Sie sind auf Seite 1von 17

SPECIAL CONTRACTS

CHAPTER 1
INDEMNITY AND
GUARANTEE

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 promises to make good the loss is
called the indemnifier (promisor) and the person
whose loss is to be made good is called the
indemnified or indemnity holder (promisee).
Example: A contracts to indemnify B against the
consequences of any proceedings which C may take
against B in respect of a certain sum of Rs. 200.
A is an indemnifier or a promisor while B is an
indemnity holder or a promisee.

ESSENTIAL ELEMENTS OF AN
INDEMNITY CONTRACT
1.
.

2.
3.

Loss to one party.


A person can indemnify another person, only if
such other person incurs some loss or is about to
incur some loss.
Indemnity by the promisor
Reason for loss

1.1 Rights of indemnity holder when sued:


I. All damages which he may be compelled to pay in any suit in
respect of any matter to which the promise to indemnify applies.
II. All costs which he may be compelled to pay in bringing or
defending such suits. But the indemnified should have acted as
any prudent man would act under similar circumstances in his
own case or with the authority of the indemnifier. And
III. All sums which he may have paid under the terms of any
compromise of any such suit. The compromise should not be
contrary to the orders of the indemnifier and should be prudent
or authorized by the indemnifier.

1.
2.
3.

Right to recover damages


Right to recover costs
Rights to recover sums paid in compromise

CONTRACT OF GUARANTEE

A contract of guarantee is a contract to perform the


promise, or discharge the liability, of a third person
in case of his default.
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. And the person to whom the guarantee is
given is called the creditor.
The guarantee may be express or implied.
S stands for surety, P for principal debtor, and C
for creditor.

Example: S requests C to lend Rs 500 to P and


guarantees that if P fails to pay the amount, he will
pay. This is a contract of guarantee.
Example: S and P go into a shop. S says to the
shopkeeper, C, let P have the goods, and if he does
not pay, I will pay.
Example: Sagar requests Chetan to lend Rs 500 tp
Paresh and guarantees that if Paresh fails to pay the
amount, he will pay. This is a contract of guarantee.
Sagar is the surety, Chetan the creditor and Paresh
the principal debtor.

A contract of guarantee is a tripartite agreement


which contemplates the principal debtor P, the
creditor C and the surety S in it. There is a
triangular relationship.
i.
As between C and P, there is a contract out of
which the guaranteed debt arises.
ii.
As between S and C, there is a contract by
which S guarantees to pay to C, Ps debt in case
of his (Ps) default.
iii. As between S and P, there is a contract that P
shall indemnify S in case S pays in the event of
a default by P.

ESSENTIAL ELEMENTS OF CONTRACT OF


GUARANTEE
1.
.

2.

Concurrence: A contract of guarantee requires


the concurrence of all the three parties to it.
Example: C enters into a contract with P, S,
without any communication with P, undertakes
for a consideration moving from C to indemnify
C against any damages that may arise from a
breach of Ps obligation.
Primary liability in some person: There
must be a primary liability in some person other
than surety.

3.
a)
b)

4.

Essentials of a valid contract:


All the parties must be capable of entering into
a valid contract.
Consideration received by the principal debtor
is sufficient for the surety.
Writing not necessary: A guarantee may be
oral or written.

GUARANTEE IS NOT A CONTRACT


OF UBERRIMAE FIDEI

one requiring full disclosure of all material facts


by the principal debtor or creditor to the surety
before the contact is entered into.

DIFFERENCE BETWEEN CONTRACT OF


INDEMNITY AND CONTRACT OF GUARANTEE
Indemnity

Guarantee

1. There are 2 parties. Indemnifier


(Promisor) and the indemnified
(Promisee)

1. There are 3 parties. Creditor,


Principal debtor and Surety.

2. The liability of the indemnifier to


the indemnified is primary and
independent.

2. The liability of the surety to the


creditor is collateral or secondary,
the primary liability being that of
the principal debtor.

3. There is only 1 contract.

3. There are 3 contracts.

4. It is not necessary for the


indemnifier to act at the request of
the indemnified.

4. It is necessary that the surety


should give the guarantee at the
request of the debtor.

5. The liability of the indemnifier


arises only on the happening of a
contingency.

5. There is usually an existing debt


or duty the performance of which is
guaranteed by the surety.

3. Extent of suretys Liability


3.1 Nature of suretys liability it is co-extensive: S guarantees to C
the payment of a bill of exchange by P, the acceptor. The Bill is
dishonored by P. S is liable not only for the amount of the bill but also for
any interest and charges which may have become due on it.
3.2 Limitation of suretys liablitiy: P owes C Rs. 8000 on a continuous
guarantee given by S. S may have given this guarantee in either of the
following two forms:
i.

I guarantee the payment of the debt of Rs. 5000 by P to C.

ii.

I guarantee the payment of any amount lent by C to P subject to a


limit of Rs. 5000.

3.3 Liability under continuing guarantee (sec. 129): liability of surety


when the contract between creditor and principal debtor is void.

Kinds of Guarantee: The function of a contract of


guarantee is to enable a person to get a loan, or
goods on credit, or an employment. A guarantee may
therefore be give for 1. the repayment of a debt, or
2. the payment of the price of the goods sold on
credit. Or 3. the good conduct or honesty of a
person.

A guarantee may be in respect of a single


transaction or in respect of a number of
transactions:
a) Specific guarantee
b) Continuing guarantee

Revocation of a continuing guarantee:

1.

By notice

2.

By death of surety

3.

By other modes

5.

Rights of Surety:
A surety has rights against -

a)

The creditor

b)

The principal debtor, and

c)

The co- sureties

5.1

Rights against creditor

i.

Before payment of the guaranteed debt

ii.

Right of set of

iii.

On payment of the guaranteed debt

5.2

Rights against principal debtor

i.

Right to be relieved of liability

ii.

Right to indemnity

5.3 Rights against co sureties


iii.

Co sureties liable to contribute equally

iv.

Liability of co sureties bound in diferent sums

v.

Release of a co - surety

Discharge of surety
6.1 Discharge of surety by revocation
i. Revocation by surety by giving a notice
ii. Revocation by death
iii. Revocation by novation
6.

6.2 Discharge of surety by the conduct of the creditor


iv. Variance in terms of contract
v. Release of discharge of principal debtor
vi. Compounding by creditor with principal debtor
vii. Creditors act or omission impairing suretys eventual
remedy
viii. Loss of security

6.3

Discharge of surety by invalidation of contract

i.

Guarantee obtained by misrepresentation

ii.

Guarantee obtained by concealment

iii.

Guarantee on contract that creditor shall no act on it until a co surety joins

iv.

Failure of consideration