Q. Define contract of Indemnity and explain its essentials fully.
Distinguish between a contract of Indemnity and contract of guarantee.
[20 marks - 2015]
Q. Define continuing guarantee [ 4 marks - 2015]
Q. Discuss liabilities and rights of a surety in contract of Guarantee.
Would the liability be differ if there are more than one sureties? [20
marks - 2016]
Q. Define Continuing Guarantee [4 marks - 2017]
Q. What are the essential elements of guarantee? What is the difference
between indemnity and guarantee? [20 marks - 2022]
Contracts of Guarantee and Indemnity
The contract of indemnity and the contract guarantee are the special
contracts under the Indian Contract Act, 1872. Both the contracts are
for providing compensation to the creditor for the failure of a third
party to perform their obligation.
Contract of Indemnity
Section 124 of the Indian Contract Act, 1872 defines a contract of
indemnity as a contract wherein 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.
Essentials in the Contract of Indemnity
(1) Valid contract: The contract must be valid as per the Indian
Contract Act, 1872.
(ii) Protection of loss: The contract should be for protection
of loss.
(iii) Two parties: There should be two parties in the indemnity
contract. The indemnifier and the holder.
(iv) Express or implied: The indemnity contract can express or
implied.
Express Indemnity:
This is a type of written indemnity, where all the terms and conditions
of the indemnity are mentioned specifically in the contract.
Implied Indemnity:
The indemnity where the obligation arises from the facts and the
conduct of the parties involved. For example, master servant
relationship. There is no written contract in this type of
indemnity.
Rights of an Indemnity Holder
A per section 125 of Indian contract Act, 1872 the promisee in a
contract of indemnity is entitled to recover from the promisor:
(i) All damages which he may be compelled to pay in any suit related to
this contract.
(ii) All costs which he may be compelled to pay in any such suit.
(iii) All sums which he may have paid under the terms of any compromise
of any such suit.
Rights of the Indemnifier
After the indemnity holder is paid for the damage incurred, the
compensator shall have all the rights to all the methods and services
which can save the compensator from the damage.
Case References for Contract of Indemnity
Gajanan Moreshwar vs. Moreshwar Madan, (1942)
Lala Shanti Swarup vs Munshi Singh & Others, (1967)
Contract of Guarantee
Section 126 of the Indian Contract Act, 1872 states that a "contract of
guarantee" is a contract to perform the promise, or discharge the
liability, of a third person in case of his default.
Essentials of a Contract of Guarantee
(i) Surety: The person providing guarantee is called the
surety.
(ii) Principal debtor: The person for whose default the
guarantee is given is the principal debtor.
(iii) Creditor: The person to whom the guarantee is given called
the creditor.
(iv) Guarantee: A written or verbal guarantee.
Example of a Contract of Guarantee
Mr. X takes a loan of Rs. 5 lakhs from the ABC Bank. Mr. Y promises to
pay the loan amount to UCO Bank if Mr. X fails to repay. This is a
contract of guarantee and Mr X is Principal debtor, ABC Bank is creditor
and Mr. Y is surety.
Liability of Surety
(i) Section 128 of the Indian Contracts Act, 1872 states the liability
of the surety is same as the principal debtor, unless it is otherwise
mentioned in the contract.
(ii) The surety can be sued directly by the creditor in case of default
by the principal debtor.
Rights of Surety
(1) Rights against the principal debtor
(i) Right to give notice.(ii) Rights of sub-rogation.(iii) Right of indemnity.(iv) Right to get securities.(v) Right to ask for relief.
(2) Rights against the creditor
(i) Right to get securities.(ii) Right to ask for set-off.(iii) Rights of sub-rogation.(iv) Right to advice to sue principal debtor.(v) Right to insist on termination of services.
C. Rights against co-sureties
(i) Right to ask for contribution from the co-sureties.
(ii) Right to claim share in securities.
Continuing Guarantee
A form of guarantee that extends to a series of transactions is a
continuing guarantee. A continuing guarantee extends to all transactions
that the principal debtor enters into before the surety revokes it.
A continuing guarantee for future transactions may be withdrawn at any
time by notice to the creditors. However, the responsibility of a surety
for transactions completed prior to such revocation of guarantee is not
diminished.
Difference between Contract of Indemnity and Contract of Guarantee
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