Indemnity and Guarantee

"Contract of indemnity"

"Contract of indemnity" defined.-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 promisees to make good the loss is called is called the indemnifier (promisor) and the person whose loss is to be made good is called the indemnified or indemnity holder (promisee). Illustration A contracts with the Government to return to India from aboard after completing his studies and deserve the Government for a fixed period. He fails to return to India. This is a contract of indemnity and his is bound to reimburse the Government.

Indemnity : SAVE FROM LOSS

.Rights of indemnity holder when sued.

The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor(1) all damages (2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, (3) all sums which he may have paid under the terms of any compromise of any such suit,

Contract of guarantee

A "contract of guarantee " is a contract to perform the promise, or discharge the liability, of a third person in case 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.

Example:

S requests C to sell and deliver to him goods on 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 in consideration of Cs promise to deliver the goods.

Features of a Contract of guarantee

1.

Concurrence : It requires concurrence of all three parties i.e. Principal debtor, creditor and the surety. For eg. C enters into contract with P. S, without any communication with P, undertakes for a consideration moving from C to indemnify C against any damage that may arise from a breach of Ps obligation. This does not make S a surety for P, for a person cannot become a surety without the consent of the principal debtor.

Features of a Contract of guarantee

2. Primary liability in some person: There must be some primary liability in some person other than surety. If the liability doesn't exist, there cannot be a contract of guarantee.

Features of a Contract of guarantee

3. Essentials of a valid contract: All the parties must be capable of entering into a valid contract though the principal debtor may be a person suffering from the incapacity to contract. In such a case, the surety is regarded as the 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 result in 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.

Difference
Contract of Indemnity 1. There are 2 parties 2. Liability of indemnifier is primary 3. Contingency: The liability of indemnifier arises only on the happening of a contingency 4. Contract : There is only one contract between the indemnifier and the indemnified 5. Object: The indemnity contracts for reimbursement of loss. It provides security 6. Right to sue: Indemnifier cannot sue a third party for the loss suffered
1.

2.

3.

4. 5. 6.

Contract of Guarantee There are 3 parties Liability of surety is secondary i,e, the surety is liable only if the principal debtor fails. The liability of the principal debtor is primary. Contingency: There is an existing debt or duty , the performance of which is guaranteed by the surety. Contract : There are 3 contracts Object: The contract of guarantee provides surety to the creditor Right to sue: Surety can sue the principal debtor

Extent of Suretys liability.

1.

Nature of suretys liability it is co-extensive The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract. Illustration

S guarantees to C the payment of a bill of exchange by P, the acceptor. The bill is dishonoured by P. S is liable not only for the amount of the bill but also for any interest and charges which may have become due on it.
The Surety is liable for what the principal debtor is liable.

Extent of Suretys liability.

2.

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

3. Liability under ."Continuing guarantee".-A guarantee which extends to a series of transactions is called a "continuing guarantee".

Kinds of Guarantee

1.
2. 3.

A guarantee may be given for Repayment of debt Payment of the price of the goods sold on credit The good conduct or honesty of a person employed in a particular office. This type of guarantee is known as FIDELITY Guarantee A guarantee maybe given for existing debt (retrospective guarantee) or may be given for future debt (prospective guarantee)

Kinds of Guarantee

Specific guarantee : When guarantee extends to a single transaction . It comes to an 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 continuing guarantee extends to all transactions until the revocation of the guarantee.

Examples of continuing guarantee.

(a) A, in consideration that B will employ C in collecting the rent of Bs zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by C of those rents. This is a continuing guarantee. (b) S guarantees payment to C, a tea-dealer, to the amount of Rs.10000, for any tea he may from time to time supply to P. C supplies 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 fails to pay. The guarantee given by S was a continuing guarantee, and he is accordingly liable to C to the extent of Rs.10000.

Revocation of a continuing guarantee.

1.

By notice : A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice 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 upon him. B draws upon C, C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity. A is liable upon his guarantee.

Revocation of continuing guarantee

2. By surety' death The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions. The liability of the surety for previous transactions however remains.

Revocation of continuing guarantee

3. By other modes: a) By novation b) By variance in terms of contract C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment. C pays the 5,000 rupees to B on the 1st January, A is discharged from his liability, as the contract has been varied, in as much as C might sue B for the money before the first of March.

Revocation of continuing guarantee

c) by release or discharge of principal debtor A contracts with B for a fixed price to build a house for B within a stipulated time. B supplying the necessary timber. C guarantees As performance of the contract. B omits to supply the timber. C is discharged from his suretyship.

Revocation of continuing guarantee

d) Discharge of surety when creditor gives time to, or agrees not to sue, principal debtor e) By creditor's act or omission impairing surety's eventual remedy Illustration B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain stages. A becomes surety to C for Bs due performance of the contract. C, without the knowledge of A, prepays to B the last two instalments. A is discharged by this prepayment.

Revocation of continuing guarantee

f ) By loss of security Illustration A, as surety for B, makes a bond jointly with B to C, to secure a loan from C to B. Afterwards, C obtains from B a further security for the same debt. Subsequently, C gives up the further security. A is not discharged.

RIGHTS OF SURETY

1.
2. 3.

A surety has right against: Creditor Principal Debtor Co-sureties

RIGHTS OF SURETY against: Creditor

1.

Before payment of the guaranteed debt: A surety may after guaranteed debt has become due and before he is called upon to pay, require the creditor to sue the principal debtor. However, the surety will have to indemnify the creditor for any expenses or loss resulting therefrom.

RIGHTS OF SURETY against: Creditor

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

RIGHTS OF SURETY against: Creditor

3.

On payment of the guaranteed debt: A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship entered into, whether the surety knows of the existence of such security or not; and if the creditor loses, or without 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 the security.

3.

On payment of the guaranteed debt: Illustrations C, advances to B, his tenant, 2,000 rupees on the guarantee of A. C has also a further security for the 2,000 rupees by a mortgage of Bs furniture. C, cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is free from liability to the amount of the value of the furniture.

4. Right to equities: On payment of guaranteed debt, the surety is entitled to all equities which the creditor could have enforced not only against the principal debtor himself, but also against persons claiming through him.

5.Right of subrogation: Where a guaranteed debt has become due and the surety has paid all that he is liable for, he is invested with all the rights which the creditor had against the principal debtor. This means payment of the guaranteed debt, the surety steps into the shoes of the creditor.

RIGHTS AGAINST PRINCIPAL DEBTOR

1. Right to be relived of liability

RIGHTS AGAINST PRINCIPAL DEBTOR

2. Right to indemnify : In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor all payments properly made.

Illustrations

(a) B is indebted to C, and A is surety for the debt. C demands payment from A, and on his refusal sues him for the amount. A defends the suit, having reasonable grounds for doing so, but he is compelled to pay the amount of debt with costs. He can recover from B the amount paid by him for costs, as well as the principal debt. (B) A guarantees to C, to the extent of 2,000 rupees, payment for rice to be supplied by C to B. C supplies to B rice to a less amount than 2,000 rupees, but obtains from A payment of the sum of 2,000 rupees in respect of the rice supplied. A cannot recover from B more than the price of the rice actually supplied.

3. Right against Co-sureties : When a debt is guaranteed by two ore more sureties they are called co-sureties. (a) Co-sureties liable to contribute equally (b ) Liability of co-sureties bound in different sums

a) Co-sureties liable to contribute equally

Where two or more persons are co-sureties for the same debt or duty, either jointly or severally, and whether under the same or different contract, and whether with or without the knowledge of each other the co-sureties, in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid 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 makes default in payment. A, B and C are liable, as between themselves, to pay 1,000 rupees each. (b) A, B and C are sureties to D for the sum of 1,000 rupees lent to E, and there is a contract between A, B and C that A is to be responsible to the extent of onequarter, B to the extent of one-quarter, and C to the extent of one-half. E makes default in payment. As between the sureties, A is liable to pay 250 rupees, B 250 rupees, and C 500 rupees

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 40,000 rupees, conditioned for Ds duly accounting to E. D makes default to the extent of 30,000 rupees. 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 40,000 rupees, conditioned for Ds duly accounting to E. D makes default to the extent of 40,000 rupees. 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 40,000 rupees, conditioned for Ds duly accounting to E. D makes default to the extent of 70,000 rupees. A, B and C have to pay the full penalty of his bond

Discharge of surety

Discharge of surety

By revocation

By conduct of the creditor

By invalidation of the contract

Revocation by surety

Death of surety

Novation

Discharge of surety

By conduct of the creditor

Variance in terms of the contract

Release or discharge of principal debtor

Compounding by creditor with principal debtor

Creditors act or omission impairing surety's eventual remedy

Loss of secrity

By invalidation of the contract

Guarantee obtained by misrepresentation

Guarantee obtained by concealment

Failure of a co-surety to join a surety

Failure of consideration