Download - Indemnity and Guaranty
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CONTRACT OF INDEMNITY
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
The person who promises to make good the loss iscalled the Indemnifier , and the person whose loss is
to be made is called the Indemnified or Indemnity
holder
Contract of indemnity is really a part of Contingent
contracts.
E.g. Contract of Insurance.
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Examples of indemnity
A shareholder has lost his share certificate
and is applying to the company for the
duplicate. The company has the risk that
there may be similar claims made by other
persons also. Then the company can ask
the shareholder to execute the indemnity
bond that he shareholder will make goodany loss the company incase any other
person claims the certificate.
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Essentials of the contract of
indemnity There must be two parties in a contract of
indemnity that is indemnifier and indemnified.
The contract may be express or implied.
Is subject to all the rules of valid contract likefree consent, legality of objects etc.,
The contract of indemnity is enforceable onlywhen the promisee suffers a loss the happening
of which is unknown. The indemnifier will make good of such loss of
the indemnified in case the latter suffers a loss.
Consideration incase of indemnity is essential to
enable the indemnity holder to make claim to be
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Contract of Guarantee: Definition: A contract of Guarantee is a
contract to perform the promise, ordischarge the liability of a third person incase of his default.
This contract entered into with the object of
enabling a person to get a loan or goods oncredit or an employment.
The person who gives guarantee is called
the Surety; the person in respect of whosedefault the guarantee is given is calledPrincipal debtor; and the person to whomthe guarantee is given is called Creditor
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Examples of contract of guarantee
1. 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
a) A is the creditor.b) B is the principal debtor
c) C is the surety or guarantor.
2. On request of X, Y promises the employer
of X that if X makes a defaults he shall
make good the same to him.
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What is the consideration for
guarantee?
Sec 127 provides that anything done, or
any promise made for the benefit of the
principal debtor may be sufficient
consideration to the surety for giving the
guarantee". Thus there need not be direct
consideration between surety and the
creditor.
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Essentials of the contract of
guarantee Tripartite agreement: every contract involves
three agreements. Creditor and principal debtor Surety and the creditors
The surety and the principal debtor. Secondary liability: In the contract of guarantee,
the principal liability lies with the debtor and thesurety has only secondary liability that is only in
case of default. The liability of the surety is conditional. The principal debtor, surety and creditor must be
competent to contract.
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Difference between indemnity and
guarantee.
No. of parties. (two and three)
Number of contracts (one and three)
Form (oral or written VS written) Continuing risk Vs absolute risk
Nature of liability (primary and secondary)
Purpose (reimbursement of loss Vssecurity of a debt or action)
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What is a continuing guarantee?
This a guarantee which extends to a
series of transactions.
E.g., S guarantees to C for D credit
purchases with a running balance not
exceeding Rs.5000.
It can be revoked by notice or death of the
surety.
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Who are co-sureties
When two or more persons guarantee the
same debt jointly or severally, they are
known as co-sureties. Since the co-
sureties share liabilities, they have right to
share the amount recovered.
E.g., S1 and S2 jointly promises C , that in
case of default of D to whom C has lentmoney, they shall jointly pay the amount to
C.
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Rights of surety
Against
creditor
Against principal
debtorAgainst co-sureties
Right
To
securities
To
Claim
Set off
Right to
subrogation
To
indemnity
To claim
contribution
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Rights of surety against the
creditor
He may ask the creditor to sue the debtor
for the amount due.
He can also require the creditor to
terminate the debtors services.
If any set off claim is available from the
debtor, he may claim when called upon to
pay.
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Right of surety against principal
debtor
Right of subrogation: when the surety pays
off the debt of the principal debtors, he
steps into the shoes of the creditor and is
entitled to all the remedies which thecreditor could have enforced against the
debtor.
He may also claim indemnity of the rightfulamount.
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Right of creditor against Co- surety
If they are liable in equal amounts the
surety can demand the amount from the
co sureties.
If any one of the co-sureties has to pay the
amount, he has right to call upon his co-
sureties to pay their contributions.
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Rights of the creditor against surety
The creditor can demand payment, even when
the debt with the principal debtor is time-barred
or the debtor has become insolvent.
If the surety becomes insolvent, the creditor hasthe right to recover the dues from the estate of
insolvent surely.
In case of co-sureties the creditor is at liberty to
proceed against any one of the sureties for the
whole debt.
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When surety will be discharged
from his obligations?
Payment by debtor.
Revocation of the contract.
Death
Release of debtor by creditor
Guarantee obtained by misrepresentation
Guarantee obtained by concealment of facts.
If there is any variance of the contract withoutthe knowledge of the surety.
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Past questions