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 Bs 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 Amount
2. 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 BETWEEN
INDEMNITY
1. Two Parties
2. Only one Contract
3. Liability is contingent
4. Indemnifiers Liability is
Primary
5. 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.


GUARANTEE
1. Three Parties
2. Three Contracts
3. Existing Liability
4. Guarantors Liability is
Secondary
5. Guarantor may recover
compensation from
debtor, after payment
6. Guarantor gets nothing
7. 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 1
st
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 GUARANTEE
1. 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
or
as to a time limit.
Thus, it may be limited to say,
a sum of Rs. 50,000/- or
All transactions conducted upto
certain date, say 31
st
Dec, 2013.
SURETYS LIABILITY
The Essential Features of Suretys 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:
Suretys 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 Bs 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 Debtors
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 suretys 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 Ds 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-sureties

A 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 Ds 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, or
2. 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

- Creditors negligence of securities

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