Indemnity & guarantee

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Indemnity and Guarantee

Indemnity and Guarantee

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  • 1.  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 the conduct of any other person is called a contract of indemnity.
  • 2.   The person who promises to save the other from loss is called indemnifier. The person whose loss is to be made good is called indemnified or indemnity holder.
  • 3.  Example- A lost his share certificates. He applied to the company for the issue of duplicate certificate. The company asked A to furnish an ‘indemnity bond’ to protect the company against any claim that may be made by any person on the original certificates. Here, A is the indemnifier and B is the indemnity holder.
  • 4.  Example- The receipt pertaining to certain goods is lost B while travelling through Indian Railways. Now, A claims the goods from Railway company. The Railway Co. asked A to give an ‘indemnity bond’. A gets the goods. Here A is indemnifier and Railway Co is the indemnity holder. Later, B the real owner sues the Railway Co.. Now, the co. can claim indemnity from A, for the loss caused by his conduct.
  • 5.    1. All damages which he may be compelled to pay in any sued in respect of any matter to which the promise to indemnify applies. 2. All cost which he may be compelled to pay in defending such sued provided he acted prudently or with the authority of the indemnifier. 3. All sum which he may have paid upon compromise of such sued provided the compromise was not contrary to the order of the indemnifier and was prudent or was authorized by the indemnifier.
  • 6.  “A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.”  Eg- A advances a loan of Rs 5000 to B and C promises to A that if B doesn’t repay the loan, C will do so. This is a contract of guarantee.
  • 7.    The person who gives the guarantee is called the ‘surety’. The person in respect of whose default the guarantee is given is called ‘principal debtor’. The person to whom the guarantee is given is called ‘creditor’.
  • 8.   A contract of guarantee must satisfy all the essential elements of a contract. It is tripartite agreement. One is principal debtor and creditor. Second is creditor & surety and the third btwn principal debtor and surety.
  • 9.   In guarantee, the primary liability is of principal debtor. The liability of surety arises only in case of default by principal debtor. A contract of guarantee is invalid where guarantee has been obtained by means of misrepresentation made by creditor.
  • 10. INDEMNITY GUARANTEE In indemnity , there are two parties In guarantee, there are three parties i.e. indemnifier and indemnity holder. i.e. creditor, principal debtor and surety. There is only one contract btw indemnifier and indemnity holder. There are three contracts, one btw principal debtor and creditor, second btw creditor and surety and third between surety and principal debtor. The liability of indemnifier is primary. The liability of the surety is secondary and arises only if the principal debtors fails to perform his obligations.
  • 11. INDEMNITY GUARANTEE The liability of indemnifier arises only There is a existing legal debt, the on the happening of contingency. performance of which is guaranteed by the surety. The indemnifier act independently without any request of the debtor or third party. Under guarantee, it is necessary that surety should give guarantee at the request of debtor. The indemnifier can’t sue the third party for loss in his own name. Surety after discharging the debt can sue the principal debtor. Indemnity is for reimbursement of loss. The contract of guarantee is for surety of debt .
  • 12.   The liability of surety is secondary i.e he is liable only on default of principal debtor. The liability of surety arises immediately on the default of principal debtor unless there is a provision in the contract that the creditor must first proceed against principal debtor or must give a notice of default to surety.
  • 13.    If creditor holds security from principal debtor for his debt, the creditor need not first resort to those securities before suing surety. Surety is not liable if guarantee has been obtained by misrepresentation. Surety is liable even if the principal debtor has been discharged like Principal debtor being discharged.
  • 14.  1. Ordinary Guarantee  2. Continuing Guarantee
  • 15. Ordinary Guarantee When a guarantee is given for a single specific debt or transaction, it is called ordinary transaction.  Continuing Guarantee When a guarantee extends to a series of distinct and separable transactions, it is continuing guarantee. 
  • 16. The guarantee may be discharged in the following manner:  1. Notice of Revokation  2. Death of Surety  3. Variation of Contract  4. Release or discharge of Principal Debtor  5. Loss of Security  6.Creditors act or commission impairing surety’s eventual remedy.  7. By Composition with the Principal Debtor 
  • 17. Right of Surety against the Creditor   1. Right to benefit of creditors securities 2. Right to claim set off, if any
  • 18. Right against Principal Debtor   1. Right of Subrogation 2. Right to claim Indemnity
  • 19. Right against Cosurety   1. Liabilities of cosurety when contributing equally. 2. When the cosurety’s have agreed to guarantee diff. sums