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