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SPECIFIC CONTRACTS

These are the contracts in which

- the contracts are given a specific name

- the parties are defined

- the terms and conditions are defined

- the rights and obligations of the parties are defined- the mode of discharge is defined

- the remedies for breach are defined

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CONTRACT OF INDEMNITY

It is a contract whereby a person promises to save the

other from loss caused to him by the conduct of the promisor himself

or of any third person.

PartiesIndemifier person who gives the indemnity

Indemnified person for whose protection the indemnity is given

Coverage only against loss caused by some human

agency

- does not cover loss caused by accidents, fire, etc

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Eg : A agrees to indemnify B against any proceedings that

C may initiate against B in respect of a certain sum of Rs2000.

Eg : Implied contract of indemnity in a contract of agency

principal to indemnify agent for all lawful acts done bythe agent in exercise of his authority

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Rights of indemnified

1. To recover damages which he might have been

compelled to pay in any suit in respect of any matter

covered under the contract

2. To recover costs of the suit filed or defended

3. To recover all sums paid under the terms of

compromise effected in such suit provided the

compromise was an act of prudence

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Commencement of liability

Liability of the indemnifier arises as soon as the loss/injury

to indemnity holder becomes imminent (clear andcertain)

- it is not postponed till the indemnified actually suffers

loss

Eg ; A engages B to sell goods worth Rs 20,000. B sells

the goods. C who is the true owner sues B for Rs

20,000. B may recover the money from A as soon as the

suit is filed. B need not have to wait till the court givesjudgment against B.

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CONTRACT OF GUARANTEE

This is a contract to perform the promise or discharge theliability of a third person in case of his default

The purpose is to enable a person to get a loan or goods

on credit

Eg : A agrees to give a loan of Rs 1 lac to B if C gives

guarantee for payment

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Parties1. Surety person who gives guarantee

2. Principal debtor - person in respect of whose default

the guarantee is given

3. Creditor person to whom guarantee is given

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Essential features1. Principal debt existence of a recoverable debt and

someone who is liable as a principal debtor

2. Consideration Anything done or any promise made

for the benefit of the principal debtor is sufficient

consideration to the surety

Eg : A agrees to give goods on credit to B if C guarantees

payment. As promise to B is itself sufficient

consideration to C.

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Difference between indemnity and guarantee

1. Two parties

2. For reimbursement of

loss

3. Liability of the indemnifieris primary

1. Three parties

2. For security of the

creditor

3. Liability of the surety issecondary

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SURETYS LIABILITY

The fundamental principles as to the nature & extent of

suretys liability are1. Co-extensive- The liability of the surety is co-extensive

with that of the pr debtor unless it is otherwise provided

by the contract. A surety is liable for the whole of the

amount for which the principal debtor is liable & for nomore. Surety may by an agreement place a limit upon his

liability.

Eg : A grants a loan of Rs. 20,000 to B & C is a surety. If B

defaults in repayment, C is not only liable for Rs, 20,000but also for the interest that has become due on it.

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2. ConditionalWhere there is a condition precedent to thesuretys liability , he will not be liable unless that condition is first

fulfilled.Eg: Where a person gives a guarantee upon a contract that creditor shallnot act upon it until another person has joined in it as co-surety, theguarantee is not valid if that other person does not join. In such a casethe surety is not liable.

3. Limitation A surety may expressly declare his guarantee to belimited to a fixed amount i.e. he may place a limit upon his liability. Inthat case the liability of the surety cannot go beyond the sum sospecified.

Eg : A takes a loan of Rs 10,000 from B for which C is a surety but Cagrees to guarantee for a sum of Rs 5,000 only. In such a case theliability of C is limited to Rs 5,000.

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4. Liability under continuing guarantee A guarantee whichextends to a series of transactions is called a continuingguarantee. In such a case the surety is liable to the creditor

for all the transactions or if the liability is limited to a fixed

sum, then surety is liable for that sum.

Eg: A guarantees payment to B for all the goods supplied byB to C in the month of September 1999 . B supplies to C

goods worth Rs. 70,000 during Sept 1999 . If C defaults A

is liable to B to the extent of Rs. 70,000.

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5. LIABILITY OF CO-SURETY- Unless there is an agreement

to the contrary the co-sureties are liable to contribute

equally. Where the co-sureties are bound in different sums,they shall be liable for these sums respectively

Eg: A, B & C are co-sureties for D under several agreements.

D makes a default for Rs 30,000 . Each of the co-sureties

A, B & C are liable to pay Rs 10,000.

6. Novation of Main contract where the main contract is

novated, the suretys liability does not extend to the new

contractEg : A gave surety to Bs business as a sole proprietary

concern. Later it is converted to a company and the

liabilities are taken over. As surety does not extend to the

liabilities of the company.

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DISCHARGE OF SURETY - A surety is said to be

discharged from liability when his liability comes to an

end. The following are the modes of discharge of surety.

a) By revocation Normally a guarantee is not revocable

once it is given. However a continuing guarantee may at

any time be revoked by the surety as to futuretransactions by notice to the creditor. Revocation

becomes effective for the future transactions only &

surety remains liable for transactions already entered

into.

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b) BY DEATH A continuing guarantee is revoked on the

death of the surety. The termination becomes effective only

for future transactions. The suretys heirs are liable for pasttransactions.

c) BY VARIANCE- A surety is discharged from his liability if

any variance (change) is made in the terms of the contract

without the consent of the surety. Variance discharges the

surety only with respect to future transactions byt not past

ones subsequent to the variance.

Eg : A agrees to lend Rs.5000 to B on 01-03-1999 & C

guarantees the repayment. A lends the money to B on

01-02-1999. C is discharged from his liability as the

contract between A & B is varied .

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d) BY RELEASE OF PRINCIPAL DEBTOR- If the creditor

releases the principal debtor from his liability, then surety isalso discharged from his liability.

Eg: Where the creditor accepts a compromise & releases the

pr debtor, the surety is also discharged.

e) BY AN ACT OR OMISSION OF THE CREDITOR When

the creditor does any act or omission which discharges the

pr debtor from his liability, the surety is also discharged

from his liability

Eg: A contracts with B to build a house & agrees to supply the

materials & C guarantees for A . B defaults in supplying the

material. A is discharged from liability & so also C.

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f) COMPROMISE , EXTENSION OF TIME & PROMISE NOT TO SUE-Where a creditor makes a compromise with the pr debtor or allows anextension of time to pr debtor or agree not to sue the pr debtor withoutobtaining the consent of the surety, the surety will be discharged fromhis liability

Eg : A grants a loan of Rs.20,000 to B and C is the surety. A promises notsue B for the loan of Rs.20,000 . C is discharged from his liability

g) BY IMPAIRING SURETYS REMEDY- If the creditor does any actwhich is inconsistent with the right of the surety or omits to do any actwhich is his duty towards surety & thereby the suretys remedy againstpr debtor is impaired, the surety is discharged.

Eg : Where a loan was obtained from a bank by pledging gold ornamentsand the bank did not take sufficient care of the ornaments and were

lost, the surety who had guaranteed the loan is discharged from hisliability to the extent of the value of the ornaments.

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RIGHTS OF SURETY

Rights against principal debtor

1. Right of subrogation Where the surety is made liable to pay to the

creditor for the default of pr debtor, the surety is invested with all the

rights which the creditor had against the pr debtor.

Eg : A gives a loan of Rs 20,000 to B for which C is surety. B fails to

repay. C makes payment. C gets the right to recover Rs 20,000 from

B.

2. Right to indemnity In a contract of guarantee, there is a implied

promise by the pr debtor to indemnify the surety for all the sums he

has rightfully paid under the guarantee.

Eg : B is indebted to A and C is surety. A sues C for recovery. C

defends the suit. The costs incurred by C are recoverable from B.

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Rights against creditor

1. Right to securities Surety is entitled to all the securities

which the creditor has against the pr debtor at the time of

the contractEg : A advances a loan to B for which B has deposited a gold

chain and C is the surety. If on Bs default, C is made to

pay the loan, C has right to take the gold chain from A.

2. Right to share reductionWherever the creditors liabilityis reduced, the suretys liability is also reduced

proportionately

3. Right of set-off If the creditor sues the surety, the surety

will have the benefit of set-off that the pr debtor hadagainst the creditor

Eg : A advances a loan of Rs 20, 000 to B for which C is

surety. In another transaction, A owes Rs 5,000 to B. If A

sues C for Rs 20,000 then C can claim set-off for Rs5,000.

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Rights against co-sureties

1. Effect of release of a surety where the creditor releases

one of the co-sureties, it does not free such a surety from

his responsibility to the other sureties.

2. Right to contribution - Unless there is an agreement to

the contrary the co-sureties are liable to contribute

equally. Where the co-sureties are bound in differentsums, they shall be liable for these sums respectively

Eg: A, B & C are co-sureties for D under several agreements.

D makes a default for Rs 30,000 . Each of the co-sureties

A, B & C are liable to pay Rs 10,000.