Indemnity & Guarantee 1

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Indemnity & Guarantee


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Definition of Indemnity

A contract by which one party promises tosave other from loss caused to him by theconduct of the promisor himself or by theconduct of any other person, is calledcontract of Indemnity

A promise to save another harmless fromloss caused as a result of transactionentered into at the instance of the promisor

Eg : A is agent of B in India for sale of Bsgoods. C lodges a case against A in respect ofinferior quality of Bs goods. B indemnifies A forthe loss suffered by him.


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Parties to a Contract ofIndemnity There are only two parties involved i.e. the person who promisesto make good the loss generally known as the indemnifier

(promisor) and the person whose loss is to be made good calledas the indemnified (promisee).

Eg: A, on the instruction of T, sold certain cattle belonging to O.

O held A liable for it and recovered damages from him for sellingit. Held, A could recover his loss from T as a promise by T to Afor any such loss would be implied from his conduct in asking Ato sell the cattle.

Eg : A and B claim certain goods from a railway company as rivalowners. A takes the delivery of goods agreeing to compensatethe railway company against the loss in case B turns out to bethe true owner. This is a contract of indemnity between A and therailway company.

Eg. Contract of Insurance is a contract of Indemnity


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Right of the Indemnity holder

Indemnity holder is entitled to recover from the promisor:- All damages which may he may be compelled to pay in respect of

the indemnity

- All costs in bringing or defending such suits

- All sums which he may have paid under terms of the compromise

of such suit.

To indemnify does not merely mean to reimburse in respectof moneys paid, but to save from loss in respect of liabilityagainst which the indemnity has been given.

- Indemnity is not only given by repayment afterpayment. Indemnity requires that the party to beindemnified shall never be called upon to pay.


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Guarantee

It is a contract to perform the promise or dischargethe liability of a third person in case of his default. Itis made to enable a person to get a loan or goodson credit or an employment.

There are three parties involved i.e.- the person who gives the guarantee known as the

Surety- the person in respect of whose default the

guarantee is given known as the PrincipalDebtorand

- the person to whom the guarantee is given knownas the Creditor


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Examples

S requests C to lend Rs. 500 to P andguarantees that if P fails to pay the amount,he will pay. S is the surety, C is the Creditorand P is the Principal Debtor

S and P go into a shop. Says to theshopkeeper C, Let P have the goods, and

if he doesnt pay, I will. This is a contract ofGuarantee


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Kinds of Guarantee

Repayment of Debt

Payment of price of goods sold oncredit

Employment insurance or Fidelityguarantee


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Essentials of Guarantee

Concurrence of all the three parties- Eg: C enters into a contract with P. S, without communication with P

undertakes for a consideration moving from C to indemnify C againsta breach made by P. This doesnt make S surety for P.

Primary Liability in some person (enforceable by law)

- P owes debt to C. S guarantees the payment after it is time barredby limitation act. S pays the amount to C. He cannot recoveranything from P as there is not enforceable liability.

Essentials of a valid Contract

- Exception : Minor can be the Principal Debtor

- Consideration is defined differently : Anything done or Promisemade for the benefit of the Principal debtor is sufficient considerationfor the surety.

Full disclosure of all material facts not necessary (except fidelityinsurance)


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Examples P requests C to deliver him goods on credit. C agrees subject to a guarantee by S.

S promises to guarantee payment in consideration of Cs promise to deliver goods.This is sufficient consideration for Ss promise

C sells goods to P. S afterwards requests C to forbear to sue P for the debt for ayear. He promises that if C does so, S will pay for goods in case P defaults. Cagrees to forbear as requested. This is sufficient consideration for Ss promise.

C sells and delivers goods to P. S, afterwards without consideration, agrees to payfor them in default of P. The agreement is void.

S guaranteed the account of P with the bank. P afterwards drew on his accountand paid off an overdraft he had with another bank. Held, the bank was suspiciousthat P was defrauding S and did not communicate this to S, does not discharge theguarantee.

C engaged P as a clerk to collect money for him. P misappropriated some of Csfunds. C demanded fidelity guarantee to continue Ps employment. S gave theguarantee for P. C did not communicate to S about Ps previous dishonesty. Heldthe guarantee could not be enforced against S.


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Indemnity v/s Guarantee

Indemnity Guarantee

Two parties viz. Indemnifierand Indemnified

Three parties viz. Creditor,Principal debtor and Surety

Liability of the Indemnifier to

the Indemnified is primary andindependent

Liability of the surety id

secondary, the primary liabilityis of the principal debtor

There is only one contract There are 3 contracts

The liability happens on thehappening of a contingency

There is an existing debt ofduty

Guarantee includes contract of indemnity, between the suretyand principal debtor


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Rights of the Surety

Right to indemnification as against thePrincipal Debtor

Right of Subrogation

Right to all securities as against theCreditor

Right to set off against the Creditor

Right to equal contribution as againstco-sureties


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Nature of Suretys Liability

Suretys liability is secondary and conditional

Suretys liability is co-extensive with the liability of theprincipal debtor

- S guarantees to C the payment of Bill of exchange by P. Thebill is dishonoured by P. S is not only liable for the amount ofbill, but also the interest.

Limitation on Suretys liability can be mutually agreed upon

Liability may be in the form of continuing guarantee- Specific Guarantee

- Continuing Guarantee for a series oftransactions


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Continuing Guarantee

S guarantee payment to C, a tea dealer,to the amount of Rs. 10,000 for any teahe may supply to P. C supplies P with tea

of value above Rs.10,000 and P pays forit. Afterwards C supplies P with tea ofvalue of Rs. 20,000. P fails to pay. Theguarantee given by S is a continuing

guarantee, and is accordingly liable to Cto the extent of Rs. 10,000.

There can be a continuing guarantee for

a fixed period of time.


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Discharge of Guarantee

By Revocation- Continuing Guarantee

By Death of the Surety

By Novation

Variance in terms of the contract

- S guaranteed payment of goods supplied by C to P, upon acondition that the credit period is 18 months. C actually gives only 12months credit. Held, the surety is discharged.

- S guaranteed conduct of P in employment of C, where P wasentitled to fixed salary. Subsequently, the salary is based as acommission on the sales achieved by P. S will be discharged.

Release or discharge of the Principal Debtor

- - C employs P on basis of S s guarantee. The employee isterminated. S is discharged

- - P contracts to build a house for C, where C is supposed to supplythe required timber. S is the surety for P. C is unable to supply the

required timber. Held, that S is discharged


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Discharge of Guarantee

By Creditors act or omission impairing suretys eventual remedy

- S gives a fidelity guarantee for P who works in a bank. P indulges in somemalpractices and the bank directors willfully neglect the same. Held, S cannot beheld liable.

- P contracts to build a ship for C for a given sum to be paid by installments as thework reaches certain stages. S becomes surety to C for Ps due performance ofthe contract. C, without knowledge of S, prepays to C the last 2 installments. S is

discharged by this prepayment

Loss of Security

- If the creditor loses or without consent of the Surety, parts with any security givento him, the surety is discharged to the extent of the value of the contract.

- C advances P, Rs 2,000 on guarantee by S. C also has pledge of Ps furnitureworth Rs. 2,000. C cancels the pledge. P becomes insolvent. S is discharged to

the extent of the value of the furniture

By invalidation of contract

- Fraud, Misrepresentation etc

Documents

Indemnity & Guarantee 1