Unit-3 Contracts of Guarantee and Indemnity

Program : MBA
Semester : III
Subject Code : MB0051
Subject Name : Legal Aspects of Business
Unit number :3
Unit Title :Contracts of Guarantee and Indemnity
Lecture Number :1

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 Unit-3 Contracts of Guarantee and Indemnity

Lecture Outline

• Introduction
• Purpose and Meaning of the Contract of Guarantee
• Kinds of Guarantee
• Rights and Obligations of the Creditor
• Rights, Liabilities and Discharge of Surety
• Contract of Indemnity
• Activity

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 Unit-3 Contracts of Guarantee and Indemnity

Contracts of Guarantee and Indemnity

Objectives

•Explain the contract of guarantee

•Describe the types of guarantee
•Explain the rights and obligations of creditor
•Enumerate the contract of indemnity

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 Unit-3 Contracts of Guarantee and Indemnity

Introduction

• Guarantee or surety ship is a contractual relationship resulting from the

unconditional promise of surety or guarantor to repay the loan to the
creditor for the obligation of the principal debtor.
• If the principal debtor fails to repay the loan, the bank can approach surety
or guarantor for the payment.
• The Indian Contract Act, 1872 under Secs.126-147 deals with the law
relating to the contracts guarantee.

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 Unit-3 Contracts of Guarantee and Indemnity

Purpose and Meaning of the Contract of Guarantee

Purpose of guarantee

• The guarantee is generally made use of to secure loans.

• The contracts of guarantee are sometimes called performance bonds.
• Bail bonds, used in criminal law, are a form of contract of guarantee

Definition and nature of the contract of guarantee

• Sec-126- “A contract to perform the promise, or discharge the liability,

of a third person in case of his default” is called as a Contract of
Guarantee or surety.
• The person who gives the guarantee is called ‘surety’.
• The person for whom the guarantee is given is called the ‘principal
debtor’
• The person to whom the guarantee is given is called the ‘creditor’.

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 Unit-3 Contracts of Guarantee and Indemnity

Kinds of Guarantee

Oral or written guarantee

Specific and continuing guarantee

A guarantee may either be for the whole debt

or a part of the debt.

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 Unit-3 Contracts of Guarantee and Indemnity

Rights and Obligations of the Creditor

Rights of a creditor

• The creditor is entitled to demand payment from the surety as soon as

the principal debtor refuses to pay or makes default in payment.
• Creditor has a right of general lien on the securities of the surety in
his possession.
• The creditor is entitled to proceed in the surety’s insolvency and claim
the pro rata dividend.

Obligations imposed on a creditor

• Sec. 133- Not to change any terms of the original contract.

• Sec. 134- Not to release or discharge the principal debtor.
• Sec-135- Not to compound, or give time to, or agree not to sue the
principal debtor.
• Sec.139- Not to do any act inconsistent with the rights of the surety

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 Unit-3 Contracts of Guarantee and Indemnity

Rights, Liabilities and Discharge of Surety

Rights against the creditor

• In case of fidelity guarantee, the surety can direct creditor to dismiss

the employee whose honesty he has guaranteed, in the event of
proved dishonesty of the employee.

• The creditor’s failure to do so will exonerate the surety from his

liability.

Rights against the principal debtor

• Right of subrogation

• Right to be indemnified

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 Unit-3 Contracts of Guarantee and Indemnity

Rights, Liabilities and Discharge of Surety

Rights against co-sureties

• Sec.146- When a surety has paid more than his share or a decree has
been passed against him for more than his share, he has a right of
contribution from the other sureties who are equally bound to pay with him.
• Sec.147- When, the co-sureties have guaranteed different sums, they are
bound to contribute equally, subject to the limit fixed by their guarantee
and not proportionately to the liability undertaken.

Liability of surety

• Sec.128-The surety is liable for all those amounts the principal debtor is
liable for.
• The liability of a surety is called as secondary or contingent, as his liability
arises only on default by the principal debtor.

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 Unit-3 Contracts of Guarantee and Indemnity

Rights, Liabilities and Discharge of Surety

Discharge of Surety

• By notice of revocation (Sec.130)

• By the death of surety (Sec.131).

• By variance in terms of the contract (Sec.133)

• Release or discharge of principal debtor (Sec.134)

• By compounding with, or giving time to, or agreeing

not to sue, principal debtor (Sec.135).

• By creditor’s act or omission impairing surety’s

eventual remedy (Sec.139).

• Loss of security

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 Unit-3 Contracts of Guarantee and Indemnity

Contract of Indemnity
Meaning of indemnity
• Sec.124- A contract of indemnity is a contract whereby one party
promises to save the other from loss caused to him (the promisee) by the
conduct of the promisor himself or by the conduct of any other person.
• A contract of indemnity may arise either by:
i. An express promise or
ii. Operation of law

Rights of the indemnified

• He is entitled to recover from the promisor:

• All damages which he may be compelled to pay in any suit in respect of any
matter to which the promise to indemnify applies;
• All costs of suit which he may have to pay to such third party, provided in
bringing or defending the suit (a) he acted under the authority of the
indemnifier or (b) if he did not act in contravention of orders of the
indemnifier and in such a way as a prudent man would act in his own case
• All sums which may have been paid under the terms of any compromise of
any such suit.
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 Unit-3 Contracts of Guarantee and Indemnity

Contract of Indemnity

Rights of the Indemnifier

• Rights of the Indemnifier is similar to the rights of a surety under Sec.141.

Distinction between a contract of guarantee and a contract of indemnity

Contract of Guarantee Contract of Indemnity

•The liability of the surety is •Liability of a promisor is primary

secondary
•There is an existing debt or
obligation, the performance of
which is guaranteed by the surety
•After discharging the debt, the
surety is entitled to proceed
against the principal debtor in his
own name
and independent
•The possibility of any loss
happening is a contingency against
which the indemnifier undertakes to
indemnify.
•The indemnifier cannot proceed
against third parties in his own
name, unless there is an assignment
in his favour.

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 Unit-3 Contracts of Guarantee and Indemnity

Activity

Activity 1

A contract of guarantee is not a contract “uberrimae fidei”. Discuss

this statement with the help of a real life business situation .

Activity 2
A guarantee which extends to a series of transactions is called a
“continuing guarantee” (Sec.129). Analyse the statement with help
of an example related to day to day business situation.

Activity 3
Analyse the position of surety in case of a minor principal debtor
with the help of a latest decision of the honourable court of
justice.

Activity 4
Analyse the circumstances where surety is discharged by variance
in terms of the contract.
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 Unit-3 Contracts of Guarantee and Indemnity

THANK YOU

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