisee in a contract of
indemnity. A guarantee necessarily consists of three contracts within itself. The first contract
is between the principal-debtor (defendants 4 and 5) and the creditor (plaintiff). The second
contract is between the surety (2nd defendant) and the creditor (plaintiff). The third contract
is between the surety (2nd defendant) and the principal debtor (defendants 4 and 5). Again, a
contract of guarantee comes into existence because the surety at the request of the principal
debtor proceeds to give the guarantee.

33. In the instant case, on the date of Ex.A-11, there were not three contracts because the
principal debtor was not in the picture. In other words, the principal debtor was not aware of
the contract between the creditor and the surety. Therefore, the third contract, namely, the
contract between the principal debtor (defendants 4 and 5) and the creditor (plaintiff) was
absent. Again, the surety (2nd defendant) did not give guarantee at the request to the principal
debtor (defendants 4 and 5). The guarantee is, therefore, as rightly pointed out by the learned
Counsel for the appellants, invalid in law. The contract between the principal debtor and the
surety is emphasised because the surety is entitled to rely on the principle of subrogation. The
surety would get rights under Section 141 of the Indian Contract Act. The principal debtor
would in such a case plead that he did not request the surety to give the guarantee.

34. For the above proposition of law, the learned Counsel for the appellants relied on the
following two decisions reported in Ramachandra B. Loyalka v. Shapurji N.
Bhownagree A.I.R. 1940 Rom. 315 and Punjab National Bank Ltd. v. Bikram Cotton Mills.
In the first cited decision it has been held as follows:

A contract of guarantee involves three parties, the creditor the surety and the principal debtor
and a contract to which those parties are party. There must be a contract, first of all, between
the principal debtor and the creditor. That lays the foundation for the whole transaction. Then
there must be a contract between the surety and the creditor, by which the surety guarantees
the debt, and no doubt the consideration for that contract may move either from the creditor
or from the principal debtor or both. But, if those are the only contracts, the case is one of
indemnity. In order to constitute a contract of guarantee there must be a third contract by
which the principal debtor expressly or impliedly requests the surety to act as surety. Unless
that element is present, it is impossible to work out the rights and liabilities of the surety
under the Contract Act.

35. Even if it is assumed in the instant case that Ex.A-11 is a valid contract of guarantee,
then, the said guarantee suffers for lack of consideration. The guarantee was admittedly not
given at the time of original sale of goods by the plaintiff to defendants 4 and 5. It was faintly
pleaded in the plaint that the 2nd defendant gave a promise to pay the money in the event of
default by defendants 4 and 5. This was specifically denied in the written statement. This
promise was alleged to have been given over the phone by the 2nd defendant. The plaint was
verified by one Swayam Prabha. From the particulars of persons to whom such assurance was
alleged to have been given, it has to be presumed that Swayam Prabha alone obtained a
promise over the phone. She was not examined as a witness to prove this statement. P.W.1
did not state anything to this effect. No questions were asked on this line to D.W.1 in the
cross-examination. Therefore, this allegation, in our view, has to be rejected. Thus the
contract of guarantee has to find its existence only in December, 1982. When Ex.A-11 was
written this contract of guarantee requires separate consideration and original consideration
between the plaintiff and defendants 4 and 5 is not sufficient. This has been so held in the
decision reported in the The Union of India v. Bank of India 94 L.W. 451. In that case, a
Bench of this Court in paragraph 27 has observed as follows:

As per the legal position enunciated in the above paragraphs the mere factum of forbearance
to sue is not sufficient to constitute consideration for a person becoming a surety for a debt,
but there must be a promise or undertaking to forbear, or an actual forbearance at the surety's
express or implied request and the promise by the creditor to forbear to form a consideration,
should be such as is capable of being enforced. In this case Ex.A-26 talks of the plaintiff
granting time as long as it thinks fit. Such a vague provision without any specified time limit
is incapable of being enforced by the surety. Therefore, it cannot be taken to be a sufficient
consideration to support the contract of guarantee. Further, any promise made by the bank
either to extend time or to forbear to sue if it is to be treated as consideration for the
guarantee bond given by the 5th defendant that promise should be such as is enforceable
against the bank. As already stated the bank has given up its case of forbearance to sue as
forming consideration for the guarantee bond but has restricted its case in the evidence only
to the plea of extension of time. The extension of time sought for either by defendants 1 to 3
or by the 5th defendant is not specific and Ex.A-26 proceeds on the basis that the bank can
give such time as it thinks fit. Such a vague term is no possible of enforcement by the 5th
defendant who has executed the guarantee. Besides, there is absolutely no evidence at all
adduced by the bank to show that there was a promise to extend time by the bank at the
instance of the 5th defendant. Unless the bank's promise to extend the time for payment of the
dues by defendants 1 to 3 was at the instance of the 5th defendant it cannot be said that the
guarantee bond given by him is supported by proper consideration.

36. It is reiterated that Ex.A-11 does not amount to forbearance to sue. There is no evidence
to show that the plaintiff undertook not to sue or did anything further in consideration of the
contract of guarantee. It is in evidence that the plaintiff proceeded to lodge a criminal
complaint and prosecuted the same and it was ultimately dismissed. It is thus evident that
there was no forbearance to sue. Therefore, the contract of guarantee is not supported by
consideration. Even if it is presumed that Ex.A-11 constituted a guarantee, it could not bind
the 2nd defendant alone and the suit should be laid only by J.K.S. Manickam, who is the
promisee. The plaintiff is a stranger to the contract between the 2nd defendant.

37. The net result is, the appellants are not liable at all to the abovesaid sale price of Rs.
27,600, and the question of paying interest thereon does not arise at all.

38. Since we are dismissing the suit claim against the appellants (defendant's 1 to 3 and 6),
we are not dealing with the question of interest claimed in this matter.

39. Since some money has been paid by the appellants/defendants 1 to 3 and 6 during the
pendency of the appeal in this Court, we order restitution of the money paid by them to the
plaintiff. Since the appeal is filed in this Court only by defendants 1 to 3 and 6, the appeal is
allowed and the suit is dismissed only against them, with costs.

Conclusion

After study of this case , we can say that these two types of contract are different in many
respects. In indemnity, the promisor cannot sue the third party, but in the case of guarantee,
the promisor can do so because after discharging the creditor’s debts he gets the position of
the creditor.