p2ch1p7contract act - indemnity and guarantee · difference between indemnity and guarantee....

The Contract Act 1872

CA. Manish Dafria

Unit 1 Part 7 Indemnity and Guarantee

IPCC Paper 2 Business Laws, Ethics & Communication

Learning Objectives

Contract of Indemnity• Meaning• Right of Promisee

Contract of Guarantee• Meaning• Rights and liabilities of the parties• Guarantee When become invalid

Difference Between Indemnity and Guarantee

Contract of Indemnity

Meaning (Sec. 124)

is called a "contract of indemnity".

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

or the conduct of any other person,

A contract by which one party promises to save the other

A contracts to indemnify B against the consequences of any proceedingswhich C may take against B in respect of a certain sum of 20000 rupees. Thisis a contract of indemnity.

Right Of Promisee When Sued (Sec. 125)• The promisee in acontract of indemnity,acting within the scopeof his authority, isentitled to recover fromthe promisor‐

All damages which he may be compelled to pay

All costs which he may be compelled to pay in any suit

All sums which he may have paid under the terms of any suit

Contract of 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.


TerminologyThe person whogives theguarantee iscalled the"surety“ or“guarantor”.

The person inrespect of whosedefault theguarantee is givenis called the"principaldebtor“.

The person towhom theguarantee is givenis called the"creditor".

Consideration for Guarantee

• Anything done, or any promise made, forthe benefit of the principal debtor, is asufficient consideration to the surety forgiving the guarantee. (Sec. 127)

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 promisesto guarantee the payment in consideration of A’s promise to deliver thegoods. This is a sufficient consideration for C’s promise.

Implied Promise to Indemnify Surity(Sec. 145)

and the surety is entitled and the surety is entitled to recover from the principal

debtor whatever sum he has rightfully paid under the guarantee.

In every contract of guarantee, In every contract of guarantee,

there is an implied promise by the principal debtor to indemnify the surety,

Surety’s Liability [Sec 128]

• The liability of the surety is co‐extensive withthat of the principal debtor, unless it isotherwise provided by the contract.

A guarantees to B the payment of a bill of exchange by C, the acceptor. Thebill is dishonoured by C. A is liable, not only for the amount of the bill, butalso for any interest and charges which may have become due on it.

Continuing Guarantee [Sec 129]

• A guarantee, which extends to a series oftransactions, is called a ‘continuing guarantee’.

A, in consideration that B will employ C in collecting the rents of B’szamindari, promises B to be responsible, to the amount of 5,000 rupees, forthe due collection and payment by C of those rents. This is a continuingguarantee.

Revocation Of Continuing Guarantee

A continuing guaranteemay at any time berevoked by the surety,as to futuretransactions, by noticeto the creditor. (Sec130)

The death of thesurety operates, in theabsence of anycontract to thecontrary, as arevocation of acontinuing guarantee,so far as regards futuretransactions. (Sec 131)

Discharge of Surety

Surety is the person who has given the

guarantee

Discharge of suretyAny variance, made without the

surety’s consent,

in the terms of the contract between the principal debtor and the creditor,

discharges the surety as to transactions subsequent to the

variance.

Discharge ofsurety byvariance interms ofcontract (S.133)

A becomes surety to C for B’s conduct as manager in C’s bank. Afterwards,B and C contract, without A’s consent, that Bs salary shall be raised, andthat he shall become liable for one‐fourth of the losses on overdrafts. Ballows a customer to over‐draw, and the bank loses a sum of money.A is discharged from his suretyship by the variance made without hisconsent, and is not liable to make good this loss.

Discharge of Surety The surety is discharged

by any contract between the creditor andthe principal debtor, by which theprincipal debtor is released, or

by any act or omission of the creditor, thelegal consequence of which is thedischarge of the principal debtor.

Discharge ofSurety byrelease ordischarge ofprincipaldebtor (S. 134)A gives a guarantee to C for goods to be supplied by C to B. C suppliesgoods to B, and afterwards B becomes embarrassed and contracts with hiscreditors (including C) to assign to them his property in consideration oftheir releasing him from their demands. Here B is released from his debtby the contracts with C, and A is discharged from his suretyship.

Discharge of Surety

A contract between the creditor and the principal debtor,

by which the creditor makes a compromise with, or promises to give time, or not to sue, the principal debtor,

discharges the surety, unless the surety assents to such contract.

Discharge ofsurety whencreditorcompoundswith, gives timeto, or agreesnot to sue,principal debtor(Sec 135)

Rights of Surety

Rights Of Surety On Payment Or Performance (Sec. 140)

The surety uponpayment orperformance of allthat he is liable for,

gets all the rightswhich the creditorhad against theprincipal debtor.

Surety’s Right to Benefit of Creditor’s Securities (Sec. 141)

A surety is entitled to the benefit of

every security which the creditor has against the principal debtor at the time when the

contract of guarantee entered into,

whether the surety knows of the existence of such security or not.

Surety’s Right to Benefit of Creditor’s Securities (Sec. 141)

• If the creditor loses, or without the consent of thesurety, parts with such security, the surety isdischarged to the extent of the value of thesecurity.

Guarantee When Invalid

Guarantee Obtained By Misrepresentation, Invalid (Sec 142)

is invalid.

concerning a material part of the transaction,

made by the creditor or with his knowledge and assent,

by means of misrepresentation

Any guarantee which has been obtained

Guarantee Obtained By Concealment, Invalid (Sec 143)

Any guarantee

which the creditor has obtained by means of keeping

silence as to a material

circumstance,

is invalid.

Guarantee on Contract that Creditor Shall Not Act on it Until Co‐surety Joins (Sec 144)

Where a person gives a guarantee upon a contract

that the creditor shall not act upon it until another person has joined in it as co‐surety,

the guarantee is not valid if that other person does not join.

Commencement of Guarantor’s (Surety’s) Liability• Liability of surety arises as soon as a default ismade by the principal debtor.

• The creditor can sue the surety without suingthe principal debtor.

Distinction Between a Contract of Indemnity and


Contract of Indemnity and Contract of Guarantee ‐ Distinction

Number of PartiesIn a Contract ofIndemnity there areonly two parties namelythe indemnifier[promisor] and theindemnified [promisee]

In a Contract ofGuarantee there arethree parties‐ creditor,principal debtor andsurety.


Extent of LiabilityIn the Contract ofIndemnity, the liabilityof the indemnifier isprimary andindependent

In the Contract ofGuarantee, the liabilityof the surety issecondary as theprimary liability is thatof the principal debtor


Time of liability

The liability of theindemnifier arises onlyon the happening of acontingency

In case of Guarantee,liability is already inexistence butspecifically crystaliseswhen principal debtorfails


Time to Act

The indemnifierneed not necessarilyact at the request ofindemnified

In case of Guarantee,surety must act byextending guaranteeat the request ofdebtor


Right to Sue Third PartyIn case of contract ofIndemnity, indemnifiercannot sue a third party forloss in his own name asthere is no privity ofcontract

In case of Contract ofGuarantee surety canproceed against principaldebtor in his own rightbecause he gets all therights of a creditor afterdischarging the debts

Summary

A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or the conduct of any other person, is called a "contract of indemnity".

A contract to perform the promise, or discharge the liability, of a third person in case of his default is called a "contract of guarantee".

The person who gives the guarantee is called the "surety“ or “guarantor”. 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".

Summary

Anything done, or any promise made, for the benefit of the principal debtor, is a sufficient consideration to the surety for giving the guarantee.

There are 3 different modes of discharge of surety given by Sec. 133.134 and 135.

After discharge of his liability, a surty has same rights as the creditor had against debtor.

A guarantee obtained by misrepresentation or concealment is invalid.

Thank You

p2ch1p7contract act - indemnity and guarantee · difference between indemnity and guarantee....

Documents