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Indemnity and guarantee (contracts-II,Unit-1)




CONTRACT OF INDEMNITY AND GUARANTEE (Section '124 to 147)
Meaning of Indemnity
A contract of indemnity is a contract by which one party promises to save the other party from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person (Section 124). 


For example, A contracts to indemnify B against the consequence of any proceedings which C may take against B in respect of a certain sum of 300 rupees. This is a contract of indemnity. The contract of indemnity may be express or implied, and the later may be inferred from the circumstances of a particular case, e.g., an act done by A at the request of B. If A incurs any expenses, he can recover the same from B.
The person who promises to indemnify or make good the loss is called the indemnifier and the person whose loss is made good is called the indemnified or the indemnity holder. A contract of insurance: is an example' of a contract of indemnity according to English Law. In consideration of premium the insurer promises to make good and loss suffered by the assured 00 account of the destruction by fire of his property insured against fire.
Under the Indian Contract Act, the contract of indemnity is restricted to such cases only where the loss, promised to be reimbursed, is caused by the conduct of the promisor or of any other person. The loss caused by events or accidents which do not depend on the conduct of any person, it seems, cannot be, sought to be reimbursed under a contract of indemnity,
Rights of Indemnity Holder when Sued
            Under Section 125, the promisee, in a contract of indemnity, acting within the
, scope of his authority, is entitled to recover from the promisor­
                 (1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnity applies;
      (2) all costs which he
may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as if it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit; and
         (3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders. of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit
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Meaning of Contract Guarantee
A contract of guarantee is a contract to perform the promise, or discharge the liability of a third person in case of is default. The person who gives the guarantee is called the Surety, the person f,or whom the guarantee is given is called the Principal Debtor; and the person to whom the guarantee is given is  called the Creditor (Section 126). A guarantee' may be either oral or written, although in the English law, it must be in writing.


llustration:-
A advances a loan of As. 5,000 to B and C promises to A that if B does not repay the loan, C will do so. This is a contract of guarantee. Here B is the principal debtor, A is the creditor and C is the surety or guarantor.
Like a contract of indemnity, a guarantee must also satisfy all the essential elements of a valid contract. There is, however, a special feature with regard to consideration in a contract of guarantee. The consideration received by the principal debtor is . sufficient. for surety. Section 127 provides that  anything done or any promise made for the benefit of the principal debtor may be a, sufficient consideration to the surety for giving the, guarantee.          '
Illustration:-
(i) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A's promise to deliver the goods. This is sufficient consideration for C's promise.
              (ii) A sells and delivers goods to 8, C afterwards requests A to forbear  to sue B for the debt for a year, and promises that if he does so. C will   pay for them in default of payment by B, A agrees to forbear as requested. This is sufficient consideration for C's promise.
Distinction between Indemnity and Guarantee
A contract of indemnity differs from a 
contract of guarantee in the following ways:
               (a) In a contract of indemnity there are only two parties: the indemni~ier and the indemnified. In a contract of guarantee, these are three parties; the surety, the principal debtor and the creditor. .
              (b) In a contract of indemnity, the liability of the indemnifier is primary. In a contract of guarantee, the liability of the surety is secondary. The surety is liable only if the principal debtor makes a default, the primary liability being that of the principal debtor.
                   (c) The indemnifier need not necessarily act at the request of the debtor;' the  surety gives guarantee only' at the request of the principal    debtor.
          (d) In the case of a guarantee there is an existing debt or duty, the performance of which is guaranteed by the surety, whereas in the case of indemnity the possibility of any loss happening is the only contingency against which the indemnifier undertakes to indemnify.
           (e) The surety, on payment of the debt when the principal debtor has failed to pay is entitled to proceed against the principal debtor in his own right, but the indemnifier cannot sue third-parties in his own name, unless there be assignment. He must sue in the name of the indemnified.

Extent of Surety's liability
The liability of the surety is co-extensive with that of the principal debtor unless the contract otherwise provides (Section 128). A creditor is not found to proceed against the principal debtor. He can sue the surety without sueing the principal debtor. As soon as the debtor has made default in payment of the debt, the surety is immediately liable. But until default the creditor cannot call upon the surety to pay. In this sense, the nature of the surety's liability is secondary.
Illustration:-
A guarantees to 8 the payment of a bill exchange by C, the acceptor. The bill is dishonoured by C. A is liable not only for the amount of the bill but also for any interest and charges which may have become due on it.
Section 128 only explains the quantum of a surety's obligation when terms of the contract do not limit it. Conversely it doesn't follow that the surety can never be liable when the principal debtor cannot be held liable. Thus, a surety is not discharged from liability by the mere fact that the contract between the principal debtor and creditor was voidable at the option of the former, and was avoided by the former. Where the agreement between the principal debtor and creditor is void as for example in the case of minority of principal debtor, the surety is liable as a principal debtor; for in such cases the contract of the so-called surety is not collateral, but a principal contract (Kashiba v. Shripat (1894) 19 Born. 697)
Kinds of Guarantees
A contract of guarantee may be for an existing debt, or for a future debt. It may be a specific guarantee, or it may be continuing guarantee. A specific guarantee is given for a single debt and comes to an end when the debt guaranteed has been paid.
A continuing guarantee is one which extends to a series of transactions (Section 129). It is a continuing guarantee where A, in consideration of B's discounting, at A's request, bills of exchange of C, guarantees to B for 12 months, the due payment of all such bills to the extent of Rs. 10,000, or A becomes answerable to C for B's purchases from C for 6 months to the extent of Rs. 1,000. 
Revocation of Continuing Guarantee
A continuing guarantee is revoked in the following circumstances:
(a) By notice of revocation by the surety (Section 130) : The notice operates to revoke the surety's liability as regards future transactions. He continues to be liable for transactions entered into prior to the notice (Offord v. Davies (1862) 6 L.T.S. 79).
(b) By the death of the surety: The death of the surety operates, in the absence of contract (Lloyds v. Harper (188) 16 Ch. D. 290). as a revocation of a continuing guarantee, so far as regards future transactions (Section 131). But for all the transactions made before his death, the surety's estate will be liable.
Rights of Surety
            A surety has certain rights against the creditor, (Section 141) the principal debtor (Sections 140 and 145) and the co-securities (Sections 146 and 147) that are­
(a) Surety's rights against the creditor: Under Section 141 a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into whether the surety knows of the existence of such security or not; and, if the creditor losses or, without the consent of the surety parts with such security, the surety is discharged to the extent of the value of the security.
(b) Rights against the principal debtor: After discharging the debt, the surety steps into the shoes of the creditor or is subrogated to all the rights of the creditor against the principal debtor. He can then sue the principal debtor for the amount paid by him to the creditor on the debtor's default; he becomes a creditor of the principal debtor for what he has paid.
In some circumstances, the surety may get certain rights even before payment. The surety has remedies against the principal debtor before payment and after payment. In Mamta Ghose v. United Industrial Bank (AIR 1987 Cal. 180) where the principal debtor, after finding that the debt became due, started disposing of his properties to prevent seizure by surety, the Court granted an injunction to the surety restraining the principal debtor from doing so. The surety can compel the debtor, after debt has become due to exonerate it from his liability by paying the debt.
(c) Surety's rights gains co-sureties: When a surety has paid more than his share of debt to the creditor, he has a right of contribution from the co-securities who are equally bound to pay with him. A, B and C are sureties to D for the sum of Rs. 3,000 lent to E who makes default in payment. A, B and Care liable, as between themselves to pay Rs. 1,000 each. If anyone of them has to pay more than Rs. 1,000 he can claim contribution from the other two to reduce his payment to only Rs. 1,000. If one of them becomes insolvent, the other two shall have to contribute the unpaid amount equally.
Discharge of Surety
A surety may be discharged from liability under the following circumstances:
(a) By notice of revocation in case of a continuing guarantee as regards future transaction (Section 130.)
      (b) By the death of the surety as regards future transactions, in a continuing guarantee in the absence of a contract to the contrary  (Section 131).
      (c) Any variation in the terms of the contract between the creditor and the principal debtor, without the consent of the surety, discharges the surety as regards all transactions taking place after the variation  (Section 133).
(d) A surety will be discharged if the creditor releases the principal debtor, or acts or makes on omission which results' in the discharge of the principal debtor (Section 134). But where the creditor fails to sue the principal debtor within the limitation period, the surety is not discharged.
(e) Where the creditor, without the consent of the surety, makes an arrangement with the principal debtor for composition, or promises it give him time or not to sue him, the surety will be discharged (Section 135).
(f) If the creditor does any act which is against the rights of the surety, or omits to do an act which his duty to surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is hereby impaired,the surety is discharged (Section 139).
     (g) If the creditor loses or parts with any security which at the time of the contract the debtor had given in favour of the creditor, the surety is discharged to the extent of the value of the security, unless the surety consented to the release of such security by creditor in favour of the debtor. I~ is immaterial whether the surety was or is aware of such security or not (Section 141). 

Illustrations:
(1) X guarantees to Y to the extent of Rs. 10,000 that C shall pay all the bills that. B shall draw upon him. B draws upon C, C accepts the bill. A gives notice of revocation, C dishonours the bill at maturity. A is liable upon his guarantee (Section 130).
     
     (2) A becomes surety to C for B's conduct as a manager in C's bank. Afterwards B and C contract without A's consent that B's salary shall be raised and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss (Section 133).
(3) C contracts to lend B Rs. 5,000 on 1 st March, A guarantees repayment. C pays the money to B on 1 st of January. A is discharged from his liability. A is discharged from his liability, as the contract has been varied in as much as C might sue B for the money before 1 st of March, (Section 133).
(4) X contracts with B to build a house for a fixed price within a stipulated time, Y supplying the necessary timber. Z guarantees X's performance. Y omits to supply the timber. Z is discharged from liability (Section 134).
(5) B contracts to build a ship for C for a given sum, to be paid by instalments as the work reaches certain stages. A becomes surety to C for B's due performance of the contract, without the knowledge of A, C prepays to B the last two instalments~_ A is discharged by this prepayment (Section 139). 

Guarantee from satyavrat1994

QUESTION AND ANSWERS:

Q. Define a contract of indemnity and what are the rights of an indemnity holder when sued. 1. Introduction:

      Indemnity means a promise to save a person harmless from the consequences of an act. The promise may be express or it may be implied from the circumstances of the case. So it include a promise of indemnity against loss arising from any cause what so ever. Insurance contracts are its example.


2. Definition:
      According to Sec 124 of contract act.
“A contract by which one party promises to save the other from loss caused to him by the conduct of the promise himself or by the conduct of any other person is called contract of indemnity”.


3. Parties of contract of indemnity:
There are two parties in the contract of indemnity.
(I) Indemnifier: The person who promises to make good the loss is called the indemnified or promisor.
(II) Indemnity holder: The person whose loss is to be made is called indemnity holder or indemnified.
Example:
A parked his cycle at of B. He lost his token. B refuses to return the cycle to A. A promises to compensate B against the loss he may suffer. If any other person claims the cycle from B. 


Essentials of the contract of indemnity:
Contract of indemnity being a part of law of the contract must have all attributes of a valid contract e. g. (i) free consent, (ii) lawful object (iii) consideration (iv) capacity to make contract etc.
 

Kinds of indemnity:
(I) Express: When indemnity is expressed or stated clearly.
( II) Implied: When inferred from the circumstance of particular cases.
 

Time of commencement of indemnifier’s liability:
      Where indemnifier has incurred an absolute liability through the actual loss, he may call upon the indemnified to save him from that liability and pay of his liability.
 

Rights of indemnity holder when sued:
According to sec. 125 an indemnity holder when sued is entitled to the following rights against the indemnifier.
(I) Right of damages: Indemnity holder is entitled to recover all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify.
 

(II) Right of recovering all costs:He is entitled to all costs which he may be compelled to pay in bringing or defending such suit.
 

(III) Right of recovering all sums:He is entitled to all sums which he may have paid under the terms of any compromise of any such suit.
 

Rights of indemnified:
The rights of indemnified are the same as the rights of guarantor:
“He is entitled to the benefit of all the securities which the creditor has against the principal debtor, whether he was aware of them or not.”
 

Conclusion:
To conclusion it can be said that, indemnity is a compensation paid by one party to another. It is made in order to protect the promise against anticipated loss. It depends upon happening of loss. In contract of indemnity there are two parties. It is direct engagement and may be made independently of the existence of third party. 

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