Indemnity and Guarantee Indemnity and Guarantee

DEFINITION Acc to Indian Contract Act- Confines itself to the losses occasioned due to the act of the promisor or due to the act of any other person. The term Indemnity literally means Security against loss. One party i.e. the indemnifier promise to compensate the other party i.e. the indemnified against the loss suffered by the other.

CONTRACT OF INDEMNITY

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 (sec 124)

 The person who undertakes or agrees to compensate the loss is called indemnifier. The person whose loss is to be made good is called the indemnity holder. A contract of indemnity may be expressed or implied. Example A contract to indemnify B against the consequences of any proceedings which C may take against in respect of certain sum of Rs 200. This is a contract of indemnity.

 Example A promises to indemnify B, a banker for any loss that he may sustain by reason of the dishonesty of the cashier appointed by B at the request of A. The contract between A and B is a contract of indemnity. Here A is the indemnifier and B is the indemnity holder.

ELEMENTS OF CONTRAT OF INDEMNITY

A contract of indemnity is like any other contract and must fulfill all the essentials of a valid contract. Consideration Free consent Competency of parties Lawful object

Sec 125 enumerates the rights of an indemnity holder in a contract of indemnity. An indemnity holder can recover from the indemnifier All damages which he may be compelled to pay under the contract in any suit. All cost which he may be compelled to pay in such suit (provided he acted cont.

RIGHTS OF INDEMNITY HOLDER

prudently or with the authority of indemnifier) All sums which he may have paid upon compromise of such suit (provided the compromise was prudent or was authorised by indemnifier).

Contract of Guarantee

 Acc to Sec 126

CONTRACT OF GURANTEE

A contract of guarantee is a contract to perform the promise or to discharge the liability of a third person in case of his default. Guarantee is a promise to pay a debt owed by a third person in case the latter does not pay.

 A contract of guarantee involves three parties i.e. the creditor, the surety and the principal debtor. The person who gives the guarantee is called the surety The person in respect of whose default the guarantee is given is called the principal debtor The person to whom the guarantee is given is called the creditor

CONTRACT OF GURANTEE

Example P advances loan of Rs 1000 to Q and R promises to P that if Q does not repay the loan, R will do so. This is contract of guarantee. Here Q is the principal debtor, R is the surety and P is the creditor.

Indemnity VS guarantee
Two parties Primary & independent Only one contract Not necessary for the indemnifier Liability arises only on the happening of contingencies Cannot sue third parties for loss in his own name Three parties Collateral or secondary Three contract Guarantee at the request of the debtor An existing debt or duty Proceed against the principal debtor in his own right

ESSENTIALS OF VALID GUARANTEE

1)Existence of principal debt A contract of guarantee pre-supposes the existence of a liability enforceable at law. If no such liability exists, there can be no contract of guarantee.

2)Consideration for a contract of guaranteeAcc to sec 127 anything done or any promise made for the benefit of the principal debtor may be sufficient consideration to the surety for giving guarantee

3)There should be no misrepresentation or concealmentAcc to sec 142- Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent concerning a material part of the transaction is invalid. Acc to sec 143- Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.

4)When co-surety does not joinWhen a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as cosurety, the guarantee is not valid if that other person does not join.

Revocation of continuing guarantee

1. By notice 2. By death of surety 3. By variation in contract

Rights of surety
1. Rights against creditor
i. ii. iii. iv. Before payment of the guaranteed debt Right of set-off On payment of the guaranteed debt Right to equities

2. Rights against principal debtor

i. Rights to be relieved of liability ii. Right to indemnity conti

3. Rights against co-sureties

i. Co-sureties liable to contribute equally ii. Release or discharge of principal debtor iii. Compounding by creditor with principal debtor iv. Creditors act or omission impairing suretys eventual liability v. Loss of security

By revocation

By the conduct of the creditor

By invalidation of the contract

Revocation by Surety (Sec. 130)

Death Of Surety (Sec. 131)

Novation (Sec. 62)

Guarantee obtained by misrepresentation (Sec. 142)

Guarantee obtained by concealment (Sec. 143)

Failure of cosurety to join a surety (Sec. 144)

Failure of consideration

Variance in terms of contract (Sec. 133)

Release or discharge of principal debtor (Sec. 134)

Compounding by creditor with principal debtor (Sec. 135)

Creditors or omission impairing suretys eventual remedy (Sec. 139)

Loss of security (Sec. 141)

By revocation

By the conduct of the creditor

By invalidation of the contract

Revocation by Surety (Sec. 130)

Death Of Surety (Sec. 131)

Novation (Sec. 62)

Guarantee obtained by misrepresentation (Sec. 142)

Guarantee obtained by concealment (Sec. 143)

Failure of cosurety to join a surety (Sec. 144)

Failure of consideration

Variance in terms of contract (Sec. 133)

Release or discharge of principal debtor (Sec. 134)

Compounding by creditor with principal debtor (Sec. 135)

Creditors or omission impairing suretys eventual remedy (Sec. 139)

Loss of security (Sec. 141)