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INDEMNITY AND GUARANTEE

At the end of chapter, the student will be able to understand the following topic; 1. Contract of indemnity Definition 2. Right of indemnifier 3. Contract of guarantee --- definition 4. Parties to the contract of guarantee 5. Liability o surety 6. Continuing guarantee 7. Revocation of continuing guarantee 8. Discharge of surety 9. Co- sureties 10. Distinction between a contract of indemnity and contract of guarantee

CONTRACT OF INDEMNITY DEFINITION SECTION 124


A contract by which one party promises to save the other from loss caused to him by the conduct of promisor himself or by the conduct of other person Example: contract of marine or fire insurance is contract of indemnity Illustration: A contract indemnify B against the consequences of any proceedings which C may take against B in respect of certain sum of Rs.2000.

In contract of indemnity there are two parties; 1. Indemnifier 2. Indemnified

LIABILITY OF INDEMNIFIER (PRINCIPAL LIABILITY)


All damages which he may be compelled to a third respect of the matter for which the indemnity is given 2. All cost of suits which he may be compelled to pay to such a third party, if or bringing or defending the suits; (a) he acted under the authority of the indemnifier or (b) if he did not contravene the orders of indemnifier or acted in such a way as a prudent man would act in his own way 3. All sum paid by him on a compromise of such a suit, if in so compromising: (i) he acted under the directions of the indemnifier or (ii) as prudent man would act in his own case and without contravening the order of the idemnifier In other words; Section 125 of the Contract Act lays down that the indemnity-holder is entitled to get from the indemnifier :
1.

1. all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies ; 2. all costs which he may be compelled to pay in such suits (provided he acted prudently or with the authority of the indemnifier) ; 3. all sums which he may have paid upon compromise of such suit (provided the compromise was prudent or was authorized by the indemnifier).

RIGHT OF INDEMNIFIER
There is no provision for the right of indemnifier I contract of indemnity. How ever he is entitled to similar benefits as for surety under section 141. Characteristics Characteristics (or the requisites) of a Contract of indemnity are as follows :
1. 2.

3.

A contract of guarantee must satisfy all the essential elements of a contract. For example, the object must be lawful, there must be free consent etc. The Contract may be express or implied. An express contract is by word or by writing. An implied contract of indemnity comes from the circumstances of the` case or the relationship between the parties. Section 69 implies a promise to indemnify

CONTRACT OF GUARANTEE--- DEFINITION 126


A contract to perform the promise, or discharge the liability of third person in case of default.

Illustration: B ask A to lend him Rs.10,000 who tells B to bring guarantor. B brings C who says to A that B will return the loan and in case of his failure he himself will pay the same.
Classification

Contracts of guarantee may be of three types :


(1) for payment to the Creditor to the Principal Debtor by the Guarantor ; (2) payment of price for goods sold, and (3) fidelity guarantee A contract of guarantee may be for

(1) a future debt or obligation or for (2) an existing debt.


A guarantee can also be (1) a Simple Guarantee or (2) a Continuing Guarantee

CONTRACT OF GUARANTEE
Essentials of a Valid Guarantee
1.

2. 3.

4.

5.

6.

A contract of guarantee must satisfy all the essential elements of a contract. (For example, the object must be lawful ; there must be free consent etc.) But the following points are to be noted. A contract of guarantee may be either oral or written. Sec 126. In a contract of guarantee there are three parties i.e., the creditor, the principal. debtor and the surety. All the parties must join the contract. In a contract of guarantee, the primary liability is that of principal debtor. The liability of surety arises only when there is a default of the principal debtor. Therefore, the liability of the surety is secondary. in a contract of guarantee the principal debtor may be a minor. In this case the surety is liable to pay even though the minor may not be. The contract will be enforced as between the surety and the creditor. Consideration

PARTIES TO CONTRACT OF GUARNATEE


In a contract of guarantee there are three parties 1. the creditor, 2. the principal debtor and 3. the surety. All the parties must join the contract. In a contract of guarantee, the primary liability is that of principal debtor. The liability of surety arises only when there is a default of the principal debtor. Therefore, the liability of the surety is secondary.

In a contract of guarantee the principal debtor may be a minor. In this case the surety is liable to pay even though the minor may not be. The contract will be enforced as between the surety and the creditor.

REVOCATION OF CONTINUING
A continuing guarantee is revoked under the f owing circumstances.
1.

By notice of revocation by the surety : The notice operates to revoke the surety's liabilities as regards transaction is entered into after the notice. He continues to be liable for transactions entered into prior to the notice.-Sec. 130. By the death of the surety : "The death of the surety operates, in the absence of a contract to the contrary, as a revocation of a continuing guarantee, so far a regards future transactions.''-Sec. 131

1.

KIND OF GUARANTEE
1. 2. 3. 4. 5. 6.

Retrospective guarantee when the guarantee is for existing debt Prospective Guarantee . When the guarantee is a future debt Specific Guarantee when guarantee is given for a single debt and comes to an end when debt is paid. Continuing guarantee when the guarantee extends to a series of distinct and separable transaction Ascertained guarantee may be for an ascertained debt e.g for Rs.10,000 or instead of floating balance Limited guarantee may be for the whole amount or for limited amount

Illustration: A, in consideration that B will be employ in collecting the rents of Bs properties, promises B to be responsible to the amount of Rs.50000, for the due collection and payment by C of these rents. This is continuing guarantee.

RIGHT AND OBLIGATION OF CREDITORS


RIGHTS: 1. Creditor is entitled to demand payment from the surity as soon as the principal debtor refuses to pay or make default in payment 2. Where surety is insolvent, the creditor is entitled to proceed in the surety's insolvency and claim prorata dividend OBLIGATIONS:
1. 2. 3. 4.

Not to change any terms of the original contract Not to release or discharge the principal debtors Not to compound or give time to or agree not to sue the principal debtor Not to do any act inconsistent with the right of the surety.

RIGHT AND OBLIGATION OF SURETY


RIGHTS:
1. 2. 3.

Right against Creditors Right against principal Debtors Right against Co-Sureties

Right against Surety: in the case of fidelity guarantee, the surety is entitled to direct the creditor to dimiss the employee whose honesty was guaranteed. If the creditor fails to do so, the surety is discharged from his liability. Right against Principal Debtor:
1. 2.

Right of subrogation Right to be indemnified

Right against Co-Sureties:


1. 2.

Right of subrogation Contribute equally and not proportionately to the liability undertaken.

DISCHARGE OF SURETY
Revocation by notice (Section 130): A specific guarantee may be revoked by a surety by notice to the creditor of the liability of the surety has not accrued. A continuing guarantee may be revoked by the surety as to future transactions by notice to the creditor. However the surety remain liable for the transaction, which have already taken place. By death of surety (Section 131): In the absence of any contract to the contrary, death of the surety operates as revocation of continuing guarantee as to the future transaction taking place after the death of surety. However, deceased suretys estate is liable for the past transaction which have already taken place before the death. By Novation (Section-62): A contact of guarantee is said to be discharged by novation when fresh contract is entered into between the same parties or between other parties, the consideration being the mutual discharged of the old contract. The original contract of guarantee comes to end and the surety under original contact is discharged. By variation in terms of Contract (Section 133): Any variation, made, with out the consent of surety, in terms of the contract between the principal debtors and creditor will discharged the surety as to transaction subsequent to the variation.

DISCHARGE OF SURETY
By Release or Discharge of Principal Debtors (Section 134): The surety is discharge by any contract between the creditor and the principal debtor, by which the principal debtors released, or by any act or omission of the creditor, the legal consequences of which is discharge of the principal debtor. By arrangement: A contract between the creditor and principal debtor by which the creditor makes a composition with or promise to give time to, or not to sue the principal debtor, then it discharges the surety unless the surety assents to such contract. By Creditors Act or Omission Impairing Suretys Eventual Remedy (Section 139): If creditor does any act, which is inconsistent with the rights of the surety, or omits to do any act which is duty to the surety required him to do, and the eventual remedy of the surety himself against the principal debtors is there by impaired, the surety is discharged. Loss of Security(Section 141): If the creditor loses, or without the consent of the surety, part with the security given to him, the surety is discharged from liability to the extent of security. By invalidation of contract: Guarantee obtained by Misrepresentation (sec 142) Guarantee obtained by concealment (Sec 143) Failure of co-surety to join a Surety (sec 144)

CO-SURETIES (SECTION 146-147)


Section 146 and 147 lay down the liability of Co-sureties; 1. In the absence of any contract, the co-sureties are responsible equally for the liability remaining unpaid by the principal debtors. 2. Where co-sureties by an agreement have fixed their liability, then each surety will be liable according to fixed liability.
3.

Co-sureties who are liable to pay equally as far as the limit of their respective obligation permit.

DISTINCTION BETWEEN CONTRACT OF INDEMNITY AND CONTRACT OF GUARANTEE


Detail No of parties No of contract Indemnity Two.. Indemnifier and indemnified Onebetween Indemnifier and indemnified Guarantee Three Creditor, Principal Debtor and Surty Three: (i) Creditor, Principal Debtor (ii) Creditor & Surety (iii) Surety & Principal Debtor Liability of surety is secondary and where by principal debtors is fail to perform Surety should give guarantee at the request of Debtor Liability already exist and its performance is guarantee Surety can sue principal debtor in case of default Security of Debt Accrue when principal debtor default

Nature of Liability

Liability of indemnifier is primary and independent Indemnifier has act with out any request of debtor Liability of indemnifier arises at happening of contingency. Indemnifier cant sue third party Reimbursement of loss Indemnified the promisee

Request of Debtor Existence of Liability Right to file suit Aim of Contract Causes of Action