Contract of Indemnity and Guarantee Notes

J.K. SHAH CLASSES INTER C.A.
- LAW
CHAPTER 1
THE INDIAN CONTRACT ACT, 1872
UNIT 1 : CONTRACT OF INDEMNITY AND GUARANTEE
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).
The person who promises to make good the loss is called indemnifier' and the
person whose loss is to be made good is called the 'indemnified' or 'indemnity-
holder.
A contract of indemnity is like any other contract and must, therefore, fulfill all
the essentials of a valid contract, e.g., consideration, free consent, competency
of parties, lawful object, etc.
A contract of Fire Insurance or Marine Insurance is always a contract of
indemnity. But there is no contract of indemnity in case of contract of Life
Insurance.
It is a contingent contract.
Indemnifier cannot sue third party on his own unless
• Rights of indemnity holder (Section 125) :

An indemnity holder acting within the scope of his authority is entitled to the
following rights:
(a) Right to recover damages
(b) Right to recover cost of litigation
(c) Right to recover sums paid under compromise
GUARANTEE
• MEANING (Sec. 126):
‘A contract of guarantee’ is a contract to perform the promise, or discharge
the liability, of a third person in case of his default.
The person wHo gives the guarantee is called the ‘surety’, the person in
respect of whose default the guarantee is given is called ‘principal debtor’,
and the person to whom the guarantee is given is called ‘the creditor’.
A guarantee may be either oral or written.
According to Sec 127 no consideration is required for contract of guarantee.
In other words anything done or any promise made for the benefit of the
principal Debtor may be sufficient consideration for the surety for giving
guarantee to the Creditor.
• ESSENTIALS OF A VALID GUARANTEE

1. Existence of a principal debt.
2. Benefit to principal debtor is sufficient consideration, but past consideration is
J.K. SHAH CLASSES INTER C.A. - LAW
no consideration for a contract of guarantee.
3. Consent of surety should not be obtained by misrepresentation or
concealment of a material fact.
4. Can be oral or written.
5. Surety can be proceeded against without proceeding against the principal
debtor first if the contract specifies.
6. If the co-surety does not join, the contract of guarantee is not valid.
• NATURE OF SURETY'S LIABILITY

As per Section 128 of the Act, the liability of the surety is co-extensive with that
of the principal debtor unless it is otherwise provided by the contract.
• KINDS OF GUARANTEE
Specific guarantee Continuing guarantee: Sec. 129

When a guarantee is given in A guarantee which extends to a series
respect of a single debt or specific of transactions is called a continuing
transaction and is to come to an guarantee.
end when the guaranteed debt is A continuing guarantee can be revoked
paid or the promise is duly as to future transactions in the
performed, it is called a specific following manner:
guarantee. 1. By Notice to the creditor (Sec 130)
A specific guarantee once given is 2. By death of surety (Sec 131)
irrevocable.
• DISCHARGE OF SURETY
A surety is said to be discharged when his liability comes to an end.
Section133 Section 134 Section 135 Section 139
Where there is any If principal If creditor gives If creditor fails to

variance in the debtor is additional time perform his duty,
terms of \ contract discharged, surety is
to principal
discharged.
between the surety is also debtor for
principal debtor and automatically pe3rformance
creditor without discharged. without the
surety's consent, it consent of the
would discharge the surety, surety is
surety in respect of discharged.
all transactions
taking place
subsequent to such
variance.
• NON-DISCHARGE OF SURETY
The surety is not discharged in the following cases:
A surety is said to be discharged when his liability comes to an end.
Section136 Section 137 Section 138
Surety not discharged Mere forbearance on the part of Where there are co-
when agreement made the creditor to sue the principal sureties, a release by the
\ person to give
with third debtor does not in the absence of creditor of one of them
does not discharge the
time to principal debtor. any provision in the guarantee to
other; neither does it free
the contrary, discharge the surety. the surety so released from
his responsibility to the
other sureties.
• RIGHTS OF SURETY
Rights against the Principal Rights against the

Debtor Creditor
1. Rights of subrogation: the Surety's right to
surety steps into the shoes of benefit of creditor's
the creditor (Section 140). securities [Section
2. Implied promise to 141]
indemnify surety [Section
145]: In every contract of
guarantee there is an implied
promise by the principal debtor
to indemnify the surety.
• INVALID GUARANTEE [ SEC 142 to 144 ]

(a) Guarantee obtained by misrepresentation invalid [Section 142]
(b) Guarantee obtained by concealment invalid [Section 143]
(c) Where more than 1 surety is required, guarantee given by only 1 surety is
invalid until others join [Section 144].
• CONTRIBUTION OF CO-SURETIES
When a debt is guaranteed by two or more sureties they are called as to co-
sureties. They are liable to contribute as agreed towards the payment of the
guaranteed debt.
The following are the rules:-

(1) Co- sureties liable to contribute equally. [Sec 146]
Liability of co-sureties, bound in different sums: [Sec 147]: Where the
co-sureties have agreed to guarantee different sums , they have to
contribute in the agreed ratio.
(2) Sureties’ liability towards other co-sureties [Sec 138]: Creditor may sue
any one of the co-sureties or he may release any of the co-sureties from the
liability. However this does not free the surety so released from his liability
towards the other co-sureties.
(3) Mutual agreement between co-sureties [Section 132]: Any
understanding/mutual agreement between debtors interse that one of them
only shall be liable as a surety will not affected the rights of the creditor in
any way even if the creditor knew the arrangement between the debtors.
DISTINCTION BETWEEN INDEMNITY AND GUARANTEE

Point of distinction Contract of Indemnity Contract of Guarantee
Number of parties/ There are only two parties There are three parties creditor,
Parties to the contract namely the indemnifier principal debtor and surety.
[promisor] and the indemnified
[promisee]
Nature of liability The liability of the indemnifier The liability of the surety is
is primary and independent secondary as the primary
liability is that of the principal
debtor.
Time of liability The liability of the indemnifier Liability is already in existence
arises only on the happening but specifically crystallizes
of a contingency. when principal debtor fails.
Time to Act The indemnifier need not Surety must act by extending
necessarily act at the request guarantee at the request of
of indemnified debtor
Right to sue third party Indemnifier cannot sue a third Surety can proceed
party for loss in his own name against principal debtor in his
as there is no privity of contract. own right because he gets all
Such a right would arise only if the right of a creditor after
there is an assignment in his discharging the debts.
favour.
Purpose Reimbursement of loss For the security of the creditor

Competency to All parties must be competent In the case of a contract of
contract to contract guarantee, where a minor is a
principal debtor, the contract is
still valid.
Number of Contracts Only one original and There are 3 contracts made
independent contract between between-
indemnifier and indemnified. • Creditor and principal debtor
• Creditor and Surety
• Surety and Principal debtor

Contract of Indemnity and Guarantee Notes

Uploaded by

Copyright:

Available Formats

Contract of Indemnity and Guarantee Notes

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Contract of Indemnity and Guarantee Notes

Uploaded by

Copyright:

Available Formats

J.K. SHAH CLASSES INTER C.A.

UNIT 1 : CONTRACT OF INDEMNITY AND GUARANTEE

• Rights of indemnity holder (Section 125) :

• ESSENTIALS OF A VALID GUARANTEE

• NATURE OF SURETY'S LIABILITY

Specific guarantee Continuing guarantee: Sec. 129

Section133 Section 134 Section 135 Section 139

Where there is any If principal If creditor gives If creditor fails to

Section136 Section 137 Section 138

Rights against the Principal Rights against the

• INVALID GUARANTEE [ SEC 142 to 144 ]

The following are the rules:-

DISTINCTION BETWEEN INDEMNITY AND GUARANTEE

Purpose Reimbursement of loss For the security of the creditor

You might also like