Indemnity & Guarantee

The word indemnity means to

compensate.
A contract by on 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, is called a contract of
indemnity.
The person who promises to make good
the loss is called the indemnifier
(promisor).
The person whose loss is to be made
good is called the indemnity holder or
indemnified (promisee).
In other words a contract where one
person promises to compensate the other
from the loss which may arise due to the
conduct of the promisor himself or any
other person, is called a contract of
indemnity.
A contract of indemnity is made in order to
protect the promise against anticipated
loss. This contract depends upon
happening of loss. Contract of insurance is
example of indemnity. It must fulfill all the
essential of a valid contract.
Example
A parked his cycle at cycle stand. He lost his
token given by B. B refuses to return the
cycle. To get the cycle A promises to
compensate B against the loss he may suffer
if any other person claims the cycle from B.

Rights of indemnity holder
The following rights of indemnity-holder against the
indemnifier.
He can recover all damages which he may be compelled to
pay in respect of any suit filed against him.
He can recover expenses in respect of any suit filed by him
with the authority of indemnifier.
He can recover all expenses which he may have paid under
the terms of any compromise of any such suit, provided the
compromise was made with consent of indemnifier.
Contract of Guarantee
A contract of guarantee is a contract to
perform the promise or discharge the
liability of a third person in case of his
default.
A requests B to lend to C and guarantees
that if C fails to pay, he will himself pay to
B, there is a contract of guarantee.
Essentials features
Secondary contract
Consideration
No misrepresentation
Writing not necessary

Secondary contract

The purpose of a guarantee is to secure a debt or
goods on credit, etc. A contract of guarantee is an
agreement between the principal debtor, the creditor
and the surety.

The three separate contracts exist between them. If
the promise by the principal debtor is not fulfilled only
then the liability of the guarantor arises.

In a contract of guarantee there should be someone
liable as a principal debtor and the surety should be
liable on principal debtors default.

The principal contract exists between the principal
debtor and the creditor and the contract between
creditor and surety is a secondary contract.
X takes a loan of Rs.5,000 from Y on the
guarantee of Z. The agreement between X
and Y is the principal contract and the
contract between Y and Z is a contract of
a guarantee. The liability of Z to pay the
amount will arise only when X fails to
repay the loan.
Consideration
A contract of guarantee, like every other
contract must have essential elements of a
valid contract, e.g. free consent, legality of
object, competency of parties etc. it must
also supported by some consideration.
But there need not be direct consideration
between the surety and the creditor and
consideration received by the principal
debtor is sufficient for the surety.
B requests A to sell goods on credit. A
agrees to do so, if C will guarantee for the
payment. C guarantees. Cs promise to
guarantee is the consideration for As
promise to sell the goods.
No misrepresentation
A guarantee obtained by means of
misrepresentation made by the creditor or
with his knowledge and assent, concerning a
material part of the transaction, is valid.
H was invited to give a guarantee for the
honesty of Lgos servant. The employer
had already dismissed him for dishonesty,
but did not disclose this fact to the surety.
The servant committed an other
embezzlement. The surety was held not
liable.
Writing not necessary
It is not necessary that contract of guarantee
must be in writing. It may be either oral or
written. It may be express or implied from the
conduct of parties.

A sells and delivers goods to B on the verbal
guarantee of C. it is a valid guarantee.

Nature & extent of suretys Liability
Kinds of Guarantee
Ordinary guarantee
Continuing guarantee
Ordinary guarantee
A guarantee which extends to a single debt or
transaction is called ordinary guarantee or
specific guarantee. It comes to an end as
soon as the liability under the transaction
ends.
For example
G guarantees K for the payment of 5 bags of
wheat purchased by C. C makes payment.
Later on C again purchases 5 bags of wheat.
C did not pay for that. K sued G. Held, Gs
guarantee is specific guarantee and G is not
libale.
Continuing guarantee
A guarantee, which extends to a series of
transactions, is called continuing guarantee.
In other words a guarantee which covers a
number of transactions over a period of time
is called continuing guarantee.
For example
A guarantees to C for Bs Credit purchases
with a running balance of account not
exceeding Rs.5,000. this is a continuing
guarantee.
Rights of surety
Rights against the creditor
Rights against the principal debtor
Rights against co-sureties
Rights against the creditor
Right to securities
Right to claim set-off

Right to securities
The surety at the time of payment, can demand the securities
which the creditor has received from the principal debtor at the
time of creation of contract.
Whether the surety knows of the existence of such securities or
not.
If creditor by negligence loses any security held by him, the
surety is discharged to that extent from the payment of
guaranteed sum.
But if the security is lost due to unavoidable act, the surety would
not be discharged.
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.
For example
C advances B Rs.2 lac on the guarantee of X.
C also pledges B furniture. B fails to pay and
X pays Rs.2 lac to C. X can get the furniture
from C.

Right to claim Set-off
It may happen that a debtor is also having
some claims against the creditor. In such a
case a debtor can ask for the adjustment of
his debts to the extent of his claims against
the creditor. If the creditor sues surety for
repayment the surety may have the benefit of
the set off, if any that the principal debtors
had against the creditor.
For example
A supplies furniture of Rs. 2 lac to B on the
guarantee of C. B claims that some furniture
is defective and refuses to pay Rs.20,000. on
the demand of A. C can ask for adjustment of
Rs.20,000.
Right against the principal debtor
Right of subrogation
Right of indemnity

Right of subrogation
When the surety has paid the guaranteed
debt on default of the principal debtor he is
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 creditor against
principal debtor.
For example
X borrowed money from Y on the guarantee
of W and mortgaged his house to Y. X fails to
pay and W paid. Now W is in position of Y and
enforce the mortgage of the house against X.
Right of indemnity
In every contract of guarantee there is an
implied promise by the principal debtor to
indemnify the surety. This right enables the
surety to recover from the principal debtor
whatever sum he has rightfully paid under the
guarantee, but no sums which he has paid
wrongfully.
For example
B is indebted to C, and A is surety for the
debt. B fails to pay. C demands payment from
A. A refuses to pay. C sues A for the money.
A defends the suit, on reasonable grounds but
loses and has to pay debts with cost of suits A
can recover the whole amount from B.
Rights against co-sureties
Similar amount
Different amount
Similar amount
Where there are sureties for the same debt
and the principal debtor has committed a
default, each party is liable to contribute
equally to the extent of the default.
For example
A, B and C are sureties to D for the sum of
Rs.3000 let to E. E makes default in payment.
A, B and C are liable, as between themselves,
to pay Rs.1,000 each. If C is insolvent and
could pay only Rs.500, then A and B will
contribute equally to make good his loss.
Different amount
Where there are sureties for the same debt
for different sums, they are bound to
contribute equally subject to the limit fixed by
their guarantee. They will not contribute
proportionately.
Discharge of surety from liability
Notice of revocation
Death of surety
Change in terms of contract
Release or discharge of principal debtor
Arrangement without suretys consent
Creditors act or omission
Loss of security
Invalidation of the contract of guarantee
Notice of revocation
An ordinary guarantee cannot be revoked if the
creditor has given the loan.
It can be revoked by notice if the liability has not been
incurred.
But a continuing guarantee may, be revoked by the
surety as to future transactions by giving a notice to
the creditor.
The liability of surety comes to an end regarding the
future transactions after the surety has served the
notice of revocation.
The surety remains liable for transactions entered into
prior to the notice.
A lends B a certain sum on the guarantee
of C, C cannot revoke the guarantee. But if
A has not yet given the sum to B, C may
revoke the guarantee by giving a notice.
Death of surety
In specific guarantee the surety is not discharged
from his liability on his death if the liability has already
occurred.
But in case of a continuing guarantee, the death of
surety discharges him from liability regarding the
transactions after his death, unless there is a contract
to the contrary.
The deceased suretys estate will not be liable for
future transactions entered into after the death of
surety, even if the creditor has no notice of the death.
For example
A sells goods to B for Rs.1 lac. C guarantees
payment. A delivers goods cost Rs.50,000.
afterwards, C dies. Cs property is liable up to
Rs.50,000 only.
Change in terms of contract
When any change is made in the terms of the
contract by the principal debtor and the
creditor, without the suretys consent, the
surety stands discharged with respect to such
contract. In continuing, guarantee the surety
discharges as to the transaction made by the
creditors and the principal debtor after such
change.
M contracts to lend N Rs.1 lac on March 1.
S guarantees payment. M pays the
amount on January 1. S is discharged
from his liability, as the terms of contract
have been changed.
Release or discharge of principal debtor
The following two ways discharge the surety
from liability:
The surety is discharged by any contract between
the creditor and the principal debtor, by which the
principal debtor is released. Any release of the
principal debtor is a release of the surety also.
The surety is also discharged by any act or
omission of the creditor, the legal consequence of
which is the discharge of the principal debtor.
For example
A contracts to build a house for B. C
guarantees for the performance of the
contract by A. if B releases A from the
performances of the contract, the liability of C
as a surety shall come to an end.
Arrangement without suretys consent
Where the creditor, without the consent of the
surety, makes an arrangement with the
principal debtor for composition, or promises
to give him time or not to sue him, the surety
will be discharged.
Where a contract to give time to the principal
debtor is made by the creditor with a third
person, and not with the principal debtor, the
surety is not discharged.
P purchased a motor car from C under a
hire purchase agreement on guarantee of
S for the due performance of the
agreement. C for valuable consideration
gives P further time for payment of one of
the installments. Held, the giving of time to
P discharged S from his liability.
Creditors act or omission
If the creditor does any act which is inconsistent with
the rights of the surety, or omits to do, any act which
his duty to the surety requires him to do and the
eventual remedy of the surety himself against the
principal debtor is impaired, the surety is discharged.
It is the duty of the creditor to do every act necessary
for the protection of the rights of the surety and if he
fails in this duty, the surety is discharged.

For example
B contracts to to build a ship for C for Rs.1
crore, to be paid by installments as the work
reaches certain stages. A becomes surety to
C for Bs performance of the contract. C,
without the knowledge of A, prepays to B the
last two installments. A is discharged by this
prepayment.
Loss of security
If the creditor loses or, without the consent of
the surety, parts with the security given by the
principal debtor against the debt, the surety is
discharged from liability to the extent of the
value of security.
If the security is lost due to an act of God, the
surety would not be discharged.
For example
A advances B Rs. 2 lac on the guarantee of X.
A gets an additional security of Rs.50,000 by
a pledge of Bs car. A cancels the pledge and
returns the car. B becomes an insolvent. X is
discharged from the liability to the extent of
value of car.
Invalidation of the contract of guarantee
A surety is also discharged from liability when the
contract of guarantee is invalid.
A contract of guarantee is invalid in the following
cases:
Where the guarantee has been obtained by
misrepresentation.
Where the guarantee has been obtained by concealment of
material facts.
Where guarantee has been obtained under the impression
that co-sureties will join and if, no body joins.
Where it lacks one or more essential elements of a valid
contract, e.g. surety is incompetent to contract or the object is
illegal.
For example
A surety is also discharged from liability when
the contract of guarantee is invalid.