SPECIFIC CONTRACTS These are the contracts in which - the contracts are given a specific name - the parties

are defined - the terms and conditions are defined - the rights and obligations of the parties are defined - the mode of discharge is defined - the remedies for breach are defined

CONTRACT OF INDEMNITY
It is a contract whereby a person promises to save the other from loss caused to him by the conduct of the promisor himself or of any third person.

Parties Indemifier person who gives the indemnity Indemnified person for whose protection the indemnity is given Coverage only against loss caused by some human agency - does not cover loss caused by accidents, fire, etc

Eg : A agrees to indemnify B against any proceedings that C may initiate against B in respect of a certain sum of Rs 2000. Eg : Implied contract of indemnity in a contract of agency principal to indemnify agent for all lawful acts done by the agent in exercise of his authority

Rights of indemnified 1. To recover damages which he might have been compelled to pay in any suit in respect of any matter covered under the contract 2. To recover costs of the suit filed or defended 3. To recover all sums paid under the terms of compromise effected in such suit provided the compromise was an act of prudence

Commencement of liability Liability of the indemnifier arises as soon as the loss/injury to indemnity holder becomes imminent (clear and certain) - it is not postponed till the indemnified actually suffers loss Eg ; A engages B to sell goods worth Rs 20,000. B sells the goods. C who is the true owner sues B for Rs 20,000. B may recover the money from A as soon as the suit is filed. B need not have to wait till the court gives judgment against B.

CONTRACT OF GUARANTEE
This is a contract to perform the promise or discharge the liability of a third person in case of his default The purpose is to enable a person to get a loan or goods on credit Eg : A agrees to give a loan of Rs 1 lac to B if C gives guarantee for payment

Parties
1. 2. 3. Surety person who gives guarantee Principal debtor - person in respect of whose default the guarantee is given Creditor person to whom guarantee is given

Essential features
Principal debt existence of a recoverable debt and someone who is liable as a principal debtor 2. Consideration Anything done or any promise made for the benefit of the principal debtor is sufficient consideration to the surety Eg : A agrees to give goods on credit to B if C guarantees payment. As promise to B is itself sufficient consideration to C. 1.

Difference between indemnity and guarantee 1. Two parties 2. For reimbursement of loss 3. Liability of the indemnifier is primary 1. Three parties 2. For security of the creditor 3. Liability of the surety is secondary

SURETYS LIABILITY The fundamental principles as to the nature & extent of suretys liability are 1. Co-extensive- The liability of the surety is co-extensive with that of the pr debtor unless it is otherwise provided by the contract. A surety is liable for the whole of the amount for which the principal debtor is liable & for no more. Surety may by an agreement place a limit upon his liability. Eg : A grants a loan of Rs. 20,000 to B & C is a surety. If B defaults in repayment, C is not only liable for Rs, 20,000 but also for the interest that has become due on it.

2. Conditional Where there is a condition precedent to the

suretys liability , he will not be liable unless that condition is first fulfilled. Eg: Where a person gives a guarantee upon a contract that 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. In such a case the surety is not liable.

3. Limitation

A surety may expressly declare his guarantee to be limited to a fixed amount i.e. he may place a limit upon his liability. In that case the liability of the surety cannot go beyond the sum so specified. Eg : A takes a loan of Rs 10,000 from B for which C is a surety but C agrees to guarantee for a sum of Rs 5,000 only. In such a case the liability of C is limited to Rs 5,000.

4. Liability under continuing guarantee A guarantee which

extends to a series of transactions is called a continuing guarantee. In such a case the surety is liable to the creditor for all the transactions or if the liability is limited to a fixed sum, then surety is liable for that sum. Eg: A guarantees payment to B for all the goods supplied by B to C in the month of September 1999 . B supplies to C goods worth Rs. 70,000 during Sept 1999 . If C defaults A is liable to B to the extent of Rs. 70,000.

5. LIABILITY OF CO-SURETY- Unless there is an agreement to the contrary the co-sureties are liable to contribute equally. Where the co-sureties are bound in different sums, they shall be liable for these sums respectively Eg: A, B & C are co-sureties for D under several agreements. D makes a default for Rs 30,000 . Each of the co-sureties A, B & C are liable to pay Rs 10,000.
6. Novation of Main contract where the main contract is novated, the suretys liability does not extend to the new contract Eg : A gave surety to Bs business as a sole proprietary concern. Later it is converted to a company and the liabilities are taken over. As surety does not extend to the liabilities of the company.

DISCHARGE OF SURETY - A surety is said to be discharged from liability when his liability comes to an end. The following are the modes of discharge of surety. a) By revocation Normally a guarantee is not revocable once it is given. However a continuing guarantee may at any time be revoked by the surety as to future transactions by notice to the creditor. Revocation becomes effective for the future transactions only & surety remains liable for transactions already entered into.

b) BY DEATH A continuing guarantee is revoked on the death of the surety. The termination becomes effective only for future transactions. The suretys heirs are liable for past transactions. c) BY VARIANCE- A surety is discharged from his liability if any variance (change) is made in the terms of the contract without the consent of the surety. Variance discharges the surety only with respect to future transactions byt not past ones subsequent to the variance. Eg : A agrees to lend Rs.5000 to B on 01-03-1999 & C guarantees the repayment. A lends the money to B on 01-02-1999. C is discharged from his liability as the contract between A & B is varied .

d) BY RELEASE OF PRINCIPAL DEBTOR- If the creditor releases the principal debtor from his liability, then surety is also discharged from his liability. Eg: Where the creditor accepts a compromise & releases the pr debtor, the surety is also discharged. e) BY AN ACT OR OMISSION OF THE CREDITOR When the creditor does any act or omission which discharges the pr debtor from his liability, the surety is also discharged from his liability Eg: A contracts with B to build a house & agrees to supply the materials & C guarantees for A . B defaults in supplying the material. A is discharged from liability & so also C.

f) COMPROMISE , EXTENSION OF TIME & PROMISE NOT TO SUEWhere a creditor makes a compromise with the pr debtor or allows an extension of time to pr debtor or agree not to sue the pr debtor without obtaining the consent of the surety, the surety will be discharged from his liability Eg : A grants a loan of Rs.20,000 to B and C is the surety. A promises not sue B for the loan of Rs.20,000 . C is discharged from his liability g) BY IMPAIRING SURETYS REMEDY- If the creditor does any act which is inconsistent with the right of the surety or omits to do any act which is his duty towards surety & thereby the suretys remedy against pr debtor is impaired, the surety is discharged. Eg : Where a loan was obtained from a bank by pledging gold ornaments and the bank did not take sufficient care of the ornaments and were lost, the surety who had guaranteed the loan is discharged from his liability to the extent of the value of the ornaments.

RIGHTS OF SURETY
Rights against principal debtor 1. Right of subrogation Where the surety is made liable to pay to the creditor for the default of pr debtor, the surety is invested with all the rights which the creditor had against the pr debtor. Eg : A gives a loan of Rs 20,000 to B for which C is surety. B fails to repay. C makes payment. C gets the right to recover Rs 20,000 from B. 2. Right to indemnity In a contract of guarantee, there is a implied promise by the pr debtor to indemnify the surety for all the sums he has rightfully paid under the guarantee. Eg : B is indebted to A and C is surety. A sues C for recovery. C defends the suit. The costs incurred by C are recoverable from B.

Rights against creditor 1. Right to securities Surety is entitled to all the securities which the creditor has against the pr debtor at the time of the contract Eg : A advances a loan to B for which B has deposited a gold chain and C is the surety. If on Bs default, C is made to pay the loan, C has right to take the gold chain from A. 2. Right to share reduction Wherever the creditors liability is reduced, the suretys liability is also reduced proportionately 3. Right of set-off If the creditor sues the surety, the surety will have the benefit of set-off that the pr debtor had against the creditor Eg : A advances a loan of Rs 20, 000 to B for which C is surety. In another transaction, A owes Rs 5,000 to B. If A sues C for Rs 20,000 then C can claim set-off for Rs 5,000.

Rights against co-sureties 1. Effect of release of a surety where the creditor releases one of the co-sureties, it does not free such a surety from his responsibility to the other sureties. 2. Right to contribution - Unless there is an agreement to the contrary the co-sureties are liable to contribute equally. Where the co-sureties are bound in different sums, they shall be liable for these sums respectively Eg: A, B & C are co-sureties for D under several agreements. D makes a default for Rs 30,000 . Each of the co-sureties A, B & C are liable to pay Rs 10,000.