Subject

Business Law

Topic
Contract of Indemnity & Guarantee

Date
21-06-2012

Class
M.B.A. 3.5 years 2nd (G)

Submitted By:
Suleman Ahmad (026)

Submitted To:
Sir. Nasir Majeed University of Gujrat

Contract of indemnity
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'. Illustration - A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees. This is a contract of indemnity. [section 124].

Parties in Contract of Indemnity There are only two parties in contract of indemnity. o o Indemnifier ( Promisor ) Indemnified ( Promisee )

Indemnifier: The person who promises to make good the loss is called Indemnifier. Indemnified: The person whose loss is to be made good is called Indemnified. Right of the indemnity holder (Section 125) An indemnity holder (i.e. indemnified) acting within the scope of his authority is entitled to the following rights 1. Right to recover damages he is entitled to recover all damages which he might have been compelled to pay in any suit in respect of any matter covered by the contract. 2. Right to recover costs He is entitled to recover all costs incidental to the institution and defending of the suit. 3. Right to recover sums paid under compromise he is entitled to recover all amounts which he had paid under the terms of the compromise of such suit. However, the compensation must not be against the directions of the indemnifier. It must be prudent and authorized by the indemnifier. 4. Right to sue for specific performance he is entitled to sue for specific performance if he has incurred absolute liability and the contract covers such liability. Right of Indemnifier Section 125 of the Act only lays down the rights of the indemnified and is quite silent of the rights of indemnifier as if the indemnifier has no rights but only liability towards the indemnified.

Contract of Guarantee
A contract where one person makes a legally binding promise to take on the legal responsibilities of another person, if that person defaults in their obligations. Section 126 The three parties involved in this type of contract are:

Surety: is the person by whom the guarantee is given Principal Debtor: is the person from whom the assurance is given. Creditor: is the person to whom the guarantee is given.

Essentials of Valid Contract of Guarantee

1.It must be supported by Consideration. (Sec.127) 2.It must satisfy the requirements of a valid contract. 3.It must be made by the parties competent to contract. 4.There must be someone primary liable. 5.The promise to pay must be conditional. 6.There should be no misrepresentation. (Sec.142) 7.There should be no concealment of facts. (Sec.143) 8.It must be oral or in writing. (Sec.126) NATURE AND EXTENT OF SURETYS LIABILITY 1.Suretys liability is coextensive . 2.Surety's liability may also be limited. 3.Surety's liability arises immediately on default of the principal debtor. 4.Suretys liability where the original contract between creditor and principal debtor is void or voidable. 5.Suretys liability under continuing guarantee. RIGHTS OF THE SURETY. 1.Rights against the principal debtor: a.Right of subrogation. The substitution of one person for another. b. Right of indemnify. As a matter of fact, in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety But amount Wrongfully paid cannot be recovered. 2. RIGHT AGAINST THE CREDITOR: a.Right to claim securities.

Example: A obtained a loan of Rs. 2,500 from B, A gavesome jewelry as security. And As friend C also gave aguarantee for the repayment of the loan. After thiscontract of guarantee, due to fall in the price of jewelryB obtained some goods from A as a further security for the same debt. In this case, C is entitled to claim onlythe Jewelry from B. And he is not entitled to claim thegoods from B as these obtained by the creditor (i.e. B) after the guarantee was given. b. Right of set off.c. Right to share reduction. 3. RIGHT AGAINST THE CO-SURETIES: a.Right to contribution. Example : A borrowed Rs.100,000 from B. C,D,E gave a joint guarantee for the repayment of the loan.C, D and E have agreed among themselves that C will be liable for 25 percent of the amount of loan, D also for 25 percent , and E have for 50 percent . On the dueDate, A made default in the repayment of the loan. In this case C is liable to pay Rs.25000, D Rs.25000 and E Rs. 50000. DISCHARGE OF SURETY FROM LIABILITY : 1.By the notice of revocation by the surety. 2.By death of the surety. 3.By variance in terms of the contract. 4.By release or discharge of the principal debtor. 5.By composition with the principal debtor. 6.By giving more time to the principal debtor. 7.By promise not to sue the principal debtor. 8.By impairing suretys remedy. 9.By losing the security by the creditor. 10.By invalidation of the contract of guarantee.

Differences between Contract of Indemnity and Guarantee

A few important distinctions between a contract of indemnity and contract of guarantee are as follows:

Number of Parties: In a contract of indemnity only two parties are involved, whereas in a contract of guarantee, three parties are involved. Purpose: A contract of indemnity is formed to provide compensation of loss. A contract of guarantee is formed to give assurance to the creditor in lieu for his money. Nature of Liability: In a contract of indemnity, the indemnifier is the sole person who is held liable. In a contract of guarantee, the liability is shared by the surety and principal debtor. The principal debtor owes the primary liability and the surety owes the secondary liability.