LAW OF INDEMNITY LAW OF INDEMNITY LAW OF GUARANTEELAW OF GUARANTEE Prof.Shrinivas V K

Prof. SVK

CONTRACT OF INDEMNITY CONTRACT OF INDEMNITY

It is a contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person. It is made in order to protect the promisee against anticipated loss.

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CONTRACT OF INDEMNITY CONTRACT OF INDEMNITY cont---cont---There are only two parties involved

i.e. the person who promises to make good the loss generally known as the indemnifier (promisor) and the person whose loss is to be made good called as the indemnified (promisee).

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CONTRACT OF INDEMNITY cont---CONTRACT OF INDEMNITY cont---

There is only one contract between the parties.

There is an undertaking on the part of the indemnifier to be answerable for the debt or default of another.

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CONTRACT OF INDEMNITY cont---CONTRACT OF INDEMNITY cont---

The liability of the indemnifier to the indemnified is primary and independent.

This contract is for the reimbursement (compensation) of loss.

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EssentialsEssentialsContract of indemnity must

contain all the essentials of a valid contract

The promisee or the Indemnity-holder must have suffered a loss.

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CONTRACT OF GUARANTEECONTRACT OF GUARANTEE

It is a contract to perform the promise or discharge the liability of a third person in case of his default. It is made to enable a person to get a loan or goods on credit or an employment.

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CONTRACT OF GUARANTEE CONTRACT OF GUARANTEE cont---cont---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 principal debtor and the person to whom the guarantee is given known as the creditor.

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CONTRACT OF GUARANTEE CONTRACT OF GUARANTEE cont---cont---There are three contracts first b/w

creditor & principal debtor, second b/w surety & creditor, third b/w surety & principal debtor.

The primary liability is of principal debtor and the surety has a secondary liability. Which means that the payment is to be made by the surety only if the debtor does not pay.

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CONTRACT OF GUARANTEE CONTRACT OF GUARANTEE cont---cont---This contract is for the security of the

creditor.

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Types of GuaranteeTypes of GuaranteeA guarantee may be either ‘Specific guarantee’

Or ‘Continuing guarantee

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Specific GuaranteeSpecific Guarantee It is given for single debt or obligation

and comes to an end when the debt guaranteed has been paid or obligation guaranteed has been discharged.

Thus, where A gives a loan to B for which C stands guarantee, it is a case of a specific guarantee. In this case, there is a specific debt and the guarantee shall come to an end the moment the loan is repaid.

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A specific guarantee cannot be revoked. Once the guarantee is given it cannot be withdrawn or revoked and even after the death of the Surety (guarantor), it continues to operate making his legal representatives liable for the same.

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Continuing GuaranteeContinuing Guaranteea continuing guarantee is one

where the guarantee given is not for a single or specific debt or obligation, but for a series of debts.

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Points to NotePoints to NoteThere are three parties in every

Contract of GuaranteeThe liability arises right from the

beginning. The surety becomes liable when the

principle debtor commits default in meeting the liability.

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Points to NotePoints to NoteSurety has the right to sue the

third party (Principle Debtor) directly. The Law puts him in the position of Creditor. Where as in Contracts of Indemnity, the Indemnifier cannot sue the third party in his name. He has to sue in the name of the Indemnity-holder or after obtaining the rights from him.

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Points to NotePoints to NoteAnything done, or any promise made,

for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. The guarantor need not personally derive any benefit from the guarantee.

The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.

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Points to NotePoints to NoteThe creditor can straightway proceed

against the guarantor without first proceeding against the principal debtor. The liability of the surety can never be greater than that of the principal debtor. The surety can however may restrict his liability to part of the Principal debtor's liability by contract.

Surety's liability is distinct and separate

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CONTRACT OF GUARANTEE cont---CONTRACT OF GUARANTEE cont---RIGHTS AND LIABILITIES OF SURETYRIGHTS AND LIABILITIES OF SURETY..

RIGHTS1. Right of subrogation (interchange):

when the surety has paid the guaranteed debt on default of the principal debtor he is then entitled to all the rights which the creditor had against the principal debtor. The surety is entitled to all the remedies which are available to the creditor against the principal debtor

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CONTRACT OF GUARANTEE cont---CONTRACT OF GUARANTEE cont---RIGHTS AND LIABILITIES OF SURETYRIGHTS AND LIABILITIES OF SURETY. . cont---cont---

2. Right to securities: Surety is entitled to the benefit of all the securities given by the principal debtor to the creditor. The surety at the time of payment can demand the securities, which the creditor has received from the principal debtor. Surety can recover the securities only after making full payment. He cannot claim the benefit of a part of the securities if he has paid a part of the debt.

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CONTRACT OF GUARANTEE cont---CONTRACT OF GUARANTEE cont---RIGHTS AND LIABILITIES OF SURETYRIGHTS AND LIABILITIES OF SURETY. . cont---cont---

3. Right of surety when the creditor loses or parts with the securities of the principal debtor: if the creditor by negligence loses any security held by him, or if the creditor parts with the security, the liability of the surety is reduced to the extent of the value of those securities.

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CONTRACT OF GUARANTEE cont---CONTRACT OF GUARANTEE cont---RIGHTS AND LIABILITIES OF SURETYRIGHTS AND LIABILITIES OF SURETY. . cont-cont-

4. Right of reimbursement (compensation) from the principal debtor: a surety is entitled to recover from the principal debtor whatever amount, he has rightfully paid to the creditor.

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CONTRACT OF GUARANTEE cont---CONTRACT OF GUARANTEE cont---RIGHTS AND LIABILITIES OF SURETYRIGHTS AND LIABILITIES OF SURETY. . cont-cont-LIABILITIESThe liabilities of the surety are co-existent

which those of the principal debtor unless it is otherwise provided.

Example: if A guarantees to B the payment of a Bill of Exchange by C, the acceptor. The bill is dishonored by C. A is liable not only for the amount of the bill but also for any interest or charges which may have become due on it.

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CONTRACT OF GUARANTEE cont---CONTRACT OF GUARANTEE cont---DISCHARGE OF SURETYDISCHARGE OF SURETY

Change in the terms of the contract: If the principal debtor and the creditor make any changes, without the consent of the surety, the surety is discharged from the contract.

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CONTRACT OF GUARANTEE cont---CONTRACT OF GUARANTEE cont---DISCHARGE OF SURETY cont---DISCHARGE OF SURETY cont---

Discharge by death of the surety: In specific guarantee the surety is not discharged from his liability on his death if the liability has already occurred. But the death of surety operates as revocation of a continuing guarantee as to future transactions. The deceased surety’s estate will not be liable for any transaction after the death, even if the creditor has no knowledge of surety’s death.

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CONTRACT OF GUARANTEE cont---CONTRACT OF GUARANTEE cont---DISCHARGE OF SURETY cont---DISCHARGE OF SURETY cont---

Release or discharge of principal debtor: a surety is discharged by any contract between the creditor and the principal debtor, or any act or omission of the creditor by which the principal debtor is released or discharged.

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CONTRACT OF GUARANTEE cont---CONTRACT OF GUARANTEE cont---DISCHARGE OF SURETY cont---DISCHARGE OF SURETY cont---

Compounding of creditor with principal debtor: a contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharge the surety.

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