Chapter 7 - Guarantees, Indemnities, Bailment and Lien

Question 1

Guarantees

the nature of a guarantee

Answer 1

Secondary legal agreement by one party, in writing, under signature, to answer for the principal’s debt, default or miscarriage or another

Question 2

Guarantees

Characteristics of a Guarantee

Answer 2

There must be 3 parties:

• principal debtor
• principal creditor
• guarantor

Question 3

Guarantees

Primary and secondary liability

Answer 3

Debtor has primary liability; guarantor has secondary liability.

That is, guarantor is only liable if debtor doesn’t pay

Question 4

Guarantees

How guarantee is created

Answer 4

• by giving of rights or the deposit of rights to security by the guarantor (land, money, etc)
• needs to be evidenced by a signed note or memorandum in writing
• guarantor will have no other connection to the primary contract than to discharge the debtor’s liability, if the latter doesn’t do so.

Example: a shareholder being guarantor for their company’s debts is a valid guarantee agreement, as they have no legal interest on mortgage or company’s goods

Question 5

Guarantees

How guarantee is created

Answer 5

• it’s not a uberrimae fidei contract (of the utmost good faith), because there is no need for disclosure of material factor by the debtor or the creditor to the guarantor. Which means fraud on the debtor is not enough to set aside the contract of guarantee, unless guarantor can prove that creditor was aware and part of it.
• when guarantee is given to a bank, there is no obligation on the bank to inform the guarantor on matters affecting how credit-worth the debtor is, or any other circumstances connected with the transaction
• if it refers to an insurance, as in a ‘fidelity guarantee’ it will be an ‘uberrimae fidei’ contract (of utmost good faith) and all material facts must be disclosed by the creditor to the guarantor, without being asked to do so. Otherwise guarantor can avoid the contract,

Question 6

Guarantees

Discharge of the Guarantor

Answer 6

Guarantor can discharge the contract in the following situations:

• contract between debtor and creditor is varied without the consent of the guarantor
• creditor or debtor’s identity is changed, unless guarantor has agreed
• creditor makes a binding contract allowing more time for debtor to pay
• creditor omits to do something which is bound to do for the protection of the guarantor
• creditor gives up any security to guarantor in respect of the guaranteed debt
• creditor impliedly or expressly discharges the debtor
• guarantee is revoked by the creditor

Question 7

Indemnities

Answer 7

Primarily undertaking by one party to recompense the other for incurred losses if a specific eventuality doesn’t occur.
That is, compensation offered in case something happens (or doesn’t happen) - indeminizacao

Question 8

Indemnities

The characteristics of an indemnity

Answer 8

There are 2 parties: debtor and creditor

Debtor is primarily liable, and there is no secondary liability.

Person giving the indemnity has greater interest in the transaction other than the indemnity.

Question 9

Differences between contracts of guarantee and contracts of indemnity

Answer 9

Guarantee: if principal debtor is discharged with no further liability, so is the guarantor. That is the contract is frustrated and debt doesn’t have to be paid. Also, if the contract is void, by the debtor, guarantor is also discharged.

Indemnity: because liability is primary, it is likely to endure, even if the apparent contract doesn’t.

Guarantee: requires a signed memorandum at minimum, in order to be enforceable.

Indemnity: enforceable even without written evidence.

Guarantee: there must be consideration from the creditor to the guarantor, for the guarantor’s promise of liability (i.e. credit to the the debtor)

Indemnity: also requires consideration. it may take the form of the unconnected contractual relationship

Guarantee: comes to an end as stated above.

Indemnity: comes to an end when the eventuality is no longer possible to happen (likely because the contract has been discharged by performance).

Question 10

Bailment

Answer 10

Delivery of goods by one person (the bailor) to another (the bailee) on the condition that the bailee re-delivers the goods to the bailor.

Question 11

Bailment

Examples

Answer 11

• deposit of goods in a cloakroom or left-luggage office
• loan for tangible chattels (not money)
• pawn
• hire of goods
• entrusting goods to a warehouseman or carrier

Question 12

Bailment

Features

Answer 12

• concerned with personal property nd not real property (land)
• often originates in contract (but not always)
• involves transfer of possession from bailor to bailee

Question 13

Bailment

Employee?

Answer 13

Employee who receives goods from employer to take it to a third party has mere custody. Possession remains with the employer.
However, if a third party gives goods to an employee for them to take to their employer, than they are bailee, as they took possession of the goods.

Question 14

Bailment

Banker?

Answer 14

A banker is not a bailee of the money that is deposited. Furthermore, they have no obligation to return the same amount in the same exact notes and coins.
However, bakers are bailees of property or goods that are deposited with them for safe custody.

Question 15

Bailment

Finder?

Answer 15

Finder is not a bailee, as they were not entrusted with goods.
However if they take them into their possession, they are liable for loss or damage resulting from their negligence.

Question 16

Bailment

Consideration

Answer 16

Consideration from bailor is their parting with the possession of the goods; consideration from bailee is the promise to return them.
There may be additional consideration in payment: from bailor , as a deposit of the goods in a cloakroom, or the bailee in a contract of hire.

Question 17

Bailment

third party damage

Answer 17

If a third party is responsible for damaging goods while in the possession of the bailee; bailee can recover damages from third party, but has to hold the amount recovered as trustee for the bailor.
That is bailor is entitled to the damages.

Question 18

Bailment

Gratuitous bailments

Answer 18

If unpaid bailment, the bailor must communicate to the bailee any defects of the article lent (that they are aware of).

Bailor should take reasonable care that goods aren’t dangerous, even if they aren’t aware of any defects in the goods. If that turns out the be the case, bailor is liable.

Question 19

Bailment

Paid Bailments

Answer 19

Implies warranties on the bailor that:

• bailor has the title of the goods so that bailee’s possession is not disturbed;
• goods are fit and suitable for the bailee’s purpose

There is no liability on the part of the bailor where damage is caused by the bailee and they have not relied on skill and judgement of the bailor.

Question 20

Bailment

Duties of bailee

Gratuitous bailments

Answer 20

Must take care of the property as any reasonable person would take care of their own goods.

Question 21

Bailment

Duties of bailee

Paid bailments

Answer 21

• where bailee’s profession requires a level of expertise, they will be liable if they fail to deliver that expertise
• where goods are known to be fragile or valuable, a higher standard of care will be expected; and may be liable for negligence if they don’t advise of a loss or try to recover lost or stolen property.
• bailee is responsible for torts of their servants.

Question 22

Bailment

Bailee’s rights to sell

Answer 22

A bailee has no right to sell goods bailed, even if they incurred expenses linked to the goods.

However, a bailee who has not been paid for services rendered in respect of the bailed goods, has the right to sell them.

Question 23

Lien

Types of Lien

Answer 23

Possessory

Maritime

Equitable

Question 24

Lien

Possessory Lien

e: Hatton v Car Maintenance (1915)

Answer 24

Right to retain possession of a person claiming the lien, until claim is satisfied.

Requirements below must be met:

• possession must be rightful
• possession must not be for a particular purpose
• possession must be continuous

Case: Hatton v Car Maintenance (1915)
Mrs H owned car and agreed with the company they would maintain and garage it for 3 years, on being paid an annual sum. She could take the car out as and when she liked, when annual payment was late, they detained the car in the garage and claimed a lien.
Held: company had no lien, as possession was not continuous, because she could take the car whenever she pleased.

Question 25

Lien

Possessory Lien - General Lien

Answer 25

Right to retain possession of goods of another until all claims against that other have been satisfied, due to:

express agreement
a course of dealing
continuous and well-recognised usage (examples: stockbrokers, solicitors, factors, bankers).

Banker has lien on all securities for the general balance owed to them on his customers.
they also have the right to combine accounts if the later is in credit on one account, but in debt in another,

Question 26

Lien

Possessory Lien - Particular Lien

Answer 26

Right to retain goods until all charges incurred in respect of those goods have been paid.

(example: carriers have a lien in respect of carrying costs for the goods; hoteliers have lien on guests’ luggage)

Question 27

Lien

Possessory Lien - Particular Lien doesn’t rise unless

Answer 27

• work has been completed (unless owner has prevented completion)
• chattel has been improved by the work or the expenditure

(Example maintaining a motor car doesn’t amount to lien, as there no improving it)

Question 28

Lien

Enforcement

Answer 28

A possessory lien is enforced by the right of retention. No claim can be made for storage or for any other expense to which the person exercising the lien must be put.

There is no general right to sale, although a lien may be enforced by sale under the Torts Act 1977 or the Sale of Goods Act 1979.

Question 29

Lien

Extinguishment of lien

Answer 29

A possessory lien is extinguished by:

• loss of possession of goods (driving the car away)
• payment or tender of the amount claimed
• taking security so as show that security was taken in substitution of the lien
• abandonment

Question 30

Lien

Maritime Lien

Answer 30

right binding a ship (its furniture, tackle, cargo and freight) for payment of a claim founded upon maritime law.

Different from possessory lien as:

• it is not founded on possession
• exercised by taking action against the property itself (arresting the ship)

Question 31

Lien

Maritime Lien - people who can claim

Answer 31

• salvors of property saved
• seamen for wages
• master for wages
• claimants in respect of damage caused by collision due to ship’s negligence

Maritime lien attaches to the ship, despite the sale or transfer of the ship, even if to a bona fide purchaser having no notice of the lien, It remains in existence until payment, release, abandonment or loss or destruction of the ship.

Question 32

Lien

Equitable Lien

Answer 32

Charge upon property that is imposed by the law until certain claims have been satisfied. it attaches independently of the possession, and it is therefore different to possessory lien.

Question 33

Lien

Equitable Lien - Land

Answer 33

Upon sale of land and unpaid vendor lien arises in favour of the vendor, unless the contract excludes the right.
If someone advances money in payment for land that another is under contract to purchase, they are entitled to the same lien, as they would if the price remained unpaid (unless clear that parties intended otherwise).
Purchaser has lien of the land for the amount of the deposit.

Question 34

Lien

Equitable Lien - Partnership Assets

Answer 34

On dissolution of partnership, due to death, bankruptcy or retirement of a partner. The retiring partner has a lien on the partnership assets existing at the date of dissolution for payment of debts prior to dissolution.

Question 35

Lien

Equitable Lien

Answer 35

Equitable Lien is binding on persons acquiring property subject to lien, with notice of the existence of lien.

Therefore someone who buys property subject to lien in good faith, without being advised, will not buy the property subject to lien.