CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE

DEFINITION AND EXPLANATION

CONTRACT OF INDEMNITY

• It is 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. It is made in order to protect the promisee against anticipated loss.

CONTRACT OF INDEMNITY cont---

• 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).

CONTRACT OF INDEMNITY cont---

• There is only one contract between the parties.

• There is an undertaking on the part of the indemnifier to be answerable for the debt or default of another.

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• The liability of the indemnifier to the indemnified is primary and independent.

• This contract is for the reimbursement (compensation) of loss.

CONTRACT OF 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.

CONTRACT OF GUARANTEE cont---

• 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.

CONTRACT OF GUARANTEE cont---

• There are three contracts first b/w creditor & principal debtor, second b/w surety & creditor, third b/w surety & principal debtor.

• The primary liability is of principal debtor and the surety has a secondary liability. Which means that the payment is to be made by the surety only if the debtor does not pay.

CONTRACT OF GUARANTEE cont---

• This contract is for the security of the creditor.

CONTRACT OF GUARANTEE cont---RIGHTS AND LIABILITIES OF SURETY.

• RIGHTS

1. Right of subrogation (interchange): when the surety has paid the guaranteed debt on default of the principal debtor he is then entitled to all the rights which the creditor had against the principal debtor. The surety is entitled to all the remedies which are available to the creditor against the principal debtor

CONTRACT OF GUARANTEE cont---RIGHTS AND LIABILITIES OF SURETY.

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2. Right to securities: Surety is entitled to the benefit of all the securities given by the principal debtor to the creditor. The surety at the time of payment can demand the securities, which the creditor has received from the principal debtor. Surety can recover the securities only after making full payment. He cannot claim the benefit of a part of the securities if he has paid a part of the debt.

CONTRACT OF GUARANTEE cont---RIGHTS AND LIABILITIES OF SURETY.

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3. Right of surety when the creditor loses or parts with the securities of the principal debtor: if the creditor by negligence loses any security held by him, or if the creditor parts with the security, the liability of the surety is reduced to the extent of the value of those securities.

CONTRACT OF GUARANTEE cont---RIGHTS AND LIABILITIES OF SURETY.

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4. Right of reimbursement (compensation) from the principal debtor: a surety is entitled to recover from the principal debtor whatever amount, he has rightfully paid to the creditor.

CONTRACT OF GUARANTEE cont---RIGHTS AND LIABILITIES OF SURETY.

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• LIABILITIES• The liabilities of the surety are co-existent which

those of the principal debtor unless it is otherwise provided.

• Example: if A guarantees to B the payment of a Bill of Exchange by C, the acceptor. The bill is dishonored by C. A is liable not only for the amount of the bill but also for any interest or charges which may have become due on it.

CONTRACT OF GUARANTEE cont---DISCHARGE OF SURETY

Change in the terms of the contract: If the principal debtor and the creditor make any changes, without the consent of the surety, the surety is discharged from the contract.

CONTRACT OF GUARANTEE cont---DISCHARGE OF SURETY cont---

• Discharge by death of the surety: In specific guarantee the surety is not discharged from his liability on his death if the liability has already occurred. But the death of surety operates as revocation of a continuing guarantee as to future transactions. The deceased surety’s estate will not be liable for any transaction after the death, even if the creditor has no knowledge of surety’s death.

CONTRACT OF GUARANTEE cont---DISCHARGE OF SURETY cont---

• Release or discharge of principal debtor: a surety is discharged by any contract between the creditor and the principal debtor, or any act or omission of the creditor by which the principal debtor is released or discharged.

CONTRACT OF GUARANTEE cont---DISCHARGE OF SURETY cont---

• Compounding of creditor with principal debtor: a contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharge the surety.