Chapter 8: Indemnity and Guarantee

Very Short Question Answer

1. What is a contract of indemnity?

Indemnity is a specific contract where a person promises or gives an assurance to another to save him from loss caused to him in the dealing between them in such circumstances as promised by the promisor. In fact, it is a promise of the promisor to save the promisee or make him good for loss suffered as a result of the circumstances as agreed between the parties.

2. State any two differences between indemnity and guarantee.

 The main two differences between indemnity and guarantee are as follows:

Basis	Indemnity	Guarantee
1. Number of parties	There are two parties	There are three parties
2. Number of agreement	There is only one agreement	There are three separate agreements in a single contract

3. Who is a surety?

Surety is a person a party of a guarantee or promisor who gives assurance or promises to perform the obligation in case of default of the principal debtor.

4. What is a continuing guarantee?

When a guarantee extends to a series or number of transactions in future, is called a continuing guarantee. The liability of surety in case of continuing guarantee extends to all the transactions contemplated until the revocation of guarantee.

5. What do you mean by subrogation?

 When rights of one are transferred or devolved to another and stands on the place of the other, it is known as subrogation. In guarantee, once the payment is made, the surety stands in the place of creditor and acquires all the rights of creditor in the contract, mainly rights against the principal debtor. The creditor drops out from the contract and the surety replaces him from his position.

Short Question Answer

1. What is guarantee? When does the liability of a surety under a contract of guarantee comes to end? Illustrate and explain. [10)

MEANING OF GUARANTEE

A contract of guarantee is understood to be a collateral engagement to answer for the debt, default or miscarriage of another person. In other words, it is a contract between three parties, namely, surety, creditor and debtor where surety promises to be responsible or to make good for loss caused to the creditor by the act, default or miscarriage of the principal debtor. A person who gives assurance to the third party, is responsible for the debt, default or miscarriage of the second party. Where ‘A’ promises that he will pay the debt of ‘c’ if ‘B’, the debtor, fails to pay it to ‘C’.

Here, the contract of guarantee postulates three persons:

The ‘Guarantor’ or surety- who gives the guarantee. The Creditor- to whom the guarantee is given. The principal debtor- whose debt or default or miscarriage is the foundation of the guarantee. Thus, a contract of guarantee is a promise to perform the promise or discharge the liability of a third person in case of his default.

DISCHARGE OF SURETY

A surety is said to be discharged when his liability comes to an end. The various modes by which the liability of a surety under a contract of guarantee come to an end as follows:

Modes of Discharged of Surety’s Liabilities

Discharge of surety by revocation. It may take place in different situations:

• Revocation by surety by giving notice: A specific guarantee cannot be revoked but a continuing guarantee may, at any time, be revoked by surety by giving notice to the creditor. By revocation surety is discharged from liabilities as to the future transaction only.
• Revocation by death: In case of death of surety his liability comes to and end and the liabilities under a new contract become effective or enforceable.
• Revocation by Novation: If party substituted new contract for an old the liability of surety under original contract of guarantee comes to an end.
• Discharge of surety’s liability by the conduct of the creditor.

It may take place by:

• Variance in terms of contract: A surety is liable for what he has undertaken in the contract. When the terms of the contract are varied without surety’s consent, his liability comes to and end.
• Release or discharged of principal debtor: If principal debtor is released by creditor from his debt the surety’s liability also come to an end.
• Loss of security: If the creditor losses or without consent of the surety, parts with any security given to him, the surety’s liability comes to an end to the extent of the value of security.
• Discharge of surety’s liability by invalidation of contract: If guarantee is obtained by misrepresentation, fraud or concealment or without consideration the surety’s liability comes to an end.

2. Explain the right and duties of surety under the contract of guarantee.

RIGHTS OF A SURETY

A surety has different rights which are as follows:

a. Rights of surety against creditor. This may be of two kinds:

• A surety may, after the guaranteed debt has become due and before he is called upon to pay, require the creditor to sue the principal debtor. The creditor, without suing the principal debtor cannot demand to pay the debts, from surety.
• At the time of payment, a surety has right to ask the creditor to release or ‘marshal’ his securities.

b. Rights of surety against the principal debtor. This may be of three kinds:

• Right to be subrogated: After payment, the surety stands in the place of creditor and subrogated to all rights which the creditor had against the principal debtor.
• Right to be relieved from liabilities: Before the payment has been made, the surety can compel the principal debtor to relieve him from liabilities by paying off the debt.
• Right to indemnify: In every contract of guarantee there is an implied promise by principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor all payment properly made by him to the creditor.

c. Right against securities: A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time of contract or subsequently whether the surety knows of the existence of such securities or not. Similarly, by giving a reasonable notice for payment to the principal debtor can sell them.

d. Rights against co-sureties: Where there are more than one surety and a surety has paid more than his part of the burden, then he is entitled to contribution form other co-sureties who are equally bound to pay with them. It is known as right of contribution. If one of the co-sureties has received any securities from the creditor, such securities must divided among the sureties.

3. What is a contract of indemnity? Describe the rights and duties of indemnity holder.

MEANING OF INDEMNITY

Indemnity is a specific contract where a person promises or gives an assurance another to save him from loss caused to him in the dealing between them in circumstances as promised by the promisor. In fact, it is a promise of the promiso to save the promisee or make him good for loss suffered as a result of the circumstances as agreed between the parties.

RIGHTS OF INDEMNITY-HOLDER

The rights are as follows:

1. The indemnity holder can recover all the amount mentioned in the contract as indemnity.
2. He can recover all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies.
3. He can recover the amount incurred on the case filed or defended by him in connection with the contract of indemnity.
4. He can recover all costs incurred on the legal action. If it becomes necessary to initiate such action for failure to pay the amount mentioned in 1 to 3.
5. He can recover all sums which he may have paid under the terms of any compromise of any suit. The compromise should not be contrary to the orders of the indemnifier and should be prudent or authorized by the indemnifier.

DUTIES OF INDEMNITY-HOLDER

The duties are as follows:

1. Duty to take reasonable care, skill and diligence: While acting business covered by the contract of indemnity the indemnity-holder must act with due care, skill and diligence, otherwise, he can not claim compensation for loss.
2. Duty to communicate the indemnifier: If there is emergency of necessity in the course of business as far as, possible he is bound to communicate the indemnifier. If he fails to communicate and act something or expenses some amount, he cannot recover the compensation for loss.
3. Duty to follow the instruction: If an instruction is given by the indemnifier such is to be followed by him. If he does not follow, he can not claim compensation for loss.
4. Duty to act in good faith: The indemnity holder must act in good faith. Therefore, acts done with bad intention which causes loss to him the indemnifier is not liable for the same.

3. Define a contract of indemnity. Explain the rights and duties of indemnifier. MEANING OF INDEMNITY

Indemnity is a specific contract where a person promises or gives an assurance to another to save him from loss caused to him in the dealing between them in such circumstances as promised by the promisor. In fact, it is a promise of the promisor to save the promisee or make him good for loss suffered as a result of the circumstances as agreed between the parties.

RIGHTS OF INDEMNIFIER

1. Right to claim compensation: If there is loss in the said business by negligence of the indemnity holder, or by not following instruction given by him he can claim compensation for his loss from the indemnity holder.
2. Right of indemnity: If any expenses has been incurred by him which have been incurred by the indemnity-holder, he can recover these amounts from the indemnity -holder.
3. Right to give instructions in the business: Indemnifier can give instruction in the way and manner of business while doing it, and that is to be followed by the indemnity-holder.
4. Right to pay for only loss caused in the course of business: Indemnifier is liable to pay for those loss which are caused in the course of business and those loss caused which are not covered by the contract he is not liable.

DUTIES OF INDEMNIFIER

1. Duty to pay compensation for loss: Under the business covered by the contract if there is any loss to the indemnity-holder he is liable to pay for those loss.
2. Duty to pay money which the indemnity holder is suffered while bringing a case or defending it.
3. He is under duty to pay money which the indemnity-holder reasonably incurred or paid while compromising a case. 4. He is liable to pay money for loss caused to the indemnity-holder by his act or default or defective goods or title.
4. Duty to take reasonable care, skill and diligence: While performing in the business or acts to which the indemnity applies he is bound to act with due care skill and diligence. Therefore, if there is loss by reason of his negligence or delay in delivery or defective delivery, he is liable to pay compensation to the indemnity-holder.

4. What is contract of guarantee? Show the difference between a contract of indemnity and a contract of guarantee.

MEANING OF CONTRACT OF GUARANTEE

A contract of guarantee is understood to be a collateral engagement to answer for the debt, default or miscarriage of another person. A person who gives assurance to the second party is responsible for the debt, default or miscarriage of the third party. If ‘A’ promises that he will pay the debt of ‘c’ if ‘B’, the debtor, fails to pay it to ‘C’ is a contract of guarantee.

Here, the contract of guarantee includes three persons:

The ‘Guarantor’ or surety- who gives the guarantee. The Creditor- to whom the guarantee is given. The principal debtor- whose debt or default or miscarriage is the foundation of the guarantee.

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

MEANING OF INDEMNITY

A contract of indemnity has been defined in English law as a promise to save another from loss caused as a result of a transaction enter into at the instance of the promisor. It is an assurance given by the promisor to promisee that he will make good or save from loss which is raised from their contract. For example ‘A’, a company, by a contract promises that it will be responsible for loss and make good to ‘B’ if he sells the product of the company. In such transaction, if any loss caused to ‘B’, whatever may be the reason, ‘A’ is bound to pay the compensation to ‘B’.

Who gives such assurance known as indemnifier and to whom that assurance is given known as indemnity-holder, or indemnified. Indemnity contract includes all losses whether it may caused by the act of the parties or act of the god or accident or natural phenomenon. Example: insurance contracts:

DIFFERENCE BETWEEN CONTRACT OF INDEMNITY AND GUARANTEE

The difference between contract of indemnity and guarantee are as follows:

Basis	Contract of indemnity	Contract of guarantee
Number of parties	There are two parties to the contract. Viz, the indemnifier and the indemnity holder.	There are three party to the contract, viz, the creditor, the principal debtor and the surely.
Nature of liability	The liability of the indemnifier is primary.	The liability of guarantor or surety in secondary.
Number of contracts	There is only one contract in indemnity.	There are three contracts in guarantee
Request for guarantee	It is not necessary for the indemnifier to act at the request of the indemnified.	It is necessary that the surety should give the guarantee at the request of the debtor.
Contingent nature	The liability of the indemnifier arises only on the happening of contingency.	There is usually an existing duty to pay the debt by surety.
Right to sue the third party	An indemnifier cannot sue a third party for his loss.	A surety. can sue the principal debtor for his loss.