session 12 n 13 indemnity and guarantee

8/3/2019 Session 12 n 13 Indemnity and Guarantee

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Indemnity and Guarantee


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"Contract of indemnity"

"Contract of indemnity" defined.-A contract by which one partypromises to save the other from loss caused to him by theconduct of the promisor himself, or by the conduct of any otherperson, is called a " contract of indemnity". The person whopromisees to make good the loss is called is called the

indemnifier (promisor) and the person whose loss is to be madegood is called the indemnified or indemnity holder (promisee).

IllustrationA contracts with the Government to return to India from aboard

after completing his studies and deserve the Government for afixed period. He fails to return to India. This is a contract ofindemnity and his is bound to reimburse the Government.

Indemnity : SAVE FROM LOSS


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.Rights of indemnity holder when sued.

The promisee in a contract of indemnity, actingwithin the scope of his authority, is entitled torecover from the promisor-

(1) all damages(2) all costs which he may be compelled to pay inany such suit if, in bringing or defending it,

(3) all sums which he may have paid under theterms of any compromise of any such suit,


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Contract of guarantee

A "contract of guarantee " is a contract to perform thepromise, or discharge the liability, of a third person incase of his default.

The person who gives the guarantee is called the

surety the person in respect of whose default the guarantee is

given is called the " principal debtor ",

and the person to whom the guarantee is given is called

the " creditor ". A guarantee may be either oral or written.


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Example:

S requests C to sell and deliver to him goodson credit to P.

C agrees to do so, provided S will guarantee

the payment of the price of the goods.

S promises to guarantee the payment inconsideration of Cs promise to deliver the

goods.


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Features of a Contract of guarantee

1. Concurrence : It requires concurrence of all threeparties i.e. Principal debtor, creditor and thesurety.

For eg. C enters into contract with P. S, withoutany communication with P, undertakes for aconsideration moving from C to indemnify Cagainst any damage that may arise from a breach

of Ps obligation. This does not make S a surety forP, for a person cannot become a surety withoutthe consent of the principal debtor.


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2. Primary liability in some person: There mustbe some primary liability in some personother than surety. If the liability doesn't

exist, there cannot be a contract ofguarantee.


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3. Essentials of a valid contract:

All the parties must be capable of entering into a valid contractthough the principal debtor may be a person suffering from theincapacity to contract. In such a case, the surety is regarded asthe principal debtor and is liable to pay personally even though

the principal debtor (for eg.minor) is not liable to pay. Consideration received by the principal debtor is sufficient for

the surety and it is not necessary that it must necessary resultin some benefit to the surety himself.

4. Writing is not necessary: A guarantee may be either oral or

written . It may be expressed or implied.


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Difference

Contract of Indemnity1. There are 2 parties2. Liability of indemnifier is primary3. Contingency: The liability of

indemnifier arises only on thehappening of a contingency

4. Contract : There is only onecontract between the indemnifierand the indemnified

5. Object: The indemnity contractsfor reimbursement of loss. Itprovides security

6. Right to sue: Indemnifier cannot

sue a third party for the losssuffered

Contract of Guarantee1. There are 3 parties2. Liability of surety is secondary i,e,

the surety is liable only if theprincipal debtor fails. The liability ofthe principal debtor is primary.

3. Contingency: There is an existingdebt or duty , the performance ofwhich is guaranteed by the surety.

4. Contract : There are 3 contracts5. Object: The contract of guarantee

provides surety to the creditor6. Right to sue: Surety can sue the

principal debtor


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Extent of Suretys liability.

1. Nature of suretys liability it is co-extensiveThe liability of the surety is co-extensive with that of theprincipal debtor, unless it is otherwise provided by the contract.

IllustrationS guarantees to C the payment of a bill of exchange by P, theacceptor. The bill is dishonoured by P. S is liable not only forthe amount of the bill but also for any interest and chargeswhich may have become due on it.

The Surety is liable for what the principal debtor is liable.


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Extent of Suretys liability.

2. Limitation of suretys liability: Though theliability of the surety is co-extensive withthat of the principal debtor, he may limit his

liability.


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3. Liability under ."Continuing guarantee".-Aguarantee which extends to a series oftransactions is called a "continuing

guarantee".


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Kinds of Guarantee

A guarantee may be given for

1. Repayment of debt

2. Payment of the price of the goods sold on credit

3. The good conduct or honesty of a personemployed in a particular office. This type ofguarantee is known as FIDELITY Guarantee

A guarantee maybe given for existing debt

(retrospective guarantee) or may be given forfuture debt (prospective guarantee)


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Kinds of Guarantee

Specific guarantee : When guaranteeextends to a single transaction . It comes toan end when the guaranteed debt is duly

discharged or the promise is duly performed. Continuing guarantee : When guarantee

extends to a series of transactions. The

liability of the surety in case of a continuingguarantee extends to all transactions until therevocation of the guarantee.


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Examples of continuing guarantee.

(a) A, in consideration that B will employ C in collecting the rentof Bs zamindari, promises B to be responsible, to the amount of5,000 rupees, for the due collection and payment by C of thoserents. This is a continuing guarantee.

(b) S guarantees payment to C, a tea-dealer, to the amount ofRs.10000, for any tea he may from time to time supply to P. Csupplies P with tea to above Rs.10000, and P pays C for it.Afterwards C supplies P with tea to the value of Rs.20000. P failsto pay. The guarantee given by S was a continuing guarantee,and he is accordingly liable to C to the extent of Rs.10000.


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Revocation of a continuing guarantee.

1. By notice :

A continuing guarantee may at any time berevoked by the surety, as to future transactions, bynotice to the creditor.

Illustration

A guarantees to B, to the extent of 10,000 rupees,that C shall pay all the bills that B shall draw uponhim. B draws upon C, C accepts the bill. A givesnotice of revocation. C dishonours the bill atmaturity. A is liable upon his guarantee.


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Revocation of continuing guarantee

2. By surety' death

The death of the surety operates, in the absence ofany contract to the contrary, as a revocation of a

continuing guarantee, so far as regards futuretransactions. The liability of the surety for previoustransactions however remains.


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3. By other modes:

a) By novation

b) By variance in terms of contract

C contracts to lend B 5,000 rupees on the 1stMarch. A guarantees repayment. C pays the5,000 rupees to B on the 1st January, A is

discharged from his liability, as the contracthas been varied, in as much as C might sue Bfor the money before the first of March.


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c) by release or discharge of principal debtor

A contracts with B for a fixed price to build ahouse for B within a stipulated time. B

supplying the necessary timber. Cguarantees As performance of the contract.B omits to supply the timber. C is discharged

from his suretyship.


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d) Discharge of surety when creditor gives time to, oragrees not to sue, principal debtor

e) By creditor's act or omission impairing surety'seventual remedy

Illustration

B contracts to build a ship for C for a given sum, tobe paid by instalments as the work reaches certainstages. A becomes surety to C for Bs due

performance of the contract. C, without theknowledge of A, prepays to B the last twoinstalments. A is discharged by this prepayment.


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f ) By loss of security

Illustration

A, as surety for B, makes a bond jointly withB to C, to secure a loan from C to B.Afterwards, C obtains from B a furthersecurity for the same debt. Subsequently, C

gives up the further security. A is notdischarged.


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RIGHTS OF SURETY

A surety has right against:

1. Creditor

2. Principal Debtor

3. Co-sureties


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RIGHTS OF SURETY against:

Creditor

1. Before payment of the guaranteed debt:

A surety may after guaranteed debt hasbecome due and before he is called upon to

pay, require the creditor to sue the principaldebtor.

However, the surety will have to indemnify

the creditor for any expenses or lossresulting therefrom.


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Creditor

2. Right to set off- On being sued by thecreditor, the surety can rely on any set-off orcounter claim which the debtor has against

the creditor.


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Creditor

3. On payment of the guaranteed debt:

A surety is entitled to the benefit of every securitywhich the creditor has against the principal debtor

at the time when the contract of suretyship enteredinto, whether the surety knows of the existence ofsuch security or not; and if the creditor loses, orwithout the consent of the existence of such

security or not; parts with such security, the surety,is discharged to the extent of the value of thesecurity.


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3. On payment of the guaranteed debt:

Illustrations

C, advances to B, his tenant, 2,000 rupeeson the guarantee of A. C has also a furthersecurity for the 2,000 rupees by a mortgageofBs furniture. C, cancels the mortgage. B

becomes insolvent and C sues A on hisguarantee. A is free from liability to theamount of the value of the furniture.


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4. Right to equities: On payment ofguaranteed debt, the surety is entitled to allequities which the creditor could have

enforced not only against the principal debtorhimself, but also against persons claimingthrough him.


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5.Right of subrogation: Where a guaranteeddebt has become due and the surety haspaid all that he is liable for, he is invested

with all the rights which the creditor hadagainst the principal debtor. This meanspayment of the guaranteed debt, the suretysteps into the shoes of the creditor.


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RIGHTS AGAINST PRINCIPAL

DEBTOR

1. Right to be relived of liability


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RIGHTS AGAINST PRINCIPAL

DEBTOR

2. Right to indemnify : In every contract ofguarantee there is an implied promise by theprincipal debtor to indemnify the surety, and

the surety is entitled to recover from theprincipal debtor all payments properly made.


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Illustrations

(a) B is indebted to C, and A is surety for the debt. C demandspayment from A, and on his refusal sues him for the amount. Adefends the suit, having reasonable grounds for doing so, but he is

compelled to pay the amount of debt with costs. He can recoverfrom B the amount paid by him for costs, as well as the principaldebt.

(B) A guarantees to C, to the extent of 2,000 rupees, payment forrice to be supplied by C to B. C supplies to B rice to a less amountthan 2,000 rupees, but obtains from A payment of the sum of 2,000rupees in respect of the rice supplied. A cannot recover from B morethan the price of the rice actually supplied.


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3. Right against Co-sureties : When a debt isguaranteed by two ore more sureties they arecalled co-sureties.

(a) Co-sureties liable to contribute equally

(b ) Liability of co-sureties bound in differentsums


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a) Co-sureties liable to contribute equally

Where two or more persons are co-sureties for the same debt or duty, eitherjointly or severally, and whether under the same or different contract, andwhether with or without the knowledge of each other the co-sureties, in theabsence of any contract to the contrary, are liable, as between themselves, topay each an equal share of the whole debt, or of that part of it which remainsunpaid by the principal debtor.

Illustrations

(a) A, B and C are sureties to D for the sum of 3,000 rupees lent to E. E makesdefault in payment. A, B and C are liable, as between themselves, to pay 1,000rupees each.

(b) A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and thereis a contract between A, B and C that A is to be responsible to the extent of one-quarter, B to the extent of one-quarter, and C to the extent of one-half. E makesdefault in payment. As between the sureties, A is liable to pay 250 rupees, B250 rupees, and C 500 rupees


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b.) Liability of co-sureties bound in

different sums Co-sureties who are bound in different sums are liable to pay equally as far as the limits of

their respective obligations permit.

Illustrations (a) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty,

namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000rupees, conditioned for Ds duly accounting to E. D makes default to the extent of 30,000rupees. A, B and C are liable to pay 10,000 rupees.

(b) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty,namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000rupees, conditioned for Ds duly accounting to E. D makes default to the extent of 40,000rupees. A is liable to pay 10,000 rupees, and B and C 15,000 rupees each.

(c) A, B and C, as sureties for D, enter into three several bonds, each in a different penalty,

namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000rupees, conditioned for Ds duly accounting to E. D makes default to the extent of 70,000rupees. A, B and C have to pay the full penalty of his bond


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Discharge of surety

Discharge of surety

By revocationBy conduct

of the creditorBy invalidationof the contract

Revocation by surety Death of surety Novation


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Discharge of surety

By conductof the creditor

Variance in termsof the contract

Release or dischargeof principal debtor

Compounding bycreditor with

principal debtorLoss of secrity

Creditors act oromission

impairing surety'seventual remedy


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By invalidationof the contract

Guaranteeobtained by

misrepresentation

Guaranteeobtained byconcealment

Failure of a co-suretyto join a surety

Failure of consideration

session 12 n 13 indemnity and guarantee

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