2.1 Indemnity and Guarantee

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SPECIAL CONTRACTS

CHAPTER 1

INDEMNITY AND

GUARANTEE


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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 thepromisor himself, or by the conduct of any other

person, is called a contract of indemnity (sec 124).

The person who promises to make good the loss is

called theindemnifier (promisor)and the personwhose loss is to be made good is called the

indemnified or indemnity holder (promisee).

Example: A contracts to indemnify B against the

consequences of any proceedings which C may take

against B in respect of a certain sum of Rs. 200.A is an indemnifier or a promisor while B is an

indemnity holder or a promisee.


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ESSENTIAL ELEMENTS OF AN

INDEMNITY CONTRACT

1. Loss to one party..A person can indemnify another person, only if

such other person incurs some loss or is about to

incur some loss.

2. Indemnity by the promisor3. Reason for loss


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1.1Rights of indemnity holder when sued:

I.All damages which he may be compelled to pay in any suit in

respect of any matter to which the promise to indemnify applies.

II.All costs which he may be compelled to pay in bringing or

defending such suits. But the indemnified should have acted as

any prudent man would act under similar circumstances in his

own case or with the authority of the indemnifier. And

III.All sums which he may have paid under the terms of any

compromise of any such suit. The compromise should not be

contrary to the orders of the indemnifier and should be prudent

or authorized by the indemnifier.

1. Right to recover damages

2. Right to recover costs

3. Rights to recover sums paid in compromise


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CONTRACT OF GUARANTEE

A contract of guarantee is a contract to perform the

promise, or discharge the liability, of a third personin case of his default.

The person whogives the guaranteeis called the

surety,the personin respect of whosedefaultthe guarantee is given is called theprincipal

debtor.And the personto whomthe guarantee is

given is called thecreditor.

The guarantee may be express or implied.

Sstands for surety,Pfor principal debtor, andC

for creditor.


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Example: S requests C to lend Rs 500 to P and

guarantees that if P fails to pay the amount, he will

pay. This is a contract of guarantee.

Example: S and P go into a shop. S says to theshopkeeper, C, let P have the goods, and if he does

not pay, I will pay.

Example: Sagar requests Chetan to lend Rs 500 tpParesh and guarantees that if Paresh fails to pay the

amount, he will pay. This is a contract of guarantee.

Sagar is the surety, Chetan the creditor and Paresh

the principal debtor.


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A contract of guarantee is a tripartite agreement

which contemplates the principal debtor P, the

creditor C and the surety S in it. There is a

triangular relationship.

i.As between C and P, there is a contract out of

which the guaranteed debt arises.

ii.As between S and C, there is a contract by

which S guarantees to pay to C, Ps debt in case

of his (Ps) default.

iii.As between S and P, there is a contract that P

shall indemnify S in case S pays in the event of

a default by P.


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ESSENTIAL ELEMENTS OF CONTRACT OF

GUARANTEE

1. Concurrence: A contract of guarantee requires

the concurrence of all the three parties to it.

. Example: C enters into a contract with P, S,

without any communication with P, undertakes

for a consideration moving from C to indemnify

C against any damages that may arise from a

breach of Ps obligation.

2. Primary liability in some person: There

must be a primary liability in some person otherthan surety.


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3. Essentials of a valid contract:

a)All the parties must be capable of entering into

a valid contract.

b) Consideration received by the principal debtoris sufficient for the surety.

4. Writing not necessary: A guarantee may be

oral or written.


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GUARANTEE IS NOT A CONTRACT

OFUBERRIMAE FIDEI

one requiring full disclosure of all material facts

by the principal debtor or creditor to the surety

before the contact is entered into.


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DIFFERENCE BETWEEN CONTRACT OF

INDEMNITY AND CONTRACT OF GUARANTEE

Indemnity Guarantee

1. There are 2 parties. Indemnifier

(Promisor) and the indemnified

(Promisee)

1. There are 3 parties. Creditor,

Principal debtor and Surety.

2. The liability of the indemnifier to

the indemnified is primary andindependent.

2. The liability of the surety to the

creditor is collateral or secondary,the primary liability being that of

the principal debtor.

3. There is only 1 contract. 3. There are 3 contracts.

4. It is not necessary for the

indemnifier to act at the request of

the indemnified.

4. It is necessary that the surety

should give the guarantee at the

request of the debtor.

5. The liability of the indemnifier

arises only on the happening of a

contingency.

5. There is usually an existing debt

or duty the performance of which is

guaranteed by the surety.


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3.Extent of suretys Liability

3.1Nature of suretys liabilityit is co-extensive: S guarantees to C

the payment of a bill of exchange by P, the acceptor. The Bill is

dishonored by P. S is liable not only for the amount of the bill but also forany interest and charges which may have become due on it.

3.2Limitation of suretys liablitiy: P owes C Rs. 8000 on a continuous

guarantee given by S. S may have given this guarantee in either of the

following two forms:

i. I guarantee the payment of the debt of Rs. 5000 by P to C.

ii. I guarantee the payment of any amount lent by C to P subject to a

limit of Rs. 5000.

3.3Liability under continuing guarantee (sec. 129):liability of surety

when the contract between creditor and principal debtor is void.


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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 give for 1. the repayment of a debt, or

2. the payment of the price of the goods sold oncredit. Or 3. the good conduct or honesty of a

person.

A guarantee may be in respect of a singletransaction or in respect of a number of

transactions:

a)Specific guarantee

b)Continuing guarantee


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Revocation of a continuing guarantee:

1.By notice

2.By death of surety

3.By other modes

5.Rights of Surety:

A surety has rights against -

a)The creditor

b)The principal debtor, and

c) The co- sureties

5.1Rights against creditori. Before payment of the guaranteed debt

ii. Right of set off

iii. On payment of the guaranteed debt


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5.2 Rights against principal debtor

i. Right to be relieved of liability

ii. Right to indemnity

5.3 Rights against co sureties

iii. Co sureties liable to contribute equally

iv. Liability of co sureties bound in different sums

v. Release of a co - surety


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6.Discharge of surety

6.1 Discharge of surety by revocation

i. Revocation by surety by giving a notice

ii.Revocation by death

iii.Revocation by novation

6.2 Discharge of surety by the conduct of the creditor

iv.Variance in terms of contract

v. Release of discharge of principal debtorvi.Compounding by creditor with principal debtor

vii.Creditors act or omission impairing suretys eventual

remedy

viii.Loss of security


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6.3Discharge of surety by invalidation of contract

i. Guarantee obtained by misrepresentation

ii. Guarantee obtained by concealment

iii. Guarantee on contract that creditor shall no act on it until a co surety joins

iv. Failure of consideration

Documents

2.1 Indemnity and Guarantee