1. Contract Of Indemnity And Guarantee Flashcards
Contract of Indemnity
According to section 124, Indian Contract Act, 1872,
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 conduct of any other person, is called a Contract of Indemnity
Parties to a Contract of indemnity
Two.
The party who promises to indemnify/ save the other party from loss is known as indemnifier.
Whereas
The party who is promised to be saved against the loss is known as indemnified/ Indemnity holder
Rights of indemnity - holder when sued
Sec 125- the promisee in a contract of indemnity, acting within a scope of his authority, is entitled to recover from the promisor—
- All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies
- All costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promissor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promissory authorized him to bring or defend the suit
- All sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promissor, and was one which it would have been prudent for the promise to make in the absence of any contract of indemnity, or if the promissor authorized him to compromise the suit
It may be understood that the rights contemplated under section 125 are not exhaustive. The indemnity holder/ indemnified has other rights besides those mentioned above. If he has incurred a liability and that liability is absolute, he is entitled to call upon his indemnifier to save him from the liability and to pay it off.
The liability of the surety is co- extensive with that of the principal debtor
As per section 128 of the Indian Contract Act, 1872, the liability of the surety with that of the principal debtor unless it is otherwise provided by the contract.
The term co-extensive with that of principal debtor means that the surety is liable for what the principal debtor is liable. However, the liability of the surety may be made less than that of the principal debtor by an express contract to that effect.
The liability of a surety arises only on default by the principal debtor. But as soon as the principal debtor defaults, the liability of the surety begins & runs co-extensive with the liability of the principal debtor, in the sense that the surety will be liable for all those sums for which the principal debtor is liable. If there is condition precedent for surety’s liability, the surety would be liable only when such condition is fulfilled.
Continuing guarantee
According to Section 129 of the Indian Contract Act, 1872 a guarantee which extends to a series of transactions is called a ‘continuing guarantee. The liability of the surety in such a guarantee continues until the performance or discharge of all the transactions entered into or the guarantee is withdrawn.
Further, as per section 130 of the Indian Contract Act, 1872 a specific guarantee cannot be revoked by the surety if the liability has already accrued. A continuing guarantee may, at any time, be revoked by the surety, as to future transactions, by notice to the creditor, but the surety remains liable for transactions already entered into
Circumstances in which surety is discharged from liability
A surety is said to be discharged when his liability come to an end. A surety may be discharge from his liability by the conduct of the creditor in the following cases:
(i) Variance in terms of contract (Section 133): Any variance, made with out the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety a transactions subsequent to the variance.
(i) Release or discharge of principal debtor (Section 154): The surety is discharged by any contrac between the creditor and the principal debtor by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. But in the following cases the surety will not be discharged even through the principal debtor has been released.
(a) If the principal debtor is discharged by operation of law eg. discharge/insolvency. (b) If creditor omits to sue the principal debtor within the period of limitation.
(iii) By impairing surety’s remedy (Section 159): If the creditor does any act which is inconsistent with the rights of the surety, or omits to do any act which the duty to the surety requires him to do
and the eventual remedy of surety himself against the principal debtor is thereby impaired, the surety is discharged.
(iv) Compounding by creditor with the principal debtor (Section 135) Any contract between the principal debtor and the creditor by which the creditor makes composition with, or promises to given time to, or not to sue, the principal debtor, discharges the surety, unless the surety assent to such contract.
Surety is not discharged in the following cases
(a) where a contract to give time to the principal debtor is made by the creditor with a third person. and not with the principal debtor (Section 136).
(b) Mere forbearance on the part of the creditor to sue the principal debtor to enforce any other remedy against him does not discharge the surety (Section 137)
(c) Where there are co-sureties, release by the creditor of one of them does not discharge the other, neither does it free the surety so released from his responsibility to the other sureties (Section 138).
Surety unaware of security
According to section 141 of the Indian Contract Act, 1872, 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 suretyship is
entered into, whether the surety knows of the existence of such security or not; and, if the creditor loses, or, without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security,
Contract of guarantee
Section 126 of the Indian Contract Act, 1872 states that “A contract to perform the promise made on discharge liability incurred by a third person in case of his default” is called a “contract of guarantee”.
Conditions under which guarantee is invalid/void
(a) Guarantee obtained by misrepresentation invalid [Section 142]: Any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid.
(b) Guarantee obtained by concealment invalid [Section 143]: Any guarantee which the creditor has
obtained by means of keeping silence as to material circumstances is invalid.
(c) Guarantee on contract that creditor shall not act on it until co-surety joins (Section 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.
Right against the principal debtor
(a) Rights of subrogation (Section 140]: Where, a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. This right is known as right of subrogation. It means that on payment of the guaranteed debt, or performance of the guaranteed duty, the surety steps into shoes of the creditor.
(b) Implied promise to indemnify surety [Section 145]: In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. The surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but not sums which he paid wrongfully.
Rights against co-sureties
(a) Co-sureties liable to contribute equally (Section 146): Equality of burden is the basis of Co- suretyship. This is contained in section 146 which states that “when two or more persons are co- sureties for the same debt, or duty, either jointly, or severally and whether under the same or different contracts and whether with or without the knowledge of each other, the co-sureties in the absence of any contract to the contrary, are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor”.
(b) Liability of co-sureties bound in different sums (Section 147): The principal of equal contribution is, however, subject to the maximum limit fixed by a surety to his liability. Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit.
