Indemnity and Guarantee

INDEMNITY AND GUARANTEE

Contract of Indemnity Defined: [Sec – 124]

A Contract by which – one party promises to save the other- from the Loss caused to him - by the conduct of - the Promisor himself, or - any other person.

This is called - A Contract of Indemnity

1. A contracts to save B from any loss he may suffer in consequence of any proceedings which C may take against B in respect of a certain sum of Rs. 15,000/-

2. A promises to pay Rs. 50,000/- to B, if B’s shop is burgled.

PARTIES TO THE CONTRACT OF INDEMNITY The Promisor is called as – Indemnifier The Promisee is called as – Indemnity-holder.

Rights of Indemnity-holder, when sued: – The Indemnity-holder (Promisee) is entitled

to recover from the Indemnifier (Promisor)1. The Indemnity Amount2. All damages, costs and other sums which he may be compelled to pay

in any suit, in respect of any matter to which the promise to indemnify applies. [Sec –125]

INDEMNITY AND GUARANTEE -2 Contract of Guarantee Defined: [Sec – 126]

A Contract of Guarantee is a contract - to perform the promise,

or - to discharge the liability of third person - in case of his default. C lends money to D and S promises C that he

will pay the money, if D fails to do so. This is an example of Contract of Guarantee.

PARTIES TO THE CONTRACT OF GUARANTEE.

The Person who gives the guarantee is called as – the surety

The person in respect of whose default the guarantee is given is called as – the Principal Debtor.

The person to whom the guarantee is given is called as – the Creditor.

SOME SPECIAL FEATURES OF CONTRACT OF GUARANTEE [Sec – 127 & 128]

A guarantee may be either Oral or Written There are three Parties to the Contract Therefore, there shall be three Agreements The Surety, in effect, gets no consideration

from the Creditor – The consideration given to the Debtor shall be sufficient for the Surety[S-127]

Hence, a guarantee given subsequent to the contract is void

The liability of the surety is co-extensive with that of the Principal Debtor, unless….. [S-128]

DIFFERENCES BETWEENINDEMNITY

1. Two Parties2. Only one Contract3. Liability is contingent4. Indemnifier’s Liability is

Primary5. No provision for recovery

of Indemnity amount.6. The Indemnifier gets an

interest in return for his promise

7. Purpose is to reimburse the loss suffered.

GUARANTEE1. Three Parties2. Three Contracts 3. Existing Liability4. Guarantor’s Liability is

Secondary5. Guarantor may recover

compensation from debtor, after payment

6. Guarantor gets nothing7. Purpose is to secure the

creditor when principal debtor defaults payment.

Continuing Guarantee. [Sec – 129]

A guarantee which extends to a series of transactions is called as ‘Continuing Guarantee’.

Thus, where X guarantees payment of Price of Rice supplied by Y to Z during the year 2013 and supplies of rice could be 12 times or 24 times or any number of times during that year; it is a case of continuing guarantee, for it extends to a series of transactions between Y and Z.

As opposed to this, if X had guaranteed payment of price of rice supplied by Y to Z on 1st Jan, 2013, it is a case of ‘Specific Guarantee’, for it is limited to the one transaction of January 1, 2013 only.

REVOCATION OF CONTINUING GUARANTEE1. Notice of the Surety:

Surety may serve a notice to the Creditor that his guarantee – shall stand revoked henceforth.

Then, revocation becomes operative for future transactions only. The Surety, however, remains liable for transactions that took place before

the aforesaid ‘Notice’.2. Death of Surety: Even though the Creditor was ignorant of the death

Death of the Surety automatically revokes a continuing guarantee. Heirs of the Surety are not liable for the transactions subsequent to the

death of the Surety. The Estate of the Surety, however, remains liable for transactions that took

place before the aforesaid ‘Death’.

SURETY CAN FIX LIMITS OF HIS LIABILITY Though a continuing guarantee extends to a

series of transactions, - surety can fix up a limit on his liability either

as to the amount of guarantee oras to a time limit. Thus, it may be limited to say,a sum of Rs. 50,000/- orAll transactions conducted upto certain

date, say 31st Dec, 2013.

SURETY’S LIABILITY

The Essential Features of Surety’s Liability are:1. It is Secondary in nature [Sec-126]2. It is co-extensive with that of the Principal Debtor, unless

stated otherwise in the contract [Sec -128]3. It still exists even when the contract between Creditor and

Principal Debtor is void or voidable for any reason [Sec-128]

4. A Surety is not discharged necessarily when the Principal Debtor is discharged. For example, in case of - insolvency of Principal Debtor; or - where the debt is barred by law of limitation

RIGHTS OF SURETY

Rights - which become available to the Surety when he has discharged obligations of the Principal Debtor to the Creditor - are three fold:Surety’s rights against

1. Principal Debtor [Sec – 140 and 145]

2. Creditor [Sec – 141]

3. Co-sureties [Sec – 146 and 147]

Rights of Surety against Principal Debtor A Surety has - two types of rights against the

Principal Debtor.1. Right of getting indemnified: [Sec-145]

The surety has a right to be indemnified by the Principal Debtor to the extent of all sums he might have rightfully paid under the contract to the Creditor.

Example: 1. A had guaranteed the payment of price of rice to an extent of Rs.2,000/- purchased by B from C. 2. A pays Rs.2,000/- to C on B’s failure to pay for rice purchased valuing Rs.1,800/- 3. A is entitled to be indemnified by B for Rs. 1,800/- which he has rightfully paid to C – and not for 2,000/-

2. Right of Subrogation: [Sec-140]

Once a Surety discharges all obligations of the Principal Debtor to the Creditor, then he – steps into the shoes of the Creditor – gets all rights and remedies which are available to the creditor previously– even entitled to sue the principal debtor in his own name and – enjoy the benefit of other securities tendered by the principal debtor to the creditor.

Rights of Surety against Creditor

The Surety, on discharging Principal Debtor’s obligations to the creditor, is invested with the lone right against the Creditor:

Benefit of existing securities: [Sec - 141] 1. Surety is entitled to the benefit of every security existing at the time of entering into the contract of guarantee, even if he has no knowledge of such security.

2. If the Creditor parts with such security without the consent of the Surety, the surety’s liability to the Creditor is reduced by the value of that security.

of

Example:

1. C advanced Rs. 10,000/- to D on the guarantee of S. 2. C also kept D’s furniture valuing Rs. 4,000/- as

security for the loan.

3. S would be discharged to the value of furniture of Rs. 4,000/- if C parts with that furniture without the consent of S.

However, if the security is obtained by the Creditor - subsequent to the execution the Contract of Guarantee, and - C releases it to D, the liability of Surety S is not affected by it.

Rights of Surety against Co-suretiesA Surety has discharged the obligations of the

Principal Debtor to the Creditor.

Then, that Surety is entitled to sharing of burden by his co-sureties.

His right against co-sureties varies in accordance with each of the - two different situations provided under the Law. [Sec 146 and 147]

1. Co-sureties bound for the same debt or duty

2. Co-sureties bound in different sums.

Co-sureties bound for the same debt or duty.1. Co-sureties who are bound for the same sum or

duty are liable to contribute equally. [Sec – 146]

2. It is immaterial that the co-sureties are liable under different

contracts for the same debt; or that they did not have knowledge of each

other. [Sec – 146]

Example:1. A, B and C were three sureties for Debtor D.2. D commits a default of Rs.30,000/- debt.3. A, B and C will pay Rs.10,000/- each to the

Creditor towards settlement of D’s debt.

Co-sureties bound in different sums. 1. Where co-sureties – guarantee the payment of different debts i.e. – they are bound in different sums

they are liable to contribute equally, but - subject to the limits of their respective obligation or promise or guarantee.

Example: 1. A, B and C are guarantors for Debtor D

2. Their liability having been limited to Rupees 10,000/-, 20,000/- and 40,000 respectively.3. Each one of them will bear equal loss – subject to the maximum limit of amount guaranteed by them respectively.

Discharge of Surety from his obligation. A Surety is discharge from his obligations to the

Creditor when his liability comes to an end. It may happen by

1. due performance of the principal debtor, or2. in his default, by the Surety.

Surety is also discharged from his obligation to the Creditor

1. by invalidation of contract of guarantee;

or 2. by revocation of the continuing guarantee;

or 3. by conduct of Creditor.

A Surety is discharged from his liability under a contract of guarantee,

1. By invalidation of contract – which happens in the following cases:- a guarantee obtained by misrepresentation;- a guarantee obtained by concealment;- on the failure of Co-Surety to join; and- parting with (or) loss of security by Creditor given by Principal Debtor.

2. If Surety revokes it - by notice - by death of surety

- by novation

3. By the conduct of the Creditor - which amounts to discharge by any of the following: - Variation in terms of contract between the Principal Debtor and the Creditor without consent of the Surety;- Release of the Principal Debtor;- Creditor ‘compounding with’ or ‘giving time’ or ‘agreeing not to sue’ the Principal Debtor;- Creditor acting in contravention of the rights of the Surety.

Surety as Co-borrower.

A Surety becomes a co-borrower once he surrenders all the rights against the creditor voluntarily. - Variance in terms and conditions

- Creditor’s negligence of securities

- Forbearance of creditor until all the means are exhausted against the principle borrower.