Indemnity and Guarantee

Indemnity and Guarantee

Meaning of contract of indemnity
Rights and duties of indemnifier and indemnity holder
Meaning of contract of guarantee
Types of guarantee
Differences between indemnity and guarantee
Rights, duties and liabilities of surety
Discharge of surety from liability

Meaning and definition of contract of indemnity
Literally, indemnity means where a person is victim of loss, compensation to him is to be provided or to save him from the loss caused by different causes. To indemnify means to compensate or to make good of the loss. The contract of indemnity means a promise or statement of liability to pay compensation for a loss or for wrong in a transaction.
In the law of contract, indemnity is the obligation, undertaken by one party to cover the loss or debt incurred by another. It is similar to a contingent contract, a part of general contract and is of special nature.
According to the Sec. 22 of NCA- ‘where any person has concluded a contract relating to indemnity with the provision to pay to any party to a contract or a third person for any loss or damage that may result from his actions, he may realize as compensation.’
According to the Sec. 124 of ICA- A contract by which one party promises to save the other from loss, caused to him by the contract of the promisor himself or by the conduct of any other person, is called a contract of indemnity. The definition of ‘contract of indemnity’ as given in the Indian Contract Act is not exhaustive. It includes:
express promises to indemnify, and
cases where the loss is caused by the conduct of the promisor himself or by the conduct of any other person.
It does not include:
implied promises to indemnify, and
cases where loss arises from accidents and events not depending on the conduct of the promisor or any other person.
In English law, it is defined in a wider sense than the above laws as: ‘A promise to save another party from a loss caused as a result of transaction entered into at the instance of the promisor.’ It covers all types of losses caused by events or accidents (personal or natural).
According to the Dictionary of Garner on modern legal usages- ‘Indemnity is a security or protection against a contingent hurt, damage or loss.’
According to the Black’s law Dictionary- ‘Indemnity is an undertaking whereby one agrees to indemnify another, upon the occurrence of the anticipated loss.’
Thus, a contract of indemnity is really a part of the general class of contingent contracts. It is entered into with the object of protecting the promisee against anticipated loss. The contingency upon which the whole contract of indemnity depends is the happening of loss. The person who promises to make good the loss is called the indemnifier (promisor) and the person whose loss is to be made good is called the indemnified or indemnity-holder. A contract of indemnity is a species of the general contract. As such it must have all the essential elements of a valid contract.
Example: A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of Rs. 200/-. This is a contract of indemnity.
Example: A and B go into a shop. B says to shopkeeper, ‘Let him (A) have the goods. I will see you paid.’ The contract is one of indemnity. [Goulston Discount Co. Ltd. V. Clark (1967)2 Q.B. 493]
A contract of indemnity differs from indemnity for the breach of contract. The first is related to the contract to bear the anticipated loss by one party (Sec. 22 of NCA) and the latter one is related to the damage for the breach of contract by the breaching party (Sec. 83 of NCA)

Distinctions between contract of indemnity and indemnity for breach

SN
Basis
Contract of indemnity
Indemnity for breach
1.
Time of agreement
It is agreed at the time of making a contract on any transaction.
Whereas, it is obligatory after a loss.
2.
Anticipation of loss
It is meant for the compensation for an anticipated loss.
But, indemnity for the breach of a contract and law is the damage after the loss to the injured party occurs.
3.
Relation between the parties
It is meant for the remedy based on the good relationship (good faith and prudence) between the parties.
But, it is based on the dispute, created by the misunderstanding between the parties.
4.
Nature
It is preventive in nature
It is curative in nature

Essentials or features of a contract of indemnity
A valid contract of indemnity should fulfill the following conditions:
i. Anticipated loss: A contract of indemnity is a security for an anticipated loss.
ii. Requirements of valid contract: Contract of indemnity being a species of contract must have all essentials of a valid contract like free consent, competence of the parties, consideration, etc.
iii. To save other party: There must be a promise to save the other party from some loss.
iv. Covers only the actual loss: It covers only the actual loss may be due to the promisor himself or any other person and it covers only the loss caused by an event mentioned in the contract. The event mentioned in the contract must happen.
v. May be express or implied: The contract of indemnity may be express or implied. An express promise is one where a person promises to compensate the other party in express term. Implied promise is one where the conduct of the promisor shows his intention to indemnify the other party from loss.
vi. Depend on good faith: This contract depends on good faith.

Kinds of contract of indemnity
A contract of indemnity can be classified into two categories on the basis of expression of the parties at time of its formulation as express and implied.
i. Express contract of indemnity: When the parties to contract expressly enter into a contract of indemnity. A party expressly promises to indemnify the other party from loss.
Example: A promise to compensate B if B’s goods are damaged due to the conduct of C.
ii. Implied contract of indemnity: When the contract of indemnity deemed to have concluded by the conduct of the parties or from the circumstances of the particular case, it is known as implied contract of indemnity.
Example: A hires a motorcycle from the B’s shop to use for one day. The motorcycle gets damaged due to the accident. Here, A has to compensate for damage to B, although he has not agreed expressly to do so.

Rights and duties of indemnity-holder

Rights of indemnity-holder [Sec. 22(1) of NCA]
A person whose loss is to be made good is called the indemnity-holder. He has some rights against the indemnifier in accordance with the legal provisions incorporated under the Nepalese and Indian Contract Acts. But, the duties of the indemnity-holder have not been mentioned under the Acts. The indemnity-holder is entitled to recover any or all of the amounts of compensation under the contract. They are as follows:
i. All the indemnity amount (damage) prescribed in the contract.
ii. All the damages he may be compelled to pay a third party for the loss.
iii. All the costs spent on the case filed or defended by him in connection with the contract relating to indemnity.
iv. All the costs of legal actions, if it becomes necessary to initiate such an action for a failure to pay the amount mentioned in all the above clauses.

Duties of indemnity-holder
Except otherwise is mentioned in the contract, the indemnifier will not liable for the loss in the following circumstances. They are called duties of indemnity-holder too.
i. Duty to work prudently: Except otherwise is mentioned in the contract, the indemnifier will not liable for the loss caused by the negligence work of the indemnity-holder. In other words, it is the duty of indemnity-holder to work prudently.
ii. Duty not to act to cause harm or loss: If the indemnity-holder acting with the intention of causing any loss or damage, the indemnifier will not liable for such loss. In other words, it is the duty of indemnity-holder not to act to cause harm or loss.
iii. Duty to comply with the intention of promisor: If the indemnity-holder acting against the instruction of the other party or promisor, the indemnifier will not liable for the loss caused by such against act to his instruction. In other words, it is the duty of indemnity-holder to comply with the intention of promisor.

Rights and duties of indemnifier

Rights of the indemnifier:
The rights of the indemnity-holder are the duties of indemnifier, and duties of the indemnity-holder are the rights of the indemnifier. There are not prescribed any specific rights of the indemnifier either in Nepalese law or in Indian law. However, he is not liable for indemnity.
i. If indemnity-holder acts negligently.
ii. If indemnity-holder is acting with the intention of causing any loss or damage.
iii. If he is acting against the instructions of the other party (promisor).

Duties of indemnifier:
The duties of an indemnifier arise in the following circumstances:
i. There must be a loss in accordance with the contract to make the indemnifier liable.
ii. There must be an occurrence of the anticipated event. Without any occurrence of the prescribed event, there is no indemnity by the indemnifier.
iii. Where the right of indemnity is used by the indemnity-holder prudently and the instruction of the indemnifier is not contravened or when there is no breach of contract.
iv. If the costs demanded by the indemnifier are not caused by negligence, haphazard behaviour.
Contract of Guarantee
Meaning and definition
A guarantee means a contract of a promise to be responsible for something, to perform the promise or to discharge the liability of a third person, in case of his default. Such a contract involves three parties. They are:
i. Creditor: the person to whom the guarantee is given;
ii. Surety: the person who gives the guarantee.
iii. Principal debtor: the person, in respect of whose default, the guarantee is given.
Section 15(1) of NCA, 'A contract relating to a guarantee shall be deemed to have been concluded if it provides that, if any person in the repayment of loan obtained by him or fulfillment of the obligation accepted by him, it will be repaid or fulfilled by a third person.'
Section 126 of ICA, A contract of guarantee is a contract to perform the promise to discharge the liability of a third person in case of his default.
A clear definition was made regarding a guarantee by English Court in the case of Bricknyrs v. Darmell (1704), 'A contract of guarantee is a contract by one person to discharge the debt, fault or miscarriage of another.'
A contract of guarantee is entered into with the object of enabling a person to get a loan or goods on credit or an employment.
Example: If 'A' advances a loan of Rs. 5000/- to 'B' and 'C' promises to 'A' that if 'B' does not repay the loan, 'C' will do so. Here, this is a contract of guarantee.
It will be noticed that in a contract of guarantee there are three separate contracts, i.e.- i. between the principal debtor and creditor, ii. between the creditor and surety, and iii. between the surety and principal debtor, wherein the principal debtor requests the surety to act as surety and impliedly to indemnify the surety in case the surety incurs liability. Thus, the contract of guarantee is of tripartite nature. The primary liability is of the principal debtor. The secondary liability is of the surety which arises only when the principal debtor defaults. The surety must have to know all the facts regarding the contract. If any alteration regarding the terms of the contract are made without the consent of the surety, it terminates automatically.
Sec. 15(3) of NCA states that such a contract must be made in written form. The English law also accepts this rule but the Indian law accepts both written and oral contract of guarantee.
The Muluki Ain, 1963, Chapter on 'Jamani garneko', Chapter on 'Court Management', Chapter on 'Punishment' and Government Contract Arrangement Act, have made some legal provisions in this regard.

Characteristics or essentials of contract of guarantee
Following are the characteristics or essentials of contract of guarantee:
i. Tripartite agreement: In a contract of guarantee, there are three parties namely: principal creditor, creditor and surety. Under this contract, three separate contracts are made among them and consent of all the three parties is necessary. The contracts connecting each-other as contract between:
a. the principal debtor and creditor,
b. the creditor and surety, and
c. the surety and principal debtor,
ii. Liability: Under such contract the primary liability is of the principal debtor and only secondary liability is of the surety. As a conditional contract, liability of the surety arises only when the principal debtor (primarily liable) defaults.
iii. Essentials of valid contract: It is also as same as other general contract in respect of essentials. All the requirements for valid contract, i.e. free consent, consideration, lawful object, competency of the parties etc. are necessary to form this kind of contract. But, in respect of consideration, no direct consideration in the contract between the surety and creditor. Consideration of principal debtor is considered to be adequate for the surety.
iv. Written form: A contract relating to guarantee must be concluded in writing in Nepal and England. But, the Indian legal framework does not compel to form such contract in written form. Both written and oral is valid in India.

Distinctions between a contract of indemnity and contract of guarantee
Although the indemnity and guarantee have a common feature that both are devices for protection against a probable loss but there are some differences. The dictions between a contract of indemnity and contract of guarantee are given below:
SN
Basis
Contract of indemnity
Contract of guarantee
1.
Number of parties
There are two parties to the contract, viz., indemnifier and indemnified.
There are three parties to the contract, viz., the principal debtor, the creditor and the surety.
2.
Number of contract
Under this, only one contract between the indemnifier and indemnified.
Under this, there are three separate contracts between the principal debtor, creditor and surety.
3.
Purpose of contract
Purpose of this contract is to save the indemnity-holder from any contingent loss.
Purpose of this contract is to provide necessary security to the creditor.
4.
Nature of contract
It is a contract of contingent nature.
It is a contract of general nature.
5.
Nature of promise
Under this contract, the indemnifier is the only one promisor for the loss of the indemnified party.
Under this contract, the surety and principal debtor are the two promisor for the debt of the creditor.
6.
Scope
Limited in comparison to the contract of guarantee.
Wider in comparison to the contract of indemnity.
7.
Request
It is not necessary for the indemnifier to act at the request of the indemnified.
It is necessary that the surety should give the guarantee at the request of the debtor.
8.
Commencement of liability
The liability of the indemnifier arises only on the happening of a contingency.
There is usually an existing debt or duty, the performance of which is guaranteed by the surety.
9.
Discharge from liability
Under this contract, the indemnifier discharges from the liability after paying indemnity to the indemnified party.
Under this contract, the surety discharges from the liability when the principal debtor discharges or fulfills his liability.
10.
Nature of liability
The liability of the indemnifier to the indemnified is primary and independent.
The liability of the surety to the creditor is collateral or secondary, the primary liability being that of the principal debtor.
11
Right to reimbursement
In this contract, the indemnifier has no right of reimbursement of the amount paid to the indemnity-holder.
In this contract, the surety has right of reimbursement of the amount from the principal debtor, which is paid to the creditor.
12.
Consideration
Under this contract, the indemnifier gets consideration for his promise made to the indemnity-holder.
Under this contract, surety does not get any consideration for his promise made to the creditor.

Types of guarantee

From the viewpoint of nature, objective and the act the guarantee may be classified as follows:
i. Absolute and conditional guarantee: An absolute guarantee is one by which the guarantor unconditionally promises to pay the debt, on the default of the principal. But if some contingency other than the default of the principal debtor arises there is a conditional guarantee.
ii. General and specific guarantee: The guarantee that can be accepted by the general public is a general guarantee and the one that can be accepted only by the particular person is a special guarantee.
iii. Limited and unlimited guarantee: When a guarantee is limited there is a liability by time and amount that is limited, whereas if a guarantee is not limited there is a liability for the surety by time, amount and transaction. There is an unlimited guarantee.
iv. Prospective and retrospective guarantee: A guarantee that is given for future transactions that may be one or more transaction is a prospective guarantee, and if it is given for the past or existing transaction it is called a retrospective guarantee.
v. Specific and continuing guarantee: When a guarantee is extended to a single transaction or debt, it is called a specific guarantee. Such a guarantee comes to an end when the transaction stops or is duly discharged or the promise is duly performed. But, if a guarantee extends to a series of transactions continuously, it is a continuing guarantee.
There is no water-tight demarcation of the continuing guarantee with specific guarantee. However, it is determined by the intention of the parties and /or terms and conditions, and/or subject-matter and/or the circumstances of the transactions. A continuing guarantee may be given for a fixed amount. It only speaks of continuing transactions and not of the period of such transaction [Eastern Bank Ltd. V. Parts Services of India Ltd. AIR (1986)]. Because of the uncertain nature of time, a continuing guarantee will be continued until the revocation of the surety.

Features of the continuing guarantee
Following are the features of the continuing guarantee:
- The continuing guarantor is not exhausted by the first advance.
- It can always be revoked by a notice to the creditor.
- A revocation of the guarantee is possible for future transactions.
- Death of the surety terminates the contract.

Revocation of continuing guarantee
On basis of following way a continuing guarantee as to future transactions may be revoked.
i. By the notice of revocation to the creditor: A guarantor (surety) may revoke a continuing guarantee at any time by a notice, as to the future transactions. But, he is liable for the transactions until the date of revocation.
ii. By the death of surety: The death of surety automatically terminates the contract of guarantee so far as regards future transactions unless there is a contract to the contrary. It is not necessary that the creditor must have notice of the death. The state of surety is free after death, although the creditor might have entered into a transaction without knowledge of the death of surety.
iii. By the other modes: When the surety is free from his liability, the continuing guarantee as to future transactions is also revoked. In some circumstances the surety discharges from his liability, they are as follows:
By variance or alteration in terms of contract;
By novation of the contract;
By release or discharge of principal debtor;
By a loss of security;
By arrangement with principal debtor;
By the creditor’s act impairing the surety’s eventual remedy.
Rights, duties and liabilities of surety

Under the contract of guarantee, the surety denotes the person who gives guarantee. He enters into two separate contracts, for giving guarantee, with the principal debtor and with the creditor. As being a party of contract of guarantee, he has some rights, duties and liabilities. They are discussed as underneath:

Rights of surety
A surety has certain rights against the creditor, principal debtor and co-sureties. These are given below:
A. Surety’s rights against creditor: The surety can enjoy following rights against the creditor:
i. Right to benefit of creditor’s security: The surety is entitled to demand from the creditor, at the time of payment, all the securities which the creditor has against the principal debtor at the time when the contract of guarantee is entered into or subsequently acquired. Whether the surety knows of the existence of such security or not is immaterial. If by negligence the creditor losses or without the consent of surety, parts with such security as acquired at the time of contract, the surety is discharged to the extent of the value of security. But, if the security is lost due to an act of nature or enemies of the state or unavoidable accident, the surety would not be discharged. [Krishna Talwar v. Hindustan Commercial Bank, AIR (1957) Punj. 310]. Similarly, if the subsequently acquired securities are parted with, the liability of surety would not be reduced. [Bhushayya v. Suryanarayan, AIR (1944) Mad. 340]. Surety cannot claim the benefit of a part of the securities merely because ha has paid the part of the debt. [Goverdhandas v. Bank of Bengal, AIR (1891) Bom. 45].
ii. Right claim set off, if any: Set-off implies a counter claim or deduction from the amount of loan. The surety is also entitled to the benefit of any set-off or counter claim, which the principal debtor might possess against the creditor in respect of the same transaction. The surety has the right of set-off on the failure to make payment of the debt. If the creditor loses or parts with (or without surety’s consent) destroys the security in his possession, got from the principal debtor, the surety is discharged to the extent of the value of the security.
B. Surety’s rights against the principal debtor: The surety enjoys following rights against the principal debtor:
i. Right of subrogation: Subrogation means to be placed in the seat of the creditor. When the surety pays off the debt on default of the principal debtor, he is invested with all the rights which the creditor had against the principal debtor. The surety steps into the shoes of the creditor and is entitled to all the remedies which the creditor could have enforced against the principal debtor. The surety may, therefore, claim the securities, if any, held by creditor and sue the principal debtor, or may claim dividend in insolvency of the debtor.
ii. Right to claim indemnity: In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but no sums which he had paid wrongfully. Thus, a surety is entitled to be indemnified by the principal debtor for whatever sum he has ‘rightfully paid’ means a just and equitable payment.
The following two must also be noted in connection with this right to indemnity:
The surety cannot claim more than what he has actually paid to the creditor. Thus, if he discharges the debt by compromise at less than its full amount, he can get from the principal debtor only the amount in actually paid.
Actual payment either in cash or transfer of property is essential for asking the principal debtor to pay. A promissory note given by the surety will not be sufficient to claim indemnity.
C. Surety’s rights against the co-sureties: Where a debt is guaranteed by more than one surety, they are called co-sureties. In such a case all the so-sureties are liable to contribute towards the payment of the guaranteed debt as per agreement among them. But in the absence of any such agreement, if one of the co-sureties is compelled to pay the entire debt, he has a right of contribution from others. The rules of contributions are as follows:
Where there are sureties for the same debt for similar amount i.e. for one and the same amount: The co-sureties are liable to contribute equally, and are entitled to share the benefit of securities, if any, held by any one of the so-sureties, equally. To sum up, the principle it may be said ‘As between co-sureties there is equality of burden and benefit.’ Further, for the application of the principle it is immaterial whether the sureties are liable jointly under one contract or severally under several contracts, and whether with or without the knowledge of each other. There is, however, no right of contribution between persons who become sureties not for the same debt but for different debts. If one is compelled to pay all the sums, he can recover the extra contribution from others.
Where there are sureties for the same debt for different sums: The rule is that ‘Subject to the limit fixed by his guarantee, each surety is to contribute equally (and not proportionately to the liability under taken). Where co-sureties are bound for different sums, they are compelled to pay their respective liabilities. If such a type of unequal liability is divided on the basis of equal benefit and equal burden the loss liable person will be injured. Such an injured co-surety has the right to the other co-sureties to recover his extra cost paid.

Duties and liabilities of surety
The liability of a surety arises from the creation of a contract. But it comes into execution only when the principal debtor fails to perform his obligation. The liabilities are already founded in the name of contract and provided in the Sec. 16 of NCA. But a surety may place a limit upon his liability in the contract. The nature of liability of a surety according to the contract of guarantee is given below:
i. Co-extensive nature of liability: The liability of the surety is secondary and co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. In general terms the quantum of obligation of a surety will neither be more nor less than that of principal debtor. Sec. 16(b) of NCA, states that the surety will be responsible until the principal debtor becomes free from his liability.
ii. Secondary and contingent nature of liability: The surety is liable only when the principal debtor fails to fulfill promise made to the creditor. [Sec. 16(c)]
iii. Limited nature of liability: When a security and guarantee both are given as a consideration for the debt or liability, the surety will not be liable to the extent of the security. [Sec. 16(d)]
Sometimes, a discharge of the principal debtor by the operation of law (death or insolvency) does not discharge the surety from his liability. [Sec. 16(e)]
- The surety will be liable for the remaining part of the debt from the sale of the security of the principal debtor.
- The surety will not be liable if any alterations are made by the principal debtor and creditor without the consent of the surety.
- The surety will not be liable to the extent of loss or destruction of the security in possession of the creditor.
- The surety will be liable for the entire debt if,
- the principal debtor is minor;
- the principal debtor becomes insolvent; and
- the death of the principal debtor.
- If a contract of guarantee is not made in a written form, the surety is not liable.
The surety is sometimes called a ‘fvoured debtor’ because his liability is of secondary nature. The extent of liability of surety depends on the contract of guarantee. The surety may declare his guarantee to be limited to a fixed amount and time. Thus, a surety may place a limit upon his duty and liability at the time of entering into the contract of guarantee.

Discharge of surety from liability

A surety is said to be discharged from liability when his liability comes to an end. A surety is freed from his obligation under a contract of guarantee in various ways. Any one of the following way or circumstances, a surety is discharged from his liability:


Discharge of surety
By performance
By conduct of creditor
By expiry of time
By revocation
By invalidation of contract
By lacking of essentials of valid contract
By concealment or misrepresentation

By failure of co-surety to join
By death
By notice
By novation
Arrangement by creditor with principal debtor
By release or discharge of principal debtor
By damaging surety's rights
By variation
By loss of security























i. By performance: A surety is discharged from his liability by performance of contract by principal debtor. It is the expected and general dome of termination of contract of guarantee. After the performance, there is no liability remains upon the surety. But, this does not apply in the case of continuing guarantee.
ii. By revocation: Following ways are included under this category:
a. By notice of revocation: An ‘ordinary guarantee’ for a single specific debt or transaction cannot be revoked once it is acted upon. But a ‘continuing guarantee’ may, at any time, be revoked by the surety as to future transactions by giving notice of it to the creditor. Thus, in such a case, the liability of the surety comes to an end in respect of future transactions which may be entered into by the principal debtor after the surety has served the notice of revocation. The surety shall, however, continue to remain liable for transactions entered into the notice.
b. By death of surety: In the case of continuing guarantee the death of surety also discharges him from liability as regards transactions after his death, unless there is a contract to the contrary. The deceased surety’s estate will not be liable for any transactions entered into after the death, even if the creditor has no notice of the death. Bur such a discharge does not after the previous transaction made before the death of the surety.
c. By novation: If new contract is made between the same parties or other parties, the contract of guarantee is terminated and the surety is discharged from his liability.
iii. By conduct of creditor: Following circumstances of are concerning to discharge the liability of the surety in contract of guarantee as conduct or creditor:
Variance of the terms of contract: Any variance made without the surety’s consent, in the terms of the contract between the principal debtor and creditor, discharges the surety as to transactions subsequent to the variance. Although the words ‘as to transactions subsequent to the variance are more pertinent in the case of continuing guarantee’, but the principle as lay down in the law is equally applicable in specific guarantee as well, no matter whether the variance is beneficial to the surety or is made innocently or does not material affect to the surety. Because a surety is liable only for what he has undertaken in the contract. It is important to note that mere knowledge and silence of the surety does not amount to an implied consent [Polak v. Everett]. Again, accepting further security for the same debt is not treated as variance in the terms of contract.
By release or discharge of principal debtor: Release or discharge of principal debtor provides for the following ways of discharge of surety from liability:
- The surety is discharged by any contract between the principal debtor and creditor, by which the principal debtor is released. Any release of the principal debtor is release of surety also.
- The surety is also discharged by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor.
But insolvency and death are exceptions to this rule.
Arrangement by creditor with principal debtor: Where the creditor, without the consent of surety, makes an arrangement with the principal debtor for composition, or promise to give him time or not sue him, the surety will be discharged.
But in the following cases, a surety is not discharged:
- Where a contract to give time to the principal debtor is made by the creditor with a third person and not with principal debtor the surety is not discharged.
- Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him does not discharge the surety, unless otherwise agreed.
- Where there are co-sureties, a release by the creditor of one of them does not discharge the other; neither does it free the surety so released from his responsibility to the sureties.
By damaging or impairing surety's eventual remedy: It is the duty of the creditor to do every act necessary for the protection of the rights of the surety and if he fails in this duty, the surety is discharged. Thus, where the integrity of cashier is guaranteed, it is the duty of the employer to give information to the surety if any dishonest act is done by the employee. If the employer continues to employ him after an act of dishonesty (which is proved), the surety is discharged, if he is not informed within a reasonable time, because then the surety's right (eventual remedy) to inform police for necessary recovery action is lost or damaged.
By loss of security: If the creditor loses or without the consent of the surety, parts with any security given to him, at the time of the contract of guarantee, the surety is discharged from liability to the extent of value of security. Here, the word 'loss' means loss because of carelessness or negligence and does not cover the event or act of God or nature, or enemies of the state or unavoidable accident. Again, if the securities lost or parted with, were obtained afterwards as a further security, the surety would not be discharged. [Bhushayya v. Suryanarayan (1944) Mad. 540].
iv. By invalidation of contract: A surety is also discharged from liability when the contract of guarantee (in between the creditor and surety). A contract of guarantee is invalid in any of the following cases:
By obtaining guarantee by concealment or misrepresentation: Where the guarantee has been obtained by means of concealment or misrepresentation or keeping silence as to material parts of the transaction, by the creditor or with creditor's knowledge and consent. But, it remains valid if the misrepresentation or concealment is done by the debtor without the concurrence of the creditor.
By lacking of essentials of valid contract: Where it lacks one or more essential elements of a valid contract, e.g. surety is incompetent to contract or the object of contract is illegal.
By failure of co-surety to join: Where a person gives guarantee to the creditor on a condition that the creditor shall take guarantee from another person too for the same subject-matter, the contract becomes invalid if that third person does not join as a co-surety within the time mentioned by surety.
v. By expiry of time: When the time specified in the contract, the principal debtor fails to repay the debt and even the surety fails to do so, the creditor must sue within the limitations prescribed by the law for covering debt. In this case, if the creditor cannot file a suit, the principal debtor becomes free from liability to pay the debt due to the expiry of time limitation. Here, the surety is also freed from his liability with the principal debtor.

Legal provisions under Chapter on Guarantee in Muluki Ain, 2020
(Jamani Garneko Mahal)

The legal provisions on contract of guarantee have been laid down under the Chapter on 'Jamani Garneko' in Muluki Ain, 2020. These provisions are provided for official arrangements and not for the business transactions. It has made some provisions about the nature and prerequisites of the surety, and official actions against the surety. It has the following provisions.
i. Procedures of guarantee: The office that is going to accept the guarantee should be aware of whether the proposed guarantor is capable or not or is disqualified by any law. if the proposed person is not a proper person for the guarantee, there should be an endorsement on the back of the application for necessary matters. The officer will be responsible if it is not performed as per the rules. That's why the proposed person who has sufficient property and competent to contract is capable for making the guarantee.
ii. Written guarantee: The names of the surety and principal debtor and the liability related conditions matters should be written clearly in the contract paper.
iii. Eligible age of surety: Surety should have attained 16 years of age and be capable to pay the guaranteed liability.
iv. Provisions of co-surety: Where two or more persons are involved in the guarantee, it should be written clearly whether there is equal or different burden or less or more burden for the co-sureties. If it is not provided in the contract paper they are equally liable for it.
v. Liability of surety: If the principal debtor does not fulfill his promise, his liability should be fulfilled by the guarantor (surety) after the default by the principal debtor. If it is insufficient from the sale of property of the debtor, the surety will be liable for the rest of the debt. Where the guarantee is made for the attendance and the debtor is liable for the imprisonment, the wealth -related liability or damages relating to the matter should be fulfilled by the guarantor. If the debtor comes within 3 years, the paid debt can be returned to the guarantor.

Kinds of Guarantee (Jamani)
There are three types of guarantees provided in the Chapter on 'Jamini garneko' in Muluki Ain, 2020. There are as follows:
i. Guarantee of Attendance: If a person is guaranteed by another of his attendance on a certain date and time in the Government office, it is called the guarantee of attendance.
This kind of guarantee assures the officer that the culprit will not be absconded. The main liability or duty of surety in such type of guarantee is to make the culprit attend at the prescribed date and time. If the surety fails to perform his duty he will be liable for all the liability of the culprit, but the legal representatives will not be liable in case of death of the surety. The surety may be kept in prison for not more than 6 years in the case of punishment and Government liability. The surety has a right to be discharged from his liability after the death of the culprit.
ii. Guarantee of Wealth or money: If a person promises to the office or a person to pay some cash or valuables on the default of the debtor, it is the guarantee of wealth. The person who makes the promise is called a surety. The surety must be able to fulfill the promise. The main duty of the surety is to pay rest of the debt on the partial default of debtor. The surety will be liable for the rest of the debt which remains unpaid even after the sale of the whole property of the culprit or debtor. The surety will be liable even in the case of death of the debtor. In the case of guarantee of wealth, the surety has the right to refund the money collected as a guarantee within three years of the concealing criminal pays the amount.
iii. Guarantee of Property: If a person gives the guarantee of his property as security for the payment of another's debt, it is called the guarantee of property. This kind of provision is contained in the 118 No. of Chapter on 'Court Management' and Revenue Judicial Tribunal Act, 2031, Sec. 31. In such guarantee the surety has to pay the debt. He has to expose if there is any defect in the security. He cannot sell or bail it. He can return the security after the payment of debt.