Shankar Nimbaji vs Laxman Supdu
case summary
(1940) 42 BOM LR 175
[Distinction between Contract of Indemnity and Guarantee]
[Commencement of Indemnifier’s Liability]
Facts
The plaintiff’s father (Supdu) had a financial agreement to send credit to the defendant (Nimbaji). After Supdu’s death, Nimbaji withdrew Rs. 5000 and lent it to a third party (defendant no.2) via a mortgage bond. The plaintiff’s protested this transaction and thereby received a promissory note by the defendant for Rs. 5000 with 9% interest. After interest accumulated, the plaintiffs filed a suit to recover Rs. 8000 from the defendant by selling his mortgaged property and cover any deficit from defendant no.2’s estate.
Issues
Whether the promissory note constituted a contract of indemnity or guarantee, i.e., whether the promissory note constituted a security or an acknowledgement of the mortgage only
Key Legal Provisions
Indian Contract Act, 1872:
Section 124 – [Contract of Indemnity] When one party promises to save the other from any loss caused to him by the promisor’s conduct or the conduct of any third party
Section 126 – [Contract of Guarantee] A contract to perform the promise or discharge the liability of a third person in case of his default.
Judgment
The trial court initially interpreted the promissory notes as a guarantee of mortgage debt. However, the High Court overturned the decision and ruled that the promissory notes were a contract of indemnity as the defendant agreed to compensate for any loss the plaintiffs might suffer due to the mortgage debt of the defendant.
Furthermore, since the plaintiff’s claim against defendant no.2 was made before the actual loss was suffered (since he anticipated a deficit sale from the mortgaged property), the High Court found the claim premature. Under a contract of indemnity, the right to sue only arises after actual loss has occurred, not in anticipation of future losses.
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