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IPCCPaper2

BusinessLaws,Ethics&Communication

TheContractAct
1872
Unit1Part7 IndemnityandGuarantee

CA.ManishDafria
LearningObjectives
ContractofIndemnity
Meaning
RightofPromisee

ContractofGuarantee
Meaning
Rightsandliabilitiesoftheparties
GuaranteeWhenbecomeinvalid

DifferenceBetweenIndemnityandGuarantee
ContractofIndemnity
Meaning(Sec.124)

Acontractbywhichonepartypromisestosavetheother

fromlosscausedtohim
bytheconductofthe ortheconductofanyother
promisor himself, person,

iscalleda"contractofindemnity".
A contracts to indemnify B against the consequences of any proceedings
which C may take against B in respect of a certain sum of 20000 rupees. This
is a contract of indemnity.
RightOfPromisee WhenSued(Sec.
125)
The promisee in a Alldamageswhichhemay
contract of indemnity, becompelledtopay
acting within the scope
of his authority, is Allcostswhichhemaybe
compelledtopayinany
entitled to recover from suit
the promisor
Allsumswhichhemay
havepaidundertheterms
ofanysuit
ContractofGuarantee
Meaning(Sec.126)

A"contractofguarantee"isacontract

toperformthepromise,ordischargetheliability,ofa
thirdperson

incaseofhisdefault.
ContractofGuarantee

Terminology
The person in
The person who
respect of whose The person to
gives the
default the whom the
guarantee is
guarantee is given guarantee is given
called the
is called the is called the
"surety or
"principal "creditor".
guarantor.
debtor.
ConsiderationforGuarantee
Anything done, or any promise made, for
the benefit of the principal debtor, is a
sufficient consideration to the surety for
giving 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 promises
to guarantee the payment in consideration of As promise to deliver the
goods. This is a sufficient consideration for Cs promise.
ImpliedPromisetoIndemnifySurity
(Sec.145)
Ineverycontractofguarantee,
thereisanimpliedpromiseby
toindemnifythesurety,
theprincipaldebtor

andthesuretyisentitled
torecoverfromtheprincipal whateversumhehasrightfully
debtor paidundertheguarantee.
SuretysLiability[Sec128]
The liability of the surety is coextensive with
that of the principal debtor, unless it is
otherwise provided by the contract.

A guarantees to B the payment of a bill of exchange by C, the acceptor. The


bill is dishonoured by C. A is liable, not only for the amount of the bill, but
also for any interest and charges which may have become due on it.
ContinuingGuarantee[Sec129]
A guarantee, which extends to a series of
transactions, is called a continuing guarantee.

A, in consideration that B will employ C in collecting the rents of Bs


zamindari, promises B to be responsible, to the amount of 5,000 rupees, for
the due collection and payment by C of those rents. This is a continuing
guarantee.
RevocationOfContinuingGuarantee
A continuing guarantee The death of the
may at any time be surety operates, in the
revoked by the surety, absence of any
as to future contract to the
transactions, by notice contrary, as a
to the creditor. (Sec revocation of a
130) continuing guarantee,
so far as regards future
transactions. (Sec 131)
Suretyistheperson
whohasgiventhe
guarantee

DischargeofSurety
Dischargeofsurety
Anyvariance,madewithoutthe
suretysconsent,

Discharge of inthetermsofthecontractbetween
theprincipaldebtorandthecreditor,
surety by
variance in
terms ofBs conduct as manager in Cs bank. Afterwards,
A becomes surety to C for
B and C contract, without As consent, that Bs salary shall be raised, and
dischargesthesuretyasto
contract (S. for onefourth
that he shall become liable transactionssubsequenttothe
of the losses on overdrafts. B
allows a customer to overdraw, and the bank losesvariance.
a sum of money.
133)
A is discharged from his suretyship by the variance made without his
consent, and is not liable to make good this loss.
Dischargeof
Surety The surety is discharged

Discharge of by any contract between the creditor and


the principal debtor, by which the
Surety by principal debtor is released, or
release or
discharge of
by any act or omission of the creditor, the
principal
A gives a guarantee to C for goods
legalto be
goods to B, and afterwards B becomes
supplied byofC which
consequence
embarrassed
to B. C issupplies
and contracts
the
discharge of the principal debtor. with his
debtor
creditors (S. 134)
(including C) to assign to them his property in consideration of
their releasing him from their demands. Here B is released from his debt
by the contracts with C, and A is discharged from his suretyship.
Dischargeof Acontractbetweenthecreditorandthe
Surety principaldebtor,

Discharge of
surety when
creditor bywhichthecreditormakesa
compromisewith,orpromisestogive
compounds time,ornottosue,theprincipaldebtor,
with, gives time
to, or agrees
not to sue,
dischargesthesurety,unlessthesurety
principal debtor assentstosuchcontract.
(Sec 135)
RightsofSurety
RightsOfSuretyOnPaymentOr
Performance(Sec.140)

The surety upon gets all the rights


payment or which the creditor
performance of all had against the
that he is liable for, principal debtor.
SuretysRighttoBenefitofCreditors
Securities (Sec.141)
Asuretyisentitledtothebenefitof

everysecuritywhichthecreditorhasagainst
theprincipaldebtoratthetimewhenthe
contractofguaranteeenteredinto,

whetherthesuretyknowsoftheexistenceof
suchsecurityornot.
SuretysRighttoBenefitofCreditors
Securities (Sec.141)

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.
GuaranteeWhenInvalid
GuaranteeObtainedBy
Misrepresentation,Invalid(Sec142)
Anyguaranteewhichhasbeenobtained

bymeansofmisrepresentation

madebythecreditororwithhisknowledgeandassent,

concerningamaterialpartofthetransaction,

isinvalid.
GuaranteeObtainedByConcealment,
Invalid(Sec143)

whichthe
creditorhas
obtainedby
meansof
Anyguarantee isinvalid.
keeping
silenceastoa
material
circumstance,
GuaranteeonContractthatCreditor
ShallNotActonitUntilCosurety
Joins(Sec144)

thatthe
creditorshall
Wherea theguarantee
notactupon
persongivesa isnotvalidif
ituntil
guarantee thatother
another
upona persondoes
personhas
contract notjoin.
joinedinitas
cosurety,
CommencementofGuarantors
(Suretys)Liability
Liability of surety arises as soon as a default is
made by the principal debtor.

The creditor can sue the surety without suing


the principal debtor.
DistinctionBetweena
ContractofIndemnityand
ContractofGuarantee
ContractofIndemnityandContractof
Guarantee Distinction

NumberofParties
In a Contract of
In a Contract of
Indemnity there are
Guarantee there are
only two parties namely
three parties creditor,
the indemnifier
principal debtor and
[promisor] and the
surety.
indemnified [promisee]
ContractofIndemnityandContractof
Guarantee Distinction

ExtentofLiability
In the Contract of
In the Contract of
Guarantee, the liability
Indemnity, the liability
of the surety is
of the indemnifier is
secondary as the
primary and
primary liability is that
independent
of the principal debtor
ContractofIndemnityandContractof
Guarantee Distinction

Timeofliability
In case of Guarantee,
The liability of the liability is already in
indemnifier arises only existence but
on the happening of a specifically crystalises
contingency when principal debtor
fails
ContractofIndemnityandContractof
Guarantee Distinction

TimetoAct
In case of Guarantee,
The indemnifier
surety must act by
need not necessarily
extending guarantee
act at the request of
at the request of
indemnified
debtor
ContractofIndemnityandContractof
Guarantee Distinction

RighttoSueThirdParty
In case of Contract of
In case of contract of
Guarantee surety can
Indemnity, indemnifier
proceed against principal
cannot sue a third party for
debtor in his own right
loss in his own name as
because he gets all the
there is no privity of
rights of a creditor after
contract
discharging the debts
Summary

Acontractbywhichonepartypromisestosavetheotherfromlosscaused
tohimbytheconductofthepromisor himself,ortheconductofanyother
person,iscalleda"contractofindemnity".

Acontracttoperformthepromise,ordischargetheliability,ofathird
personincaseofhisdefaultiscalleda"contractofguarantee".

Thepersonwhogivestheguaranteeiscalledthe"suretyorguarantor.
Thepersoninrespectofwhosedefaulttheguaranteeisgiveniscalledthe
"principaldebtor.Thepersontowhomtheguaranteeisgiveniscalledthe
"creditor".
Summary

Anythingdone,oranypromisemade,forthebenefitoftheprincipaldebtor,
isasufficientconsiderationtothesuretyforgivingtheguarantee.

Thereare3differentmodesofdischargeofsuretygivenbySec.133.134and
135.

Afterdischargeofhisliability,asurty hassamerightsasthecreditorhad
againstdebtor.

Aguaranteeobtainedbymisrepresentationorconcealmentisinvalid.
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