contracts of indemnity and guarantee

8/6/2019 Contracts of Indemnity and Guarantee

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It is a contract whereby one party promises tosave the other party from the loss caused to himby the conduct of the promisor himself, or by anyother person [Section 124]. Losses caused by death, disability, destruction by fire, flood,

cyclone, tsunami, etc., are also covered.



(a) To recover all damages sustained by him, and

(b) To recover all costs of suits, paid to any third party.

However, the indemnifier (indemnifying party), does notenjoy any legal rights, except those of the surety orguarantor (under Section 141), viz. to get title to all the

benefits of securities, obtained by creditor from principaldebtor, whether he was aware of such securities or not

R ights of Indemnity Holder [Section 125]R ights of Indemnity Holder [Section 125]



Not to wait, until the indemnified party has actually

incurred the loss or damages, to be compensated for

So that he may meet his obligation under the indemnity,without waiting for actually suffering loss, by way of actual payment, out of his own funds, in a legal case

Commencement of Liabilities of the IndemnifierCommencement of Liabilities of the Indemnifier



It is µa contract to perform the promise, or to dischargeliability of a third person, in case of his (third person¶s)

default¶

� Person giving guarantee is µSurety¶

� Person on whose behalf guarantee is given isµPrincipal Debtor¶, and

� Person or party to whom the guarantee is given isµCreditor¶

� Guarantee could be either written or verbal



Two sets of agreements:

(a) Principal contract between principal debtor andcreditor, and

(b) Secondary contract between the creditor and theguarantor

In a contract of guarantee there are three parties, viz.creditor, principal debtor, and guarantor



Contract of Indemnity Vs. Contract of Guarantee

In a contract of indemnity,; A tells BµIf you lend 20 pound sterling to C, I will see that your money comes back.¶

In a contract of indemnity, there aretwo parties; (indemnifier andindemnified),

In a contract of indemnity, liability of Promisor is primary andindependent.

In guarantee, A undertakes thatµIf you lend 20 pound sterling toC, and he does not pay you, I will¶.

In the case of a contract of guarantee there are three parties

(creditor, surety and principaldebtor).

In a contract of guarantee liability of S Surety is only secondary; i.e.he is liable only after principaldebtor refuses or fails to repay.

Contract of Indemnity Contract of Guarantee



In case of an indemnity, indemnifier

undertakes to indemnify thepromisee, if any loss gets caused,and not otherwise.

In case of indemnity, theindemnifier cannot file suit against

the third parties in his own name,unless he is an assignee.

In case of a contract of guarantee,there must be an already existing

debt/obligation the payment/fulfillment, whereof is assured(guaranteed) by the surety.

In case of a contract of guarantee,the guarantor (surety), after

paying the debt of the principaldebtor, automatically enters intothe shoes of the creditor.

Accordingly, all securities obtained by creditor, from principal debtor, gettransferred in his name. Besides, he canproceed against the principal debtor in his

own name for recovery of the balanceamount, if any.

Contract of Indemnity Contract of Guarantee

Contract of Indemnity Vs. Contract of Guarantee



(b)C ontin ing arantee

(i) It pertains to a series of transactions; not just one.

(ii) It may be revoked, but regarding only futuretransactions; not to transactions prior to therevocation.

(iii)After the death of the surety, a continuing guarantee

gets revoked (unless there is a contract to thecontrary), but only in regard to the transactionssubsequent to the death, i.e. prior transactions willbe satisfied by his legal heirs, to the extent of theinherited property of the deceased surety.

Types of GuaranteesTypes of Guarantees



(a)R ights

(i) To demand from surety, the repayment of loan

given to principal debtor, immediately after thelatter fails or refuses to make repayment when due,even before exhausting all remedies available tohim against the principal debtor

(ii) Right of µgeneral lien¶ on the securities of the

surety, but only after default or refusal by theprincipal debtor.

(iii) If surety be declared insolvent, creditor canproceed in the insolvency proceedings for his claims

(on pro rata basis)

R ights & Duties of CreditorsR ights & Duties of Creditors



(b) Duties [Obligations]

(i) Not to change term and conditions of the contractwith the principal debtor, without specific consent of surety. Otherwise, surety automatically getsdischarged of all his future (not earlier) obligations.

(ii) Not to release or discharge the principal debtor;which absolves surety of all his future (not earlier)obligations.

(iii) Not to compound with, or give time to, or agree notto sue, the principal debtor.

(iv) Not to do any act inconsistent with the rights of surety, and which may impair the surety¶s eventualremedy against the principal debtor.



(a)R ights against Creditor

To direct creditor to dismiss the employee, whosehonesty he had guaranteed, failing which, the surety isdischarged of his liabilities.

R ights & Duties of SuretyR ights & Duties of Surety



(b)R ights against Principal Debtor

(i) All rights with creditor against principal debtor getinvested in the surety, when he repays latter¶s debt,or when he himself performs the duty guaranteed.

(ii) If creditor loses, or parts with any of the securities,without consent of surety; surety is discharged to

the extent of the value of such securities.

(iii)Surety has right to recover from the principal debtor,the amount he has rightfully paid to the creditor.

R ights & Duties of Surety (Continued«)R ights & Duties of Surety (Continued«)



(c) R ights against Co-sureties

(i) Right of contribution amongst themselves, i.e. to

recover extra amount paid by him, from theremaining co-sureties.

(ii) If one co-surety becomes insolvent, remaining co-sureties will share the total liability equally amongstthem; but, only upto the extent of the specifiedagreed guaranteed amounts.

R ights & Duties of Surety (Continued«)R ights & Duties of Surety (Continued«)



(i) It is co- t i ith that of the principal debtor

(ii) ut, it is only a condary or contingent liability,i.e. it begins only after the principal debtor def aults orref used to pay

(iii) Creditor is not required to first file a suit against the principal debtor, and then alone to file a suit againstthe guarantor(s). Creditor may not file suit againstprincipal debtor but only against guarantor(s); or both as co-accused parties

(iv) Creditor is not required to first exhaust all remedies,bef ore filing suit against guarantor

(v) Creditor is not bound to give notice to the guarantor,regarding the def ault, on the part of the principaldebtor

Liabiliti of SuretyLiabilities of Surety



P osition of the S rety in the case where the P rincipal Debtor is a Minor

As liability of surety is co-extensive with that of principal debtor, it cannot be more than that of principal debtor.

Thus, as liability of minor is µnil¶; the liability of surety,too, is µnil¶ .

But, surety will be liable for having guaranteed aminor debt, if it has been specifically provided inguarantee document.



(i) By giving prior notice of revocation to the creditor,but pertaining only to the f uture transactions. But, if one co-surety revokes his guarantee, and the otherco-sureties do not do so, they ill be held liable f or

the repayment of the dues.

(ii) n death of surety, but pertaining only to f uture transactions, and only in the absence of any othercontract to the contrary.

(iii)When creditor changes the terms and conditions of the contract ithout prior specific consent of surety (pertaining to transactions thereafter (and not earlierones).

(i )When creditor releases or discharges the principaldebtor.

Discharge of SuretyDischarge of Surety



(v) When creditor compounds, or gives time to, or agreesnot to sue the principal debtor, without surety¶s

consent. But, not so, if creditor enters into anagreement with any third party to give someextension of time to principal debtor.

(vi)When the creditor¶s action or omission impairssurety¶s eventual remedy against the principal debtor.

(vii)When creditor loses or parts with any of thesecurities, without consent of surety, but only to theextent of the value of such securities.

Discharge of Surety (Continued«)Discharge of Surety (Continued«)

contracts of indemnity and guarantee

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