IDENMNITY AND GUARANTEE
PROCEDURES AND COMPLIANCES
DATTATRAYA MORE
ROLL NO: DPGD/OC13/0953
SPECIALISATION: SUPPLY CHAIN MANAGEMENT
WELINGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT
&RESEARCH
Year of Submission: September, 2015
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Overview –Supply Chain Management
The Product Flow
The information Flow
The Finance Flow.
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Role of Purchasing in SCM
Coordinating purchase needs with user departments
Identifying potential suppliers
Conducting market studies for material purchases
Proposal analysis
Supplier selection
Issuing purchase orders
Negotiating
Meeting with sales representatives
Contract administration
Resolving purchasing-related problems
Maintenance of purchasing records
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Legal Aspects of Purchasing -SCM
Purchasing manager is an agent for the firm
The terms purchasing manager, buyer and purchasing agent used
interchangeably.
Purchasing officer involved in is representing the principal in development
and negotiation of contracts with the third party.
From legal standpoint, the term purchasing agent accurately defines the
individual who deals with a third party for a principal.
Essentials of Purchasing contracts.
Parties must be capable for execution of contract.
The subject of matter must be legal and void.
There must be mutual consideration.
The parties must reach an agreement by offer and acceptance.
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General Principals of Contracts
Contract law is generally governed largely by common law i.e. the body of law established by judges and followed by the rules of judicial precedent applied in civil courts. Statutory legislation is increasingly regulating contract law by primary legislation (acts of parliament) and secondary legislation (statutory instruments and regulations).
Salient Features of Contracts. Contract
Proposal or Offer
Acceptance of the Proposal
Competency of parties
Contracts with Individuals
Contracts with Partnerships
Contracts with Limited Companies
Communication of Acceptance
Discharge of Contracts
Stamping of Contracts
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Indemnity –Concept & Overview
Sections 124 to 127 of the Indian Contract Act, 1872 deals with the contract of
indemnity.
“A contract by which one party promises to save the other from any loss
caused to him by the conduct of the promisor himself, or by the conduct of
any other person is called “Contract of Indemnity”
Acceding to English Law, a contract of indemnity means “promise to save
another harmless from loss caused as a result of transaction entered into at
the instance of the promisor”
The person who promises to save other is called indemnifier.
The person whose loss is to be made good is called indemnified or
indemnity holder.
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Essential Features of Indemnity Contracts
It must be a valid contract under section 10 of Indian Contract Act:
Free consent
Parties competent to contract
Lawful consideration, lawful objects.
Not expressly declared void.
There must be two parties in contract of Indemnity.
Indemnifier (Promisor)
Indemnity holder (Promisee)
Loss to indemnity holder:
A contract of Indemnity is enforceable only when the promisee suffers a loss on the
happening of which is unknown. The indemnity holder is entitled to enforce the
contract only if he suffers the loss against which the indemnity holder was promised to
be protected.
Consideration: Consideration in the case of contract of indemnity is essential to
enable the indemnity holder’s claim to be compensated
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Types of Indemnity
Comparative Indemnity: Also known as Equitable apportionment,
proportionate indemnity. Implies sort of comparison or proportionating
the faults among all defenders.
Implied Indemnity: Also known as active/passive indemnity, full
indemnity or positional indemnity. A cross –complainant who succeeds
on such a theory will be reimbursed by his cross-defendant for
everything the cross –defendants for everything the cross –complainant
lost to plaintiff.
Express Indemnity : Express indemnity is a written agreement to
indemnify.
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Indemnity Clauses in Commercial Contracts.
Bare Indemnities: Party A indemnifies Party B for all liabilities or losses
incurred in connection with specified events or circumstances, but without
setting out any specific limitations.
Reverse or Reflexive Indemnities: Party A indemnifies Party B against
losses incurred as a result of Party B’s own acts and/ or omissions (mostly
Party B’s own negligence).
Proportionate or Limited Indemnities: These are the opposite of Reverse
Indemnities. Party A indemnifies Party B against losses except those
incurred as a result of Party B’s own acts and/ or omissions
Third Party Indemnities: Party A indemnifies Party B against liabilities to
or claims by Party C.
Financing Indemnities : Party A indemnifies Party B against losses
incurred if Party C fails to honor the financial obligation (i.e. the primary
obligation) to Party B (most often these are coupled with a guarantee)
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Benefits of Indemnity Clauses
Protected group of “Indemnitees” can be much larger than just the parties
to the agreement. e.g. non- signatories such as directors, employees, agents,
a subsidiary corporation, or a parent corporation, may be included
A claimant may be able to recover more under indemnity provisions
(including attorneys’ fees and other additional losses) than could be
recovered at common law.
Parties can resolve uncertainties relating to how a party will be protected as
regards notice requirements, tax treatment of losses, selection of defense
counsel in case of litigation and other matters.
Indemnity may cause the indemnitor to be more serious about the
representations made, if a breach would trigger a specific and identifiable
indemnification obligation
Another benefit to the indemnitee is that a third party (such as a lender or
bonding company) may view the indemnification provisions as part of its
security
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Enforcement of Indemnity Provisions
As an aid to efficiency, the parties can stipulate to the following
enforcement-related matters in connection with an indemnity
agreement.
Cover and pursuits of costs of cover.
Automatic withdrawal from escrow, possession of collateral, or
exercise of offset rights.
Waiver of ability to dispute fees sought.
Waiver of bond requirements for an injunction.
Waiver of jury trial.
Stipulation as to facts so as to facilitate entry of an injunction or
other enforcement order and/or other agreed self-help remedies.
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Rights and Duties of Indemnity Holder
An indemnity holder (i.e. Indemnified) acting within the scope of his authority is
entitled to the following rights:
Right to recover damage:
Right to recover the cost:
Right to cover sums under compromise:
Right to sue for specific performance
Except otherwise is mentioned in the contract, the indemnifier will not liable for
the loss in the following circumstances. They are called duties of indemnity-holder
too which are listed below
Duty to work prudently:
Duty not to act to cause harm or loss:
Duty to comply with the intention of promisor:
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Contract of Indemnity – Meaning & Definition
As per section 126 of Indian contract Act 1872 the definition of Contract of
Guarantee is,
“Contract of guarantee is a contract to perform the promise or discharge the
liability of the third person in case of default.”
Surety: Surety is a person who gives Guarantee.
Principal Debtor: The person in respect of whose default the guarantee is given.
Creditor: The person to whom guarantee is given.
Illustration 2: ‘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 ‘A’s promise to deliver the goods. This deemed sufficient
consideration for C’s promise. In this case ‘A’ is Creditor, ‘B’ is Principal Debtor and ‘C’ is
Surety.
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Essentials of Contract of Guarantee
A contract of guarantee is a species of general contract and as such all the essentials of a valid contract must be present. However, it has the following special features.
The contract of guarantee must satisfy the requirements of a valid contract
Tripartite Agreement.
The Creditor and principal debtor The Surety and Creditor. The surety and Principal Debtor.
The contract of guarantee may be oral or written
The contract of guarantee must be supported by consideration
The contract of guarantee must be made by the parties competent to contract
There must be someone primarily liable
The promise to pay must be conditional
There should be no misrepresentation
There should be no concealment of the facts
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Difference Between English Law and Indian Law
In English Law, contracts of guarantee must always in writing. In Indian law, guarantee
may be either oral or written. (Section 126)
Under English Law, an act or omission of the creditor impairing the surety’s eventual
remedy entitles him only to a proportionate revocation of the claim against him. But in
Indian law, surety is completely discharged by creditor’s act or omission impairing
surety’s eventual remedy (Section 130)
In English Law, the death of the surety does not revoke the guarantee as to contracts
entered into with creditor without notice of the death. But under Indian Law, death of
surety brings about a revocation of the continuing guarantee, as regards future
transactions (Sections 131)
A creditor, in English Law is under no obligation to disclose all facts, in the absence of
specific enquiry. In Indian Law any guarantee which is obtained by creditor by keeping
silence as to material circumstances is invalid
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Types of Guarantee
Specific Guarantee: This is guarantee given to single or particular debt, it is called
Specific Guarantee and it comes to an end when the debt is paid.
Continuing Guarantee: A guarantee which extends to series of transactions is called a
‘Continuing Guarantee’ ( Sec 129 of Indian Contract Act). Such guarantee is not
exhausted by first transaction or advance. It can always be revoked by giving notice to
creditor. The surety remains liable for transactions effected before the notice of
revocation. This type of guarantee may also give for limited period.
Retrospective Guarantee: The guarantee given for existing debt only
Prospective Guarantee: Prospective guarantee is given for a future debt, i.e., a debt to be
taken in future
Fidelity Guarantee: Guarantee given for good conduct and honesty of an employee is
called fidelity guarantee.
Absolute Guarantee: An absolute guarantee is one by which the guarantor
unconditionally promises payment or performance of the contract on default of the
principal debtor.
Conditional Guarantee: A conditional guarantee is one which is not enforceable
immediately on the default of the principal debtor, but some contingency other than
default must happen.
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Revocation of Guarantee
A contract of guarantee can be revoked by serving a notice of revocation under
section 130 of the contract Act which the surety is discharged from his liabilities.
Death of surety, unless otherwise specified in the contract, revokes a continuing
guarantee as regards the future transactions. He continues to be liable for
transactions entered into prior to the notice
Any variance in terms of contract between the principal debtor and creditor without
the consent of surety can discharge the surety from his/her liabilities. (Sec 133).
If the principal debtor is discharge by mutual agreement between principal debtor
and creditor or by any act or omission on the part of creditor, the surety will be
discharged (Sec 134).
If the creditor makes the compensation for or promises to give time to or not to sue
principal debtor without consent of surety, the surety will be discharged except in
case where the contract to give time by creditor with the third party and not with the
creditor (Sec 135).
If the creditors action or omission impairs the remedy against the principal debtor,
the surety will be discharged (Sec 139)
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Advantage and Disadvantages of Guarantee
Advantages:
A guarantee is non fund based credit facility; therefore banks do not need to deploy
fund immediately. Often banks would not have called upon to pay liability under
guarantee since principal debtor would have fulfilled his/her liabilities.
Guarantee brings income to the banks without utilizing the resources.
Guarantees are one of the potential sources for enhancing the income of the bank
A Guarantee is the simple document which does not need any registration and
hence less costly.
The Guarantees are off balance sheet finance; hence do not affect the liability
structure.
Disadvantages:
There is every chance of default by principal debtors meeting their obligations
towards bank. As a result, non-performing asset of bank may increase.
Though it is not fund based security, banks insists on collateral securities for
sanctioning guarantee facility.
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Difference Between Indemnity and Guarantee
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Sr.No. Indemnity Guarantee
1 There are only two parties i.e. Indemnified and Indemnifier.
There are three parties i.e. the Principal debtor, the Surety and the Creditor.
2 There is only one contract between indemnified and
indemnifier.
There are three contracts: One between the principal debtor and the
creditor; Second between the Surety and the Creditor; Third between the
Surety and the principal debtor.
3 May be written or oral in both Indian and English Law. According to Section 4, of status of fraud (in England) it should be in writing;
in Indian law it may be written or oral.
4 The indemnifier has direct interest in the transaction apart
from the indemnity, i.e. apart from his promise to pay loss.
The guarantee is totally unconnected with the contract but only interest in
the contract is his promise to the loss.
5 It is possibility of risk of any loss happening in future against
which the indemnifier undertakes to indemnify.
There is an existing debt the discharge or performance of which is
guaranteed by the surety, i.e. it is the absolute and subsisting risk.
6
The indemnifier is primarily and independently liable In a guarantee, the liability of the surety is coextensive with that of principal
debtor. The guarantor is secondarily liable except where the principal
debtor is incapable of contracting.
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An indemnifier cannot have subrogation unless there is an
assignment.Othewise he must bring the suit in the name of
the indemnified.
If a surety pays the debt or performs the obligation he can file a suit in his
own name against the principal debtor to reimburse the amount so paid.
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It is not necessary for the indemnifier to act at the request of
indemnified.
It is necessary for the surety to give his/her guarantee at the request of the
debtor.
Conclusion
There are no hard and fast rules for determining whether a
contract is an indemnity or a guarantee. In each case the courts
will look at the specific terms of the agreement and in some cases
the surrounding circumstances. Thus the central concern is
construction, and the courts will base their decision on the
substance of the agreement as opposed to its form or description.
The fact that a document is described as either a "guarantee" or
an "indemnity" is taken as a guide by the courts, but is by no
means conclusive. Each case is a question of fact. A document
will be construed by the courts in accordance with what is seen to
be the "ultimate object" of the agreement. The intention of the
parties will be central to interpretation.
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