Special Contract - Indemnity & Guarantee PDF

Copyright Protected - Adv.Beena Menon 2024 Special Contract - Indemnity & Indemnity...

Copyright Protected - Adv.Beena Menon 2024 Special Contract - Indemnity & Indemnity One party promises to save the other from loss caused to him by the Guarantee: conduct of the promisor himself or any other person May be express or implied Meaning of Indemnity Eg. 1. Loss of share certificate, you apply for a duplicate, they ask you to Rights of Indemnity Holder execute an indemnity, so that any other claims on the original certificate is indemnified Meaning of Contract of Guarantee 2. A owes a debt to B for a loan at an interest of 10% annually, for which C Features is a surety. When A has financial issues, B agrees to lower the interest rate to 8% annually. Thereafter A becomes insolvent. B sues C. Will he Distinction between Indemnity & Guarantee succeed? C is not liable due to change in the contents of the contract without Surety, Rights of surety and extent of his his consent liability 3. Insurance – fire – damages – repair can be claimed 97 98 Rights of Indemnity holder Guarantee Perform the promise or discharge the liability of 3rd person in case of his default Damages Eg: On B’s request, C promises A that if B defaults, C will make good the same to A. Recover Costs a. In above eg: B is principal debtor Recover sums of compromise b. c. A is creditor C is guarantor entered into – lawsuits d. Important that B should request C – only then privity of contract between B &C e. Privity of contract between B & C makes it a contract of Guarantee between C & A f. Without B’s request C promises to pay on default - it becomes an 99 Indemnity 100 Features Difference between Indemnity and Guarantee Tripartite Agreement – 3 parties [the principal debtor, Variables Indemnity Guarantee the surety, and the creditor] Type of Liability – Secondary – only when the One party promises to compensate A contract where one party promises for any loss suffered by another party Meaning to fulfill the obligation or compensate principal debtor defaults due to the act of the promisor or any other party. for the loss if a third party defaults. Consideration - the consideration between the Nature of Contract Contract of reimbursement Contract of secondary liability principal debtor and the creditor is sufficient Parties Involved Two parties: Indemnifier and Three parties: Creditor, Principal Written form - Mandatory Indemnified Debtor, and Surety The creditor must first attempt to Specific or Continuing Guarantee – can be for one or a Legal Action The indemnified party can directly sue recover from the principal debtor. If the indemnifier. they fail, they can then sue the series of transactions continuing guarantor. Right to indemnity – can get himself indemnified – Degree of Liability Primary Secondary can recover from the principal debtor amount paid Purpose To compensate for the loss To give assurance to the promisee under the guarantee 101 Maturity of Liability When the contingency occurs Liability already exists 102 Page 1 Copyright Protected - Adv.Beena Menon 2024 Surety and Discharge of Surety Egs.. Surety is the guarantor who assures the payment of the principal debtor in case of default. A safety net for creditors, ensuring that obligations are met even if the principal debtor defaults the obligation 1: A parent guarantees their child’s student loan. If Modes of Discharge the child defaults, the parent (surety) must repay By Revocation: Notice of Revocation: Surety can revoke the guarantee for future transactions by giving notice the loan. to the creditor. Death of Surety: Automatically discharges the surety for future transactions unless otherwise 2: A contractor guarantees the completion of a agreed. By Conduct of the Creditor: project. If the contractor fails, the surety (often an Release of Principal Debtor: If the creditor releases the principal debtor, the surety is discharged. insurance company) will fulfill the obligations. Variation in Terms: Any material variation in the terms of the contract without the surety’s consent discharges the surety. 3: A is Surety who guarantees payment of a Bill of Loss of Security: If the creditor loses or parts with any security without the surety’s consent, the surety is discharged to the extent of the value of the security. Exchange. On default, A will be liable for the By Operation of Law: Insolvency of Principal Debtor: Discharges the surety. principal amount + interest + costs of recovery Merger of Debt: If the principal debtor’s debt merges with a higher obligation/debt, the surety is discharged. 103 104 Extent of Surety’s Liability Rights of Surety A surety cannot be held liable beyond the express terms of the surety's Against the Creditor: contract. Right to benefit from securities held by the creditor against the principal debtor. When the debtor has not fulfilled their part of the promise Against the Principal Debtor: When the creditor has availed of and exhausted all remedies against the Right to recover amounts paid on behalf of the principal debtor. debtor Against Co-Sureties: The Surety is liable – to what extent Right to contribution if the surety pays more than their share of the debt. The obligation of the surety is co-extensive to the obligation of the principal 1.Right of Subrogation: After paying the debt, the surety steps into the shoes of the creditor debtor and can claim the amount from the debtor. 2.Right of Indemnity: Surety has the right to recover any losses or amounts he has paid, from  Sole condition required is to demand the payment pertaining to principal debtor’s liability the principal debtor. 3.Right to Contribution: If there are multiple sureties for the same debt, the surety who has  Fulfilling this condition – despite constant demands, both principal debtor and surety will not fulfill their part of the contract – The surety is liable to pay the paid more than their share can claim contribution from the co-sureties. whole sum – Surety’s liability is co-extensive with the principal debtor. 4.Right to Security: Surety is entitled to any securities held by the creditor against the debtor. This right arises even if the surety was unaware of the securities at the time of entering into  No anticipation for the remedies to be exhausted by the creditor the contract.  Suit is maintainable against the Surety before suing the principal debtor 5.Right to Discharge: as seen in discharge 105  Creditor can initiate a suit against the principal debtor alone without initiating 106 any proceedings against the surety Key Points Defined by Contract: The surety’s liability is strictly limited to what is agreed upon in the contract. They are not liable for anything beyond those terms. Co-extensive Liability: The surety’s liability is co-extensive with that of the principal debtor, meaning the surety is liable for the same amount as the principal debtor unless the contract specifies otherwise1. Conditional Liability: The surety’s liability is contingent upon the principal debtor’s default. If the principal debtor fulfills their obligations, the surety is not liable. Immediate Liability: The creditor can directly approach the surety for payment without first exhausting remedies against the principal debtor. Limitations: The surety can limit their liability through specific terms in the contract. For example, they can specify a maximum amount they are willing to guarantee3. Discharge of Liability: The surety can be discharged from liability under certain conditions, such as if the creditor alters the terms of the contract without the surety’s consent or if the creditor releases the principal debtor 107 Page 2