Indemnity and Guarantee Bba
Indemnity and Guarantee Bba
Indemnity and Guarantee Bba
AND
GUARANTEE
CONTRACT OF INDEMNITY
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, is called a
‘contract of indemnity. [section 124].
Examples:
Motor insurance
Marine insurance
Fire insurance
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 indemnify applies;
(2) all costs which he may be compelled to pay in any such suit, if in bringing of
defending it, he did not contravene the orders of the promisor, and acted as it would
have been prudent for him to act in the absence of any contract of indemnity, or if the
promisor authorized him to bring or defend the suit;
(3) all sums which he may have paid under the terms of any compromise of any such
suit, if the compromise was not contract to the orders of the promisor, and was one
which it would have been prudent for the promise to make in the absence of any
contract of indemnity, or if the promisor authorized him to compromise the suit.
RIGHTS OF INDEMNIFIER:
SURETY: The person who gives the guarantee is called the “surety”. Person giving
guarantee is also called as ‘guarantor’. ;
PRINCIPAL DEBTOR: the person in respect of whose default the guarantee is given
is called the “principal debtor”, and
CREDITOR: the person to whom the guarantee is given is called the “creditor”.
Three parties are involved in contract of guarantee. Contract between any two of
them is not a ‘contract of guarantee’. It may be contract of indemnity.
Primary liability is of the principal debtor. Liability of surety is secondary and arises
when Principal Debtor fails to fulfill his commitments. However, this is so when surety
gives guarantee at the request of principal debtor. If the surety gives guarantee on his
own, then it will be contract of indemnity. In such case, surety has all primary
liabilities.
ESSENTIALS OF CONTRACT OF GUARANTEE:
Contract of guarantee must contain all the essential elements of valid contract.
1. No. of parties There are two parties to the contract viz. There are three parties to the viz.
indemnifier (promisor) and the Indemnified creditor, principal debtor and the surety
(promise).
2. Liability of parties Liability of the indemnifier to the Liability of the surety to the creditor is
indemnified is primary and independent. collateral or secondary, the primary
liability being that of the principal
debtor.
3. No. of contracts There is only one contract in case of a In a contract of guarantee there are
contract of indemnity, i.e., between the three contracts, between principal
indemnifier and the indemnified. Debtor and Creditor; between creditor
and the surety and between surety and
principal debtor.
4. Liability is due The liability of the indemnifier arises only There is usually an existing debt or
on the happening of a contingency. duty, the performance of which is
guaranteed by the surety.
5. Liability of third party An indemnifier cannot sue a third party for A surety, on discharging the debt due
loss in his own name, because there is no by the principal debtor, steps into the
privity of contract. He can do so only if shoes of the creditor. He can proceed
there is an assignment in his favour. against the principal debtor in his own
right
KINDS OF GUARANTEE
By variation in contract
Novation
Illustration
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 a sufficient consideration for C's promise.
The liability of the surety is coextensive with that of the principal debtor, unless it is
otherwise provided by the contract.
Illustration
A guarantees to B the payment of a bill of 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.
RIGHTS OF SURETY
Right of subrogation
Right to indemnity
Surety's right to benefit of creditor's securities and, (if the creditor loses, or, without
the consent of the surety, parts with such security, the surety is discharged to the
extent of the value of the security).
Surety can rely upon any set off or counter claim which the debtor must possess
against the creditor.
When several co-sureties have given guarantee for the same debt with their
maximum limits, they are liable to pay equally but subject to the limits they have fixed.
DISCHARGE OF SURETY
Revocation by notice.
Revocation by death.
Discharge of surety when creditor compounds with, gives time to, or agrees not to
sue, principal debtor.
By concealment or misrepresentation.