Contract of Indemnity and Guarantee

Contract of Indemnity and Guarantee

The contract of indemnity and the contract of the guarantee are the special contracts under the Indian Contract Act, 1872. The contract of indemnity is the contract where one person compensates for the loss of the other. Contract of guarantee is a contract between three people where the third person intervenes to pay the debt if the debtor is at default in paying back. This article deals with the contract of indemnity and the contract of guarantee.

Contract of Indemnity

A contract where one party tries to help and compensate the other party of the loss is indemnity. The person giving the indemnity is the indemnifier. Whereas the person receiving the indemnity to pay the loss is the indemnity-holder or indemnified.

Rights of Indemnity-holder

The Indemnity-holder has the rights to enforce the following from the Indemnifier’s a contract:

  • Pay for the damages of any suit irrespective of any manner
  • Pay for all the cost that requires for defending the suit against him legally
  • Amount to the sums for the compromise of any suit

Commencement of Liability

The Indemnity is not given just for the repayment after the payment. It requires that the indemnified party shall never come up to pay. Major courts state that as soon as the liability to pay is precise and clear by the indemnity-holder, then he has the right to put the indemnifier in a position to meet the claims of repayment.

Indemnity Bond

The indemnity bond permits an employee to withdraw from the employment prior to the agreed period. This withdrawal is applicable only at the forfeiture cost of the bond money, which is valid only when the bond money and the period of restriction are reasonable. It retains only that part of the bond money to indemnify for the loss of the employer.

Contract of Guarantee

A contract where a third person discharges the liability of the debtor to the creditor. The person who gives a guarantee is the surety. A person who receives the guarantee to repay his debt is the principal debtor. The person to whom the principal debtor has to pay the guarantee is the creditor. A guarantee is either in the format of writing or of oral. This contract lets the principal debtor to avail employment, loan or goods on credit and the surety would ensure repayment in case of any default in the part of the debtor.

Salient Features of Guarantee

Principal Debtor

The guarantee or the surety is only for securing the debt. It is necessary for the existence of the recoverable debt. The contract of guarantee should contain the essentials of the valid contract. The guarantee is valid even when the principal debtor is incompetent. But if the surety is incompetent, then the contract stands void.

Consideration

For a contract to be valid, there should be a valid consideration. The consideration of the principal debtor should be a sufficient consideration for the surety to give a guarantee.

Misrepresentation

A contract availed through misrepresentation will become an invalid contract. The misrepresentation may be by the creditor or considering with his knowledge the transaction of the material part stays invalid. Moreover, the creditor’s silence on the material circumstances makes the guarantee invalid.

Surety’s Liability

The surety’s liability remains co-extensive with that of the principal debtor unless the contract provides it. This is the maximum liability of the surety.  However, the surety can have a limit on his liability. The contract can provide that the surety will be liable to only a certain extent of the liability of the principal debtor.

Coextensive with Liability of Principal Debtor

The general rule states that the surety is responsible for paying all the debts of the principal creditor from the creditor. The principal debtor can recover the costs, damages and interests from the surety. There might be an exception in these rules only when the contract pertains to it.

Commencement

Immediately after the default of the principal debtor rises the responsibility of the surety. The creditor need not first either sue or give notice to the principal debtor. The surety limits his liability, and his guarantee will be effective only until such a limit.

Continuing Guarantee

The guarantee that extends for a series of transactions is the continuing guarantee.

Joint-debtor and Surety-ship

Two-person contract with a third party to take certain liability. Then the two persons will contract with each other that one of them will be liable on the default of the other. The third-party will not be a part of the second contract. The existence of the second contract does not affect the liability of the two persons with the third party even though the third party knows about it.

Discharge of Surety from Liability

The surety is free from his liability only after the end of his limit of liability. The discharge of surety from the liabilities takes place through the following:

Revocation: The surety can revoke the continuing guarantee at any time by sending a notice to the creditor. This is for future transactions.

Death of Surety’s: The death of the surety revokes the continuing guarantee in future transactions.

Variance in the Contract: The variance made in the contract between the creditor and the principal debtor releases the surety from his liability.

Discharge or Release of Principal Debtor: If the contract discharges the principal debtor, then the surety is also free from his liabilities. The discharge of the principal debtor takes place by an act or omission of the creditor. This will result in the discharge of the principal debtor.

Composition, Promise not to Sue or Extension of Time: If the creditor makes changes in the contract without consulting the surety, then the surety is free from such liability. Moreover, these changes will portray variations in the original contract.

Creditor’s Forbearance to Sue: The mere forbearance of the creditor to sue the principal debtor does not discharge the surety.

A promise made with the Third Person: An agreement with the third party does not discharge the surety. The initiation of the agreement takes place to give time to the principal debtor. Moreover, the agreement is between the creditor and the third party.

Impairing Surety’s Remedy: If the creditor does an act that is inconsistent or omits to do an act, then such a circumstance will discharge the surety as the remedy of the surety against the principal debtor stands impaired. Moreover, the creditor must remain consistent with the surety’s rights.

Rights of Surety

The rights of the surety are of three categories. The following are the categories:

Rights against Principal Debtor

Rights of Subrogation: The surety has the rights of the creditor against the principal debtor. But the surety receives such rights only after the repayment of the default of the principal debtor.

Right to Indemnity: In every guarantee contract there implies a promise to indemnify the surety by the principal debtor. The principal debtor has to repay all the sum paid by the surety rightfully. But the amount paid wrongly need not be repaid.

Rights against Creditor

Right to Creditor’s Securities: The surety has the benefit of every security that the creditor has which is against the principal debtor at the time the surety enters into a contract. The surety has rights over the securities even if he does not know of its existence at the time of the contract. If the creditor loses or parts with the security, then the surety discharges with the extent of the value of the security.

Right to Set-off: The surety has the benefit to set off if the creditor sues him.

Rights against Co-sureties

Release of Co-surety: When there is more than one co-surety, the release of one of the co-surety does not discharge the others. Moreover, it also does not discharge the surety from the responsibilities to the other sureties.

Right to Contribution: The co-sureties are liable to themselves if they are of co-sureties of the same debt. Moreover, they have to pay the equal share of the full debt or part of the debt, which is unpaid by the principal debtor. This stands irrespective of the liability of the same or different contract. It is also regardless of that the liability is with or without the knowledge of the co-sureties.

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