Innovate Review

Benjamin Mkapa High School

THE LAW OF GUARANTEE & INDEMNITY

Contract of guarantee is the contract to perform the promise or discharge the

liability of the third person incase of default. The person who gives the guarantee
is called surety. The person who inrespect of whose default the guarantee is given
is called the Principal debtor and person to who the guarantee is given is called the
Creditor.
KINDS OF GUARANTEE
The function of a contract of guarantee is to enable a person to get a Loan or goods
on credit or an employment. A guarantee may therefore be given for repayment of a
debt or the repayment of the price of the goods sold on credit or the goods
conduct or honesty of a person employed in a particular office. In the last case the
guarantee is called FEDELITY guarantee.
 Specific Guarantee:
This is a guarantee extending to a single transaction or debt. It comes to an end
when the guarantee debt is duly discharge or the promise is duly performed when
the guaranteed debt is duly.
 Continuing Guarantee:
This is the guarantee extending to a series of transactions. The liability of surety
in case of continuing guarantee extends to all the transaction contemplated until
the revocation of guarantee is made.
Distinction between Contract of Guarantee and Indemnity
Indemnity (Insurance) Guarantee
1 An indemnity is a contract in 1 Guarantee or surety ship is an
Parties Definition

which the indemnifier promises to . undertaking to answerable for debt,

preserve the other party from default or miscarriage of another.
loss
2. There are two parties i.e. the 2 There are three parties to the contract
indemnifier . i.e. the creditor principal, debtor and
(promisor) and the surety.
indemnified (promise)
3. The liability of indemnifier to the 3 The liability of surety to the creditor is
PrommisorLiability

indemnified is primary and . collateral or

independent secondary.
The primary liability been that of the
principal debtor

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Sue ariseLiabilityWhen actRequest to involved Contract 4. There is only one contract i.e 4 There is three contracts i.e between
between indemnifier and - Creditor vs Surety
indemnified - P. debtor vs creditor
- P. debtor vs surety

5. It is not necessary for the 5 It is necessary that surety should give

indemnifier to act at the request . the guarantee at the request of the
of indemnified principal debtor.

6. The liability of the indemnifier 6 The liability of the surety arises after
arises only at the happening of a . the DEFAULT by the principal debtor
contingency i.e loss

An indemnifier cannot sue a third A surety on discharging the debt due

party for loss in his own name, by the principal debtor, steps into the
because there is no prority of shoes of the creditor. He can proceed
contract. He can do so only if against the P. debtor in his own
there is an assignment to him. right/name.

RIGHTS OF SURRETY
(1) RIGHTS AGAINST CREDITOR
i. Right to requires the creditor to sue the principal debtor: The
surety has the right before the debt become due and before he is called upon
to pay to ask the creditor to sue the debtor on the loan, in case of fidelity
guarantee the surety can ask the employer to dismiss the employee in the event
of his proven dishonesty.
ii. Right of set-off on being sued the surety can rely on any set – off
or counter claim which the debtor has against the creditor.
iii. The right to demand securities but after payment of the existing
debt all the securities received by the creditor before, at or after the creation
of the guarantee will be returned.
iv. Right of subrogation: where a guaranteed debt has become due and
surety has paid all that he is liable for, he invested with all rights which the
creditor had against the principal debtor.
(2): RIGHTS AGAINST PRINCIPAL DEBTOR
i) The right to be relived of liability. The surety can compel the principal
debtor to relieve him from liability by paying of the debt provided the debt
has to ascertain.
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ii) Right to indemnity: In every contract of guarantee there is an implied
promise by the principal debtor to indemnity the surety, and the surety is
entitled to recover from the principal debtor all payments properly made/
incurred. After the surety makes payment under the guarantee he become a
creditor of the principal debtor and can recover from the latter the amount
he has with interest.

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(3 RIGHT AGAINST CO- SURETY

The right of contribution – when the debt is guarantees by two or more sureties
they are called co-sureties. The co-sureties are liable to contribute, as agreed,
towards the payment of the guarantee debt. When one of the co-sureties makes
payment tot creditor, he has a right to claim contribution from the other party (co-
surety or sureties).
Generally co-sureties are liable to contribute equally unless the contract itself
states otherwise (different sums). The right to contribution arises only where the
co-surety has paid more than his is liable to pay

TERMINATION/DISCHARGE OF SURETY
A surety is said to be discharge/ terminated when his liability comes to an end the
following modes are applicable for discharge.
1. DISCHARGE BY PRINCIPAL DEBTORS
Payments of guaranteed debt by the debtor release the guarantor.
2. DISCHARGE OF SURETY BY REVOCATION
(a) Revocation by surety by giving notice , it is possible to revoke a continuing
guarantee at any time by the surety as regards future transaction by
notice the creditor. But the surety remains liable for transactions
already entered into.
(b) Revocation by death; the death of the surety operates in absence of any
contract to contrary, as revocation of continuing guarantee, so far as
regard future transactions, the administrator of the estate of the
surety will not be liable after the death of the surety even if the
creditor has no notice of the/death.

(c) Revocation by Novation – Novation means substitution of a contract of

guarantee for an old one either between the same parties or between one
of the old parties and a new party. The original contract of guarantee in
such a case comes to an end.

3. DISCHARGE OF SURETY BY THE CONDUCT OF THE CREDITOR

(a) Variance in terms of contract. A surety is liable for what he has under
taken in the contract. When the terms of the contract between the
principal debtor and the creditor are varied/changed without the
surety’s consent, the surety is discharged as to the transactions
subsequent to the variance.
(b) Release or discharge of principal debtor the surety is discharge by any
contract between the creditor and the principal debtor, by which the
principal debtor is released.

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E.g. C employs P at one place on S standing as surety for P. this
employment is later terminated. C employs P afresh at different place,
taking a security bond from another person. S. is discharged

RELATED EXAMS QUESTIONS

QN1

Distinguish a contract of guarantee from a contract of insurance

QN2

Under what circumstances is the guarantor discharged from his obligation as the
secondary?

QN3

Define a contract of guarantee. What are the rights of a surety against co-
sureties, the principal debtor creditor after he has been paid the guaranteed debt?

QN4

(a) A contract of guarantee is a tripartite agreement explain

(b) Distinguish a contract of guarantee from that of identify

QN5

(a) What is contract of guarantee?

(b) In what circumstances can a contract of guarantee come to an end?

(c) Distinguish a contract of guarantee with that of indemnity

QN6

(a) State the nature of guarantee contract

(b) Distinguish between contracts of indemnity and guarantee

QN7

Mr. Urio is indebted to Miss Ngarama in the sum of Shs. 100,000/= payable on 30 th
April 1995 and Mr. Shami has guaranteed the debt. On 31 st March Mr. Urio offered
to pay Miss Ngarama shs 120,000/= if Miss Ngarama would allow him to pay two
installments of shs. 60,000/= each, the first to be paid on 30 th April 1995 and the
other on 30th June 1995 Miss Ngaram accepted this offer without consulting or
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informing Mr. Shami. By mid Jul Mr. Urio had not paid eithr of installments and
Miss Ngarama has asked Mr. Shami to pay Shs. 100,000/= under the guarantee.

State with reasons, whether Mr. Shami is liable to make the payments.

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