Contract of Indemnity and Guarantee
Contract of Indemnity and Guarantee
BusinessLaws,Ethics&Communication
TheContractAct
1872
Unit1Part7 IndemnityandGuarantee
CA.ManishDafria
LearningObjectives
ContractofIndemnity
Meaning
RightofPromisee
ContractofGuarantee
Meaning
Rightsandliabilitiesoftheparties
GuaranteeWhenbecomeinvalid
DifferenceBetweenIndemnityandGuarantee
ContractofIndemnity
Meaning(Sec.124)
Acontractbywhichonepartypromisestosavetheother
fromlosscausedtohim
bytheconductofthe ortheconductofanyother
promisor himself, person,
iscalleda"contractofindemnity".
A contracts to indemnify B against the consequences of any proceedings
which C may take against B in respect of a certain sum of 20000 rupees. This
is a contract of indemnity.
RightOfPromisee WhenSued(Sec.
125)
The promisee in a Alldamageswhichhemay
contract of indemnity, becompelledtopay
acting within the scope
of his authority, is Allcostswhichhemaybe
compelledtopayinany
entitled to recover from suit
the promisor
Allsumswhichhemay
havepaidundertheterms
ofanysuit
ContractofGuarantee
Meaning(Sec.126)
A"contractofguarantee"isacontract
toperformthepromise,ordischargetheliability,ofa
thirdperson
incaseofhisdefault.
ContractofGuarantee
Terminology
The person in
The person who
respect of whose The person to
gives the
default the whom the
guarantee is
guarantee is given guarantee is given
called the
is called the is called the
"surety or
"principal "creditor".
guarantor.
debtor.
ConsiderationforGuarantee
Anything done, or any promise made, for
the benefit of the principal debtor, is a
sufficient consideration to the surety for
giving the guarantee. (Sec. 127)
andthesuretyisentitled
torecoverfromtheprincipal whateversumhehasrightfully
debtor paidundertheguarantee.
SuretysLiability[Sec128]
The liability of the surety is coextensive with
that of the principal debtor, unless it is
otherwise provided by the contract.
DischargeofSurety
Dischargeofsurety
Anyvariance,madewithoutthe
suretysconsent,
Discharge of inthetermsofthecontractbetween
theprincipaldebtorandthecreditor,
surety by
variance in
terms ofBs conduct as manager in Cs bank. Afterwards,
A becomes surety to C for
B and C contract, without As consent, that Bs salary shall be raised, and
dischargesthesuretyasto
contract (S. for onefourth
that he shall become liable transactionssubsequenttothe
of the losses on overdrafts. B
allows a customer to overdraw, and the bank losesvariance.
a sum of money.
133)
A is discharged from his suretyship by the variance made without his
consent, and is not liable to make good this loss.
Dischargeof
Surety The surety is discharged
Discharge of
surety when
creditor bywhichthecreditormakesa
compromisewith,orpromisestogive
compounds time,ornottosue,theprincipaldebtor,
with, gives time
to, or agrees
not to sue,
dischargesthesurety,unlessthesurety
principal debtor assentstosuchcontract.
(Sec 135)
RightsofSurety
RightsOfSuretyOnPaymentOr
Performance(Sec.140)
everysecuritywhichthecreditorhasagainst
theprincipaldebtoratthetimewhenthe
contractofguaranteeenteredinto,
whetherthesuretyknowsoftheexistenceof
suchsecurityornot.
SuretysRighttoBenefitofCreditors
Securities (Sec.141)
bymeansofmisrepresentation
madebythecreditororwithhisknowledgeandassent,
concerningamaterialpartofthetransaction,
isinvalid.
GuaranteeObtainedByConcealment,
Invalid(Sec143)
whichthe
creditorhas
obtainedby
meansof
Anyguarantee isinvalid.
keeping
silenceastoa
material
circumstance,
GuaranteeonContractthatCreditor
ShallNotActonitUntilCosurety
Joins(Sec144)
thatthe
creditorshall
Wherea theguarantee
notactupon
persongivesa isnotvalidif
ituntil
guarantee thatother
another
upona persondoes
personhas
contract notjoin.
joinedinitas
cosurety,
CommencementofGuarantors
(Suretys)Liability
Liability of surety arises as soon as a default is
made by the principal debtor.
NumberofParties
In a Contract of
In a Contract of
Indemnity there are
Guarantee there are
only two parties namely
three parties creditor,
the indemnifier
principal debtor and
[promisor] and the
surety.
indemnified [promisee]
ContractofIndemnityandContractof
Guarantee Distinction
ExtentofLiability
In the Contract of
In the Contract of
Guarantee, the liability
Indemnity, the liability
of the surety is
of the indemnifier is
secondary as the
primary and
primary liability is that
independent
of the principal debtor
ContractofIndemnityandContractof
Guarantee Distinction
Timeofliability
In case of Guarantee,
The liability of the liability is already in
indemnifier arises only existence but
on the happening of a specifically crystalises
contingency when principal debtor
fails
ContractofIndemnityandContractof
Guarantee Distinction
TimetoAct
In case of Guarantee,
The indemnifier
surety must act by
need not necessarily
extending guarantee
act at the request of
at the request of
indemnified
debtor
ContractofIndemnityandContractof
Guarantee Distinction
RighttoSueThirdParty
In case of Contract of
In case of contract of
Guarantee surety can
Indemnity, indemnifier
proceed against principal
cannot sue a third party for
debtor in his own right
loss in his own name as
because he gets all the
there is no privity of
rights of a creditor after
contract
discharging the debts
Summary
Acontractbywhichonepartypromisestosavetheotherfromlosscaused
tohimbytheconductofthepromisor himself,ortheconductofanyother
person,iscalleda"contractofindemnity".
Acontracttoperformthepromise,ordischargetheliability,ofathird
personincaseofhisdefaultiscalleda"contractofguarantee".
Thepersonwhogivestheguaranteeiscalledthe"suretyorguarantor.
Thepersoninrespectofwhosedefaulttheguaranteeisgiveniscalledthe
"principaldebtor.Thepersontowhomtheguaranteeisgiveniscalledthe
"creditor".
Summary
Anythingdone,oranypromisemade,forthebenefitoftheprincipaldebtor,
isasufficientconsiderationtothesuretyforgivingtheguarantee.
Thereare3differentmodesofdischargeofsuretygivenbySec.133.134and
135.
Afterdischargeofhisliability,asurty hassamerightsasthecreditorhad
againstdebtor.
Aguaranteeobtainedbymisrepresentationorconcealmentisinvalid.
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