Contract of indemnity : contract whereby one party promises to save the other party from
loss caused to him by the conduct of the promisor himself or any other person –
a class of contingent contracts - promisor
is called indemnifier – promisee is called indemnity-holder or indemnified.
Example : A and
B claim certain goods from a railway company as rival owners - A takes delivery of the goods by agreeing to
compensate the railway company against loss in case B turns to be the true
owner – contract of indemnity between A and railway company.
May be express
or implied – implied contract of indemnity may be inferred from the
circumstances of the case or relationship of the parties.
Example : T instructs
A to sell certain cattle belonging to O – O held A liable and recovered damages
from him – Held, contract of indemnity
implied from T’s conduct in asking A to sell the cattle – A entitled to recover
the loss from T.
Rights of indemnity-holder
when sued -
entitled to recover from the indemnifier :
- all damages which he may be compelled to pay in any suit in
respect of any matter to which promise to indemnify applies.
- All costs which he may be compelled to pay in bringing or
defending any such suit – but must have acted prudently.
- All sums which he may have paid under the terms of any
compromise of any such suit – compromise should not be contrary to the
orders of the indemnifier – should be prudent or authorised by the
indemnifier.
Rights of indemnifier – Similar to rights of surety
Contract of guarantee : contract to perform the promise or discharge the liability of a
third person in case of his default – may be written or oral – may be express
or implied – can also be inferred from the course of conduct of the parties.
Surety - Person
giving the guarantee or the guarantor
Principal Debtor
– person in respect of whose default the guarantee is given.
Creditor –
person to whom the guarantee is given.
Essential
features of contract of guarantee :
- Concurrence – requires concurrence of all the three parties,
viz. the principal debtor, surety and the creditor.
- Principal Debt – guarantee secures payment of a recoverable
debt – of no principal debt, there can be no valid guarantee - primarily liability
is that of principal debtor – liability of surety is secondary which
arises when there is default by principal debtor.
In following
cases guarantee of void debt is enforceable :
a)
guarantee given by directors of
a company securing payment of their company’s loan which was void as being
ultra vires - enforceable against
directors.
b)
Guarantee of minor’s debt - if debt is void, the contract of the surety
is not collateral but a principal contract - surety liable as principal debtor
himself
1.
Fulfilment of all essentials of
a valid contract - consideration
received by principal debtor is sufficient for the surety – benefit to the
surety himself is not necessary.
Example : 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 is sufficient consideration for C’s
promise.
Example : A sells and delivers goods to B – afterwards
C requests A to forbear to sue B for the debt for a year – in return, C
promises to pay for them in default of payment by B – A agrees to forbear as
requested – this is sufficient consideration for promise.
Example : A sells and delivers goods to B – afterwards C,
without consideration, agrees to pay for them in default of B – the agreement
is void being without consideration.
2.
Writing not necessary –
contract of guarantee may be oral or written – may also be express or implied from
the circumstances of the case.
Guarantee is
not a contract of uberrimae fides or one of absolute faith – it does not require full disclosure of
all material facts by principal debtor or creditor to the surety before the
contract is entered into.
Sec 142 : a
guarantee obtained by means of misrepresentation made by creditor or with his
knowledge and assent, concerning a material party of the transaction, is
invalid.
Sec.143 : a
guarantee obtained by a creditor by means of keeping silence as to material
circumstances is invalid.
Fraud or
misrepresentation on the part of principal debtor is not enough to set aside
the contract unless the creditor is a party to it or had knowledge about it –
in case of guarantee given to a banker, no obligation lies on banker to inform
the intending surety of circumstances affecting the credit of the principal
debtor.
National Provincial Bank of England V Glanusk – S guaranteed P’s account with bank – afterwards, P drew on this
account and paid off an overdraft he had with another bank – Bank suspicious
that P was defrauding S but did not communicate its suspicions to S – Held,
bank under no obligation to disclose to the surety – guarantee not
discharged.
However, if
guarantee is of nature of an insurance (as in fidelity guarantee), all material
facts must be disclosed – otherwise voidable at option of surety.
London General Omnibus Co. V Holloway – L employed P as clerk to collect money – P misappropriated some
receipts – L threatened to dismiss P – loss made good by P’s relations - L
agreed to retain P in service on having a fidelity guarantee – H gave his
guarantee – L did not made disclosure of P’s previous dishonesty - HeldHH
Held, the surety
believed he was making himself answerable for a presumably honest man, not for
a known thief – owning to non-disclosure by L, guarantee could not be enforced
against H.
Co-operative Commission Shop Ltd V. Udham Singh – fresh guarantees obtained for
the fidelity of a manager of bank without disclosing his previous defalcations (misappropriation/embezzlement)
– Held, sureties not liable for further defalcation.
Distinction
between a contract of indemnity and a contract of guarantee
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Sl.
No.
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Basis
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Contract
of indemnity
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Contract
of guarantee
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1
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No. of parties
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There are two parties – the indemnifier
(promisor) and the indemnified/indemnity-holder (promisee)
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There are three parties- the creditor,
the principal debtor and the surety.
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2
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Type of liability
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The liability of the indemnifier to the
indemnified is primary and independent.
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The liability of the surety to creditor
is collateral/secondary; the primary liability being of the principal debtor.
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3
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No. of contract(s)
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Only one contract, i.e. between the
indemnified
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There are three contracts : one between
the principal debtor and the creditor, the second between the creditor and
the surety (guarantee) and the third between the surety and the principal
debtor ((indemnity).
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4
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Request to contract
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Not necessary for indemnifier to act at
request of the indemnified.
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Surety gives the guarantee at the request
of the surety.
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5
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Arising of liability
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Liability of indemnifier arises only on
happening of contingency.
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The liability of principal debtor is
already there on an existing debt; the liability of surety arises only on
default by the principal debtor.
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6
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Right to sue
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Indemnifier cannot sue a third party for
loss in his own name unless there is assignment in his favour.
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On discharging the debt of the principal
debtor, the surety steps into the shoes of the creditor and can sue the principal
debtor in his own right.
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Kinds of guarantee - May be –
a)
for repayment of a debt –
existing or future.
b)
for payment of the price of
goods sold on credit, or
c)
for good conduct or honesty of
a person employed in a particular office (known as fidelity guarantee).
Can also be
differentiated as -
a)
Specific guarantee – extends to a single transaction or debt – comes to end when the
guaranteed debt is discharged or the promise is performed.
b)
Continuing guarantee : extends to series of transactions – liability of surety extends to
all transactions contemplated unless revocation of guarantee – may also cover
continuing transactions for a fixed period.
Example : S guarantees payment to C to the amount of
Rs.10,000 for any goods he supplies to P from time to time – C supplies P with
goods to the value of above Rs.10,000 – P pays for it – afterwards C supplies
goods to the value of Rs.20,000 – P fails to pay – guarantee of S is a
continuing one and he is liable to C to the extent of Rs.10,000.
Kay V Groves - G provides guarantee in following terms “I
hereby agree to be answerable to K for the amount of five sacks of flour to be
delivered to T, payable in one month” – five sacks actually supplied – T paid
for them - further supplies made during
the same month for which T failed to pay – Held, it was not a continuing
guarantee to cover subsequent deliveries though not exceeding in the whole five
sacks – G not liable for various subsequent parcels.
Revocation of
continuing guarantee - revocation can be as to future transactions
only – modes :
a.
By notice of revocation by
surety to the creditor.
Offord V Davies – S stands surety for P for any amounts which C may lend to P from
time to time in the next 12 months upto a maximum of Rs.10,000 – after 3 months,
S revokes the guarantee when C had lent Rs.3,000 to P – S discharged from all
liability to C for subsequent loans but remains liable for Rs.3,000 on default
of P.
b.
By death of surety – however,
liability for previous transactions remain.
c.
By other modes – novation, variation of terms
of contract, release/ discharge of principal debtor, compounding with principal
debtor, creditor’s act or omission impairing surety’s eventual remedy or loss
of security.
Extent of
surety’s liability :
1. Surety’s liability
co-extensive with that of principal debtor, unless specified to the contrary –
it may be made less than that of principal debtor but never greater – creditor
can sue surety without suing the principal debtor.
2. surety’s
liability may be for a part of the entire debt or for the entire debt subject
to a limit.
3. May be a
continuing guarantee - may be unlimited
or upto a specified limit.
4. Where
original agreement is void or voidable - surety liable as principal debtor – in
such cases, surety’s liability is principal one and not collateral
5. If creditor
does not sue the principal debtor within period of limitation – surety is not
discharged.
6. Death of
principal debtor or his discharge by law does not release the surety from his
obligations.
Rights of surety :
1.
Against the creditor
a.
Right to require creditor to
sue principal debtor first – liable to indemnify creditor for any expense or
loss therefrom – in case of fidelity guarantee, he can ask the creditor to
dismiss the principal debtor in case of proven dishonesty.
b.
Right to set-off or
counter-claim which debtor has against
the creditor.
c.
On payment of the guaranteed debt, right to
claim from creditor all the securities which he holds.
d.
Right to equities which creditor could have
enforced against the principal debtor or persons claiming through him.
Example : C advances to P
Rs,2,000 on guarantee of S – C also takes further security for Rs.2,000 by way
of pledge of P’s furniture – C cancels pledge – P becomes insolvent – S is
discharged from liability to the amount of the value of furniture.
e.
Right of subrogation – after
payment of guaranteed debt by surety, surety steps into shoes of creditor –
gets right to sue principal debtor for recovery.
2.
Against the principal-debtor
a.
Right to be relieved from
liability – before payment becomes due – debt must be ascertained – surety can
compel principal debtor to relieve him from guarantee by paying off the debt.
b.
Right to indemnity – after
payment made by surety to creditor, surety entitled to recover that amount alongwith
any damage sustained from the principal debtor.
Example : P indebted to C – S
is surety – C sues S for recovery of debt – S defends suit having reasonable
grounds to do so – S compelled to pay C amount of debt with costs – S entitled
to recover from P amount of debt as well as costs paid by him.
3.
Against co-sureties
(a)
Right of contribution – each
liable to contribute equally – liability may be limited to a maximum amount by
each one – if any one makes payment to creditor, he is entitled to claim contribution
from other co-sureties.
(b)
Right on release of co-surety –
even though creditor may release any of the co-sureties from his liability, the
released co-surety will remain liable to others for contribution in event of
default.
Discharge of surety
:
1.
Discharge by revocation :
a) Revocation by
surety by giving notice – continuing guarantee can be revoked as to future
transactions by giving notice – specific guarantee cannot be revoked after
liability has accrued.
b) Revocation by
death – continuing guarantee revoked as to future transactions on death of
surety – estate not liable for transactions after death even if creditor has no
notice of death.
c) Revocation by
novation – substitution of new contract for the old one – either between same
parties or between any one of old parties and a new one – mutual discharge of
old contract forms consideration for the new one.
2.
Discharge by conduct of the
creditor –
(i) Variance in terms of contract – without the consent of surety – immaterial
whether variation prejudicial to surety or not - discharged as to future
transactions – where guarantee to perform several obligations, variance in
nature of one will not discharge the rest.
Example : S guaranteed payment for goods supplied by C
to P – condition that 18 months’ credit to be given – C gives only 12 months’
credit – S is discharged.
General Steam Navigation Co. V Rolt – P contracted to built ship for C – contract money payable in
instalments as work reached certain stages of completion – S became surety for
due performance by P – C allowed P to draw large portion of last two
instalments before they were due – Held, S discharged from liability.
(ii) Discharge of principal debtor by creditor – wilful act or
omission by creditor - surety is also released – but surety is not discharged
by operation of law – omission of creditor to sue within the period of
limitation does not discharge the surety.
Hewison V Rickets - C let goods to P under hire-purchase
agreement – S guaranteed the payment of instalments – On instalments being in
arrears, C seized the goods and determined the contract – then sued S on his
guarantee – Held, as C had determined the contract, he could not recover from
S.
Example : P contracts with C to build a house for C
within a stipulated time – C has to supply the timber – S guarantees
performance by P – C omits to supply the timber – S discharged from suretyship.
Example : C employs P at one place – S stood surety for
P – this employment terminated – P employed by C at a different place – C takes
security bond from another person – S is discharged.
(iii) Compounding by creditor with principal debtor – contract by
which creditor makes composition with or promises to give time to, or not to
sue the principal debtor – surety is discharged unless he assents to such
contract.
Midland Motor Showrooms Ltd V Newman - P purchased motor car from C under
hire-purchase agreement – S guarantees performance of the contract – for
valuable consideration, C gives further time to P for payment of one of the
instalments – Held, P discharged from any further liability.
But in the following
cases the surety is not discharged :
(a)
where contract to give time to
principal debtor is made by creditor with a third person and not with the
principal debtor.
(b)
Mere forbearance on part of
creditor to sue the principal or to enforce any other remedy against him, in
the absence of anything to the contrary in the guarantee.
(c)
Release of one of the co-surety
by the creditor does not discharge the other co-sureties – the surety so
released is not discharged from his liability to the other sureties.
(iv) Creditor’s act or omission impairing surety’s eventual remedy
against principal debtor.
General Steam Navigation Co. V Rolt – P contracted to built ship for C – contract money payable in
instalments as work reached certain stages of completion – S became surety for
due performance by P – C allowed P to draw large portion of last two
instalments before they were due – Held, S discharged from liability.
Example : S gives
guarantee for fidelity of a manager of bank – manager indulges in malpractices
– directors wilfully ignore it – S stands discharged from obligation by conduct
of the directors
(v) Loss of security – if creditor loses any security given to him
at the time of contract of guarantee, or parts with it without consent of
surety, surety is discharged to the extent of value of security – if separate
debts secured by separate securities, loss of one security does not discharge
the other debts.
Example : C advances to P Rs,2,000 on guarantee of S –
C also takes further security for Rs.2,000 by way of pledge of P’s furniture –
C cancels pledge – P becomes insolvent – S is discharged from liability to the
amount of the value of furniture.
3.
Discharge by invalidation -
(i)
Guarantee obtained by
misrepresentation concerning a material fact – with knowledge or consent of
creditor – guarantee invalid.
(ii)
Guarantee obtained by
concealment of a material fact is invalid.
London General Omnibus Co. V Holloway – L employed P as clerk to collect money – P misappropriated some
receipts – L threatened to dismiss P – loss made good by P’s relations - L
agreed to retain P in service on having a fidelity guarantee – H gave his
guarantee – L did not made disclosure of P’s previous dishonesty - HeldHH
Held, the surety
believed he was making himself answerable for a presumably honest man, not for
a known thief – owning to non-disclosure by L, guarantee could not be enforced
against H.
(iii)
Guarantee on contract that
creditor shall not act on it until a co-surety joins – guarantee invalid if
that other person does not join.
Example : S2
signed a guarantee given to bank though it was intended to be joint and several
guarantee of S1, S2, S3 and S4 – S4
died without signing – bank did not agree with S1, S2 and
S3 to dispense with signature of S4 – Held, S2
not liable on guarantee.
(iv)
Failure of consideration
discharges the surety.
Example : P
agrees to pay maintenance to C if C marries A – S guarantees performance of
contract – A dies – S is discharged from surety.
