Contract of Guarantee/Surety

&
Indemnity
General Idea about the law
 Suretyship/formation
• In essence (a contract by which one person (the surety)
agrees to answer for some liability of another (the principal
debtor) to a third person (the creditor)
• Personal engagement by the surety
• Charge on property without any personal liability or both
• Surety undertake to see if the principal debtor will perform
• Important results flows from this prima facie rule of
construction
• Surety is liable to the same extent as the principal debtor for
damages (even though he has not in terms guaranteed the
payment of damages
 Parties to the contract
Duncan Fox & Co. v. North & South Wales Bank
Pointed out by Lord Selborne three possible variations in
the parties to a contract of suretyship
1. All three parties concerned are parties to the contract
in the sense that both the principal debtor and the
creditor agree that the surety’s liability is secondary
liability only, and that the principal debtor is primarily
liable for the obligations guaranteed
2. Contract of suretyship may be recognized only as
between the principal debtor and the surety or as
between the creditor and the surety , in which event
the rights and duties arising out of the contract of
suretyship only effect those parties
 Indemnity
• The term is used in several different senses
• Recompense for any loss or liability which one person has
incurred, whether the duty to indemnify comes from an
agreement or not
e.g., a) where a breach of contract gives rise to a claim for
damages, that claim may include the claim to be indemnified
against some loss or liability
b) On recession of a contract for misrepresentation, the
representee may be entitled to an indemnity against liability
incurred under the contract even where there is no claim to
damages
These kind of indemnities fall out of the scope of our lecture
 Continued…..
• Obligation to indemnify another may also
arise out of the contract of indemnity
• The “contract of indemnity” is used in more
than one sense
• It includes all kinds of contract of Guarantee
and many contracts of insurance (widest
sense)
• It used in contrast to a contract of Guarantee
(narrow sense)
 Contract Act 1872
• Definition sec 124, deals only with the one
particular kind of indemnity which arise from a
promise made by the indemnifier himself or by
the conduct of any other person
• It does not deal with those classes of cases where
the indemnity arises from loss cause by events or
accidents which do not or may not depend upon
the conduct of indemnifier or any other person or
by reason of liability incurred by something done
by the indemnity holder at the request of the
indemnifier
 Insurance contract
• Contract of insurance is in fact a contract of
indemnity whereby insurer undertook to
indemnify the assured in the manner and to the
extent thereby agreed against losses
• But general law about the contract of indemnity
is much more wider than the contract of
indemnity as defined in the contract Act
• A contract of fire insurance or marine insurance is
always a contract of indemnity though under the
contract Act, it would more properly come under
S. 31 which defines contingent contract
 Damages and Indemnity
• A right to indemnity given by the original
contract should always be distinguished from
a right to damages arising from a breach of
contract
 Indemnity and Suretyship
• The distinction is evolved the courts in the process of construing
1. Apart from the fact that contracts of guarantee but not of
indemnity must be evidenced by a note or memorandum in
writing
2. The question whether the surety is liable where the main contract
is void because of the principal debtor’s incapacity has been said
to depend on the distinction between guarantees and
indemnities and the same may also be true of other invalidating
causes
3. Liability of the guarantor is normally coextensive with the liability
of the principal debtor so that if the debtor is discharged the
surety will also be discharged, where if the contract is one of
indemnity, the surety is not necessarily discharged
 Continued…….
4. In a contract of guarantee the surety assumes a
secondary liability to answer for the debtor who
remains primarily liable, whereas in a contract
of indemnity the surety assumes a primary
liability, either alone or jointly with a principal
debtor
5. In a contract of indemnity there is no privity of
contract between the surety and the debtor
while in the case of a contract of guarantee ,
surety creditor and principal debtor were all
parties to the contract
 Continued……
6. For contract of suretyship there must be a tripartite
agreement between the creditor the principal debtor and
the surety
7. In contract of indemnity it is not necessary for the
indemnifier to act at the request of the debtor in the case
of the contract of guarantee it is necessary that surety
should give the surety at the request of the debtor
8. In the indemnity case it is direct agreement between the
two parties whereas in the indemnity there are three
parties, the creditor the debtor and the surety who
undertake at the request of the debtor to answer the
default of the debtor
 Example
• Where a decree holder transferred a decree to
B, and executed a security bond in favour of B
undertaking to indemnify B for loss due to
acquisition of rights under the decree. The
bond did not show that the judgment debtor
was a party to the arrangement, the deed is
not guarantee but only an indemnity bond.
 Continued….
• A contract of guarantee presupposes three parties the
creditor the principal debtor and the surety
a) First of all there is a contract between the principal
debtor and the creditor. This is the base of the entire
transaction.
b) Then there must be a contract between the surety
and the creditor by which the former guarantees the
debt to the latter
c) There must be a further contract by which the
principal debtor ask the surety to act as such though
such a request need not always be express and may
be implied
 Continued…..
• If a person undertakes to reimburse another for some
loss which may be caused to him, say by a third person
or by himself, but not at the request express or implied
of the third person then the person who having
undertaken the liability and having been called upon to
make good the loss will not be able to recover the loss
so caused to him from the principal debtor, the latter
been not privy but virtually a stranger to the
undertaking given to the promisee.
• The position of the party undertaking the liability is
that of an indemnifier and the contract is a contract of
indemnity.
 Continued…….
• Where under the document, the executant agreed to
reimburse the Municipal Committee to the extent of
Rs. 200 in case of loss caused to it by the conduct of
the certain bill collector. The document was signed by
the executant and executed in favour of the Municipal
Committee. It was not signed by the bill collector.
There was no liability of the bill collector to the MC.
The document was executed in order to ensure a
faithful discharge of duties by the bill collector. It was
held that the document was a contract of indemnity
and not one of guarantee notwithstanding the
description of the executant as surety at the foot of the
document AIR 1949 Nag 48