Contract of guarantee-business law

LAW OF INDEMNITYLAW OF INDEMNITY
LAW OF GUARANTEELAW OF GUARANTEE
Prof.ShrinivasV K
Prof. SVK

CONTRACT OF INDEMNITYCONTRACT OF INDEMNITY
It is 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. It is made in
order to protect the promisee against
anticipated loss.
Prof. SVK

CONTRACT OF INDEMNITY cont---CONTRACT OF INDEMNITY cont---
There are only two parties involved i.e. the
person who promises to make good the loss
generally known as the indemnifier (promisor)
and the person whose loss is to be made good
called as the indemnified (promisee).
Prof. SVK

There is only one contract between the parties.
There is an undertaking on the part of the
indemnifier to be answerable for the debt or default
of another.
Prof. SVK

The liability of the indemnifier to the indemnified is
primary and independent.
This contract is for the reimbursement
(compensation) of loss.
Prof. SVK

EssentialsEssentials
Contract of indemnity must contain all
the essentials of a valid contract
The promisee or the Indemnity-holder
must have suffered a loss.
Prof. SVK

CONTRACT OF GUARANTEECONTRACT OF GUARANTEE
It is a contract to perform the promise or discharge
the liability of a third person in case of his default. It
is made to enable a person to get a loan or goods on
credit or an employment.
Prof. SVK

cont---cont---
There are three parties involved i.e. the person who
gives the guarantee known as the surety, the
person in respect of whose default the guarantee is
given known as the principal debtor and the
person to whom the guarantee is given known as the
creditor.
Prof. SVK

cont---cont---
There are three contracts first b/w creditor &
principal debtor, second b/w surety & creditor,
third b/w surety & principal debtor.
The primary liability is of principal debtor and
the surety has a secondary liability. Which
means that the payment is to be made by the
surety only if the debtor does not pay.
Prof. SVK

cont---cont---
This contract is for the security of the creditor.
Prof. SVK

Types of GuaranteeTypes of Guarantee
A guarantee may be either
‘Specific guarantee’
Or
‘Continuing guarantee
Prof. SVK

Specific GuaranteeSpecific Guarantee
 It is given for single debt or obligation
and comes to an end when the debt
guaranteed has been paid or obligation
guaranteed has been discharged.
Thus, where A gives a loan to B for
which C stands guarantee, it is a case of a
specific guarantee. In this case, there is a
specific debt and the guarantee shall
come to an end the moment the loan is
repaid.
Prof. SVK

A specific guarantee cannot be revoked.
Once the guarantee is given it cannot be
withdrawn or revoked and even after the
death of the Surety (guarantor), it
continues to operate making his legal
representatives liable for the same.
Prof. SVK

Continuing GuaranteeContinuing Guarantee
a continuing guarantee is one where the
guarantee given is not for a single or
specific debt or obligation, but for a
series of debts.
Prof. SVK

Points to NotePoints to Note
There are three parties in every Contract of
Guarantee
The liability arises right from the beginning.
The surety becomes liable when the principle
debtor commits default in meeting the liability.
Prof. SVK

Surety has the right to sue the third party
(Principle Debtor) directly. The Law puts
him in the position of Creditor. Where as
in Contracts of Indemnity, the
Indemnifier cannot sue the third party in
his name. He has to sue in the name of
the Indemnity-holder or after obtaining
the rights from him.
Prof. SVK

Anything done, or any promise made, for
the benefit of the principal debtor, may
be a sufficient consideration to the surety
for giving the guarantee. The guarantor
need not personally derive any benefit
from the guarantee.
The liability of the surety is co-extensive
with that of the principal debtor, unless it
is otherwise provided by the contract.
Prof. SVK

The creditor can straightway proceed
against the guarantor without first
proceeding against the principal debtor.
The liability of the surety can never be
greater than that of the principal debtor.
The surety can however may restrict his
liability to part of the Principal debtor's
liability by contract.
Surety's liability is distinct and separate
Prof. SVK

CONTRACT OF GUARANTEE cont---CONTRACT OF GUARANTEE cont---
RIGHTS AND LIABILITIES OF SURETYRIGHTS AND LIABILITIES OF SURETY..
 RIGHTS
1. Right of subrogation (interchange): when the
surety has paid the guaranteed debt on default of
the principal debtor he is then entitled to all the
rights which the creditor had against the principal
debtor. The surety is entitled to all the remedies
which are available to the creditor against the
principal debtor
Prof. SVK

cont---cont---
2. Right to securities: Surety is entitled to the
benefit of all the securities given by the principal
debtor to the creditor. The surety at the time of
payment can demand the securities, which the
creditor has received from the principal debtor.
Surety can recover the securities only after making
full payment. He cannot claim the benefit of a part
of the securities if he has paid a part of the debt.
Prof. SVK

cont---cont---
3. Right of surety when the creditor loses or
parts with the securities of the principal
debtor: if the creditor by negligence loses any
security held by him, or if the creditor parts with
the security, the liability of the surety is reduced to
the extent of the value of those securities.
Prof. SVK

RIGHTS AND LIABILITIES OF SURETYRIGHTS AND LIABILITIES OF SURETY.. cont-cont-
4. Right of reimbursement (compensation)
from the principal debtor: a surety is entitled
to recover from the principal debtor whatever
amount, he has rightfully paid to the creditor.
Prof. SVK

RIGHTS AND LIABILITIES OF SURETYRIGHTS AND LIABILITIES OF SURETY.. cont-cont-
LIABILITIES
The liabilities of the surety are co-existent which
those of the principal debtor unless it is otherwise
provided.
Example: if A guarantees to B the payment of a Bill
of Exchange by C, the acceptor. The bill is
dishonored by C. A is liable not only for the amount
of the bill but also for any interest or charges which
may have become due on it.
Prof. SVK

DISCHARGE OF SURETYDISCHARGE OF SURETY
 Change in the terms of the contract: If the
principal debtor and the creditor make any changes,
without the consent of the surety, the surety is
discharged from the contract.
Prof. SVK

DISCHARGE OF SURETY cont---DISCHARGE OF SURETY cont---
Discharge by death of the surety: In specific
guarantee the surety is not discharged from his
liability on his death if the liability has already
occurred. But the death of surety operates as
revocation of a continuing guarantee as to future
transactions. The deceased surety’s estate will not
be liable for any transaction after the death, even if
the creditor has no knowledge of surety’s death.
Prof. SVK

Release or discharge of principal debtor: a
surety is discharged by any contract between the
creditor and the principal debtor, or any act or
omission of the creditor by which the principal
debtor is released or discharged.
Prof. SVK

Compounding of creditor with principal
debtor: a contract between the creditor and the
principal debtor, by which the creditor makes a
composition with, or promises to give time to, or
not to sue, the principal debtor, discharge the
surety.
Prof. SVK

Contract of guarantee-business law

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