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SPECIAL CONTRACTS
CHAPTER 1
INDEMNITY AND
GUARANTEE
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CONTRACT OF INDEMNITY
A contract by which one party promises to save the
other from loss caused to him by the conduct of thepromisor himself, or by the conduct of any other
person, is called a contract of indemnity (sec 124).
The person who promises to make good the loss is
called theindemnifier (promisor)and the personwhose loss is to be made good is called the
indemnified or indemnity holder (promisee).
Example: A contracts to indemnify B against the
consequences of any proceedings which C may take
against B in respect of a certain sum of Rs. 200.A is an indemnifier or a promisor while B is an
indemnity holder or a promisee.
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ESSENTIAL ELEMENTS OF AN
INDEMNITY CONTRACT
1. Loss to one party..A person can indemnify another person, only if
such other person incurs some loss or is about to
incur some loss.
2. Indemnity by the promisor3. Reason for loss
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1.1Rights of indemnity holder when sued:
I.All damages which he may be compelled to pay in any suit in
respect of any matter to which the promise to indemnify applies.
II.All costs which he may be compelled to pay in bringing or
defending such suits. But the indemnified should have acted as
any prudent man would act under similar circumstances in his
own case or with the authority of the indemnifier. And
III.All sums which he may have paid under the terms of any
compromise of any such suit. The compromise should not be
contrary to the orders of the indemnifier and should be prudent
or authorized by the indemnifier.
1. Right to recover damages
2. Right to recover costs
3. Rights to recover sums paid in compromise
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CONTRACT OF GUARANTEE
A contract of guarantee is a contract to perform the
promise, or discharge the liability, of a third personin case of his default.
The person whogives the guaranteeis called the
surety,the personin respect of whosedefaultthe guarantee is given is called theprincipal
debtor.And the personto whomthe guarantee is
given is called thecreditor.
The guarantee may be express or implied.
Sstands for surety,Pfor principal debtor, andC
for creditor.
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Example: S requests C to lend Rs 500 to P and
guarantees that if P fails to pay the amount, he will
pay. This is a contract of guarantee.
Example: S and P go into a shop. S says to theshopkeeper, C, let P have the goods, and if he does
not pay, I will pay.
Example: Sagar requests Chetan to lend Rs 500 tpParesh and guarantees that if Paresh fails to pay the
amount, he will pay. This is a contract of guarantee.
Sagar is the surety, Chetan the creditor and Paresh
the principal debtor.
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A contract of guarantee is a tripartite agreement
which contemplates the principal debtor P, the
creditor C and the surety S in it. There is a
triangular relationship.
i.As between C and P, there is a contract out of
which the guaranteed debt arises.
ii.As between S and C, there is a contract by
which S guarantees to pay to C, Ps debt in case
of his (Ps) default.
iii.As between S and P, there is a contract that P
shall indemnify S in case S pays in the event of
a default by P.
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ESSENTIAL ELEMENTS OF CONTRACT OF
GUARANTEE
1. Concurrence: A contract of guarantee requires
the concurrence of all the three parties to it.
. Example: C enters into a contract with P, S,
without any communication with P, undertakes
for a consideration moving from C to indemnify
C against any damages that may arise from a
breach of Ps obligation.
2. Primary liability in some person: There
must be a primary liability in some person otherthan surety.
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3. Essentials of a valid contract:
a)All the parties must be capable of entering into
a valid contract.
b) Consideration received by the principal debtoris sufficient for the surety.
4. Writing not necessary: A guarantee may be
oral or written.
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GUARANTEE IS NOT A CONTRACT
OFUBERRIMAE FIDEI
one requiring full disclosure of all material facts
by the principal debtor or creditor to the surety
before the contact is entered into.
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DIFFERENCE BETWEEN CONTRACT OF
INDEMNITY AND CONTRACT OF GUARANTEE
Indemnity Guarantee
1. There are 2 parties. Indemnifier
(Promisor) and the indemnified
(Promisee)
1. There are 3 parties. Creditor,
Principal debtor and Surety.
2. The liability of the indemnifier to
the indemnified is primary andindependent.
2. The liability of the surety to the
creditor is collateral or secondary,the primary liability being that of
the principal debtor.
3. There is only 1 contract. 3. There are 3 contracts.
4. It is not necessary for the
indemnifier to act at the request of
the indemnified.
4. It is necessary that the surety
should give the guarantee at the
request of the debtor.
5. The liability of the indemnifier
arises only on the happening of a
contingency.
5. There is usually an existing debt
or duty the performance of which is
guaranteed by the surety.
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3.Extent of suretys Liability
3.1Nature of suretys liabilityit is co-extensive: S guarantees to C
the payment of a bill of exchange by P, the acceptor. The Bill is
dishonored by P. S is liable not only for the amount of the bill but also forany interest and charges which may have become due on it.
3.2Limitation of suretys liablitiy: P owes C Rs. 8000 on a continuous
guarantee given by S. S may have given this guarantee in either of the
following two forms:
i. I guarantee the payment of the debt of Rs. 5000 by P to C.
ii. I guarantee the payment of any amount lent by C to P subject to a
limit of Rs. 5000.
3.3Liability under continuing guarantee (sec. 129):liability of surety
when the contract between creditor and principal debtor is void.
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Kinds of Guarantee: The function of a contract of
guarantee is to enable a person to get a loan, or
goods on credit, or an employment. A guarantee may
therefore be give for 1. the repayment of a debt, or
2. the payment of the price of the goods sold oncredit. Or 3. the good conduct or honesty of a
person.
A guarantee may be in respect of a singletransaction or in respect of a number of
transactions:
a)Specific guarantee
b)Continuing guarantee
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Revocation of a continuing guarantee:
1.By notice
2.By death of surety
3.By other modes
5.Rights of Surety:
A surety has rights against -
a)The creditor
b)The principal debtor, and
c) The co- sureties
5.1Rights against creditori. Before payment of the guaranteed debt
ii. Right of set off
iii. On payment of the guaranteed debt
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5.2 Rights against principal debtor
i. Right to be relieved of liability
ii. Right to indemnity
5.3 Rights against co sureties
iii. Co sureties liable to contribute equally
iv. Liability of co sureties bound in different sums
v. Release of a co - surety
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6.Discharge of surety
6.1 Discharge of surety by revocation
i. Revocation by surety by giving a notice
ii.Revocation by death
iii.Revocation by novation
6.2 Discharge of surety by the conduct of the creditor
iv.Variance in terms of contract
v. Release of discharge of principal debtorvi.Compounding by creditor with principal debtor
vii.Creditors act or omission impairing suretys eventual
remedy
viii.Loss of security
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6.3Discharge of surety by invalidation of contract
i. Guarantee obtained by misrepresentation
ii. Guarantee obtained by concealment
iii. Guarantee on contract that creditor shall no act on it until a co surety joins
iv. Failure of consideration