Indemnity & Guarantee

Definition of Indemnity

A contract by which one party promises to save other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person, is called contract of Indemnity

A promise to save another harmless from loss caused as a result of transaction entered into at the instance of the promisor

Eg : A is agent of B in India for sale of Bs goods. C lodges a case against A in respect of inferior quality of Bs goods. B indemnifies A for the loss suffered by him.

Parties to a Contract of Indemnity

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). 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 selling it. Held, A could recover his loss from T as a promise by T to A for any such loss would be implied from his conduct in asking A to sell the cattle. Eg : A and B claim certain goods from a railway company as rival owners. A takes the delivery of goods agreeing to compensate the railway company against the loss in case B turns out to be the true owner. This is a contract of indemnity between A and the railway company. Eg. Contract of Insurance is a contract of Indemnity

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 respect of moneys paid, but to save from loss in respect of liability against which the indemnity has been given. - Indemnity is not only given by repayment after payment. Indemnity requires that the party to be indemnified shall never be called upon to pay.

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.

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

Examples

S requests C to lend Rs. 500 to P and guarantees that if P fails to pay the amount, he will pay. S is the surety, C is the Creditor and P is the Principal Debtor S and P go into a shop. Says to the shopkeeper C, Let P have the goods, and if he doesnt pay, I will. This is a contract of Guarantee

Kinds of Guarantee
Repayment of Debt Payment of price of goods sold on credit Employment insurance or Fidelity guarantee

Three Contracts under Guarantee

Principal Debtor

principal obligation

Creditor

indemnity obligation Guarantor

payment under guarantee

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 against a 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 barred by limitation act. S pays the amount to C. He cannot recover anything 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 Promise made for the benefit of the Principal debtor is sufficient consideration for the surety.

Full disclosure of all material facts not necessary (except fidelity insurance)

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 a year. He promises that if C does so, S will pay for goods in case P defaults. C agrees to forbear as requested. This is sufficient consideration for Ss promise. C sells and delivers goods to P. S, afterwards without consideration, agrees to pay for them in default of P. The agreement is void. S guaranteed the account of P with the bank. P afterwards drew on his account and paid off an overdraft he had with another bank. Held, the bank was suspicious that P was defrauding S and did not communicate this to S, does not discharge the guarantee. C engaged P as a clerk to collect money for him. P misappropriated some of Cs funds. C demanded fidelity guarantee to continue Ps employment. S gave the guarantee for P. C did not communicate to S about Ps previous dishonesty. Held the guarantee could not be enforced against S.

Indemnity v/s Guarantee

Indemnity Guarantee Two parties viz. Indemnifier Three parties viz. Creditor, and Indemnified Principal debtor and Surety Liability of the Indemnifier to Liability of the surety id the Indemnified is primary and secondary, the primary liability independent is of the principal debtor There is only one contract There are 3 contracts

The liability happens on the There is an existing debt of happening of a contingency duty Guarantee includes contract of indemnity, between the surety and principal debtor

Rights of the Surety

Right to indemnification as against the Principal Debtor Right of Subrogation Right to all securities as against the Creditor Right to set off against the Creditor Right to equal contribution as against co-sureties

Nature of Suretys Liability

Suretys liability is secondary and conditional

Suretys liability is co-extensive with the liability of the principal debtor

S guarantees to C the payment of Bill of exchange by P. The bill is dishonoured by P. S is not only liable for the amount of bill, 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 of transactions

Continuing Guarantee

S guarantee payment to C, a tea dealer, to the amount of Rs. 10,000 for any tea he may supply to P. C supplies P with tea of value above Rs.10,000 and P pays for it. Afterwards C supplies P with tea of value of Rs. 20,000. P fails to pay. The guarantee given by S is a continuing guarantee, and is accordingly liable to C to the extent of Rs. 10,000. There can be a continuing guarantee for a fixed period of time.

Discharge of Guarantee
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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 a condition that the credit period is 18 months. C actually gives only 12 months credit. Held, the surety is discharged. S guaranteed conduct of P in employment of C, where P was entitled to fixed salary. Subsequently, the salary is based as a commission 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 is terminated. S is discharged - P contracts to build a house for C, where C is supposed to supply the required timber. S is the surety for P. C is unable to supply the required timber. Held, that S is discharged

Discharge of Guarantee
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By Creditors act or omission impairing suretys eventual remedy S gives a fidelity guarantee for P who works in a bank. P indulges in some malpractices and the bank directors willfully neglect the same. Held, S cannot be held liable. P contracts to build a ship for C for a given sum to be paid by installments as the work reaches certain stages. S becomes surety to C for Ps due performance of the 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 given to 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 furniture worth 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