indemnity and guaranty

7/31/2019 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

indemnity and guaranty

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