Contract of indemnity and guarantee

Question 1

What is Indemnity

Answer 1

Indemnity refers to making good the loss/security against loss/compensating someone for the loss he has suffered

Question 2

What are the parties of a contract of indemnity

Answer 2

The parties are the indemnifier- the person who makes good the loss and the indemnified- the person who is saved from the loss

Question 3

When is the contract of indemnity applicable

Answer 3

when loss occurs due to conduct of promisor himself, and conduct of third party.
Loss due to natural occurrence and acts of God are not considered in the contract of indemnity.

Question 4

What are the types of indemnity contracts

Answer 4

Express and implied (by conduct and circumstances of case)

Question 5

What is the status of Marine, Fire and Life insurance as indemnity contracts

Answer 5

Marine, Fire insurance are contracts of indemnity
Life insurance is not a contract of indemnity

Question 6

What if an indemnified person is sued

Answer 6

Then he has a right over
any damages paid by him under the suit
any expenses incurred by him to defend the suit
any amount paid to compromise the suit

Question 7

When does liability of indemnifier start

Answer 7

when liability of indemnified becomes absolute and certain

Question 8

Contract of guarantee

Answer 8

A contract of guarantee is a contract which is where a person pays or discharges a liability on the default of another person

Question 9

Parties of a contract of guarantee

Answer 9

surety
principal debtor
creditor

Question 10

tripartite agreement

Answer 10

1. Principal agreement between creditor and PD
2. Secondary agreement between surety and creditor
3. Implied agreement between surety and PD to indemnify surety

Question 11

Essentials of a contract of guarantee

Answer 11

1. Purpose is to guarantee for payment of debt
2. Consideration must exist
3. Misrepresentation and concealment
4. Co-sureties
5. Written or oral

Question 12

Consideration rule in contract of guarantee

Answer 12

Past consideration no consideration
Surety cannot be incompetent but PD can be.

Question 13

Types of guarantee

Answer 13

Specific gaurantee is where the surety gives guarantee to discharge or pay a particular debt/s. Specific guarantee comes to an end when the debt is discharged.

Continuing guarantee is a guarantee by the surety to cover a series of transactions. The continuing guarantee comes to an end when the surety revokes the guarantee.

Question 14

Nature of Surety liability

Answer 14

1. The liability of the surety is co-extensive with the liability of the principal debtor.
2. Liability of surety is secondary i.e. he is liable on PD’s default.
3. If the PD cannot be held liable due to a defect in the documents then the surety also cannot be held liable.
4. The creditor may first take action against the surety.

Question 15

Modes of discharge of a surety

Answer 15

1. Revocation
2. Invalidation of contract of guarantee
3. Conduct of the creditor

Question 16

Revocation- Discharge of surety

Answer 16

1. By giving notice
   -to creditor
   -will be liable for transactions before notice
2. Death of surety
   -surety’s estate remains liable for transactions done before death
3. Novation
   - new contract entered into by same or other parties discharges the surety

Question 17

By conduct of creditor discharge of surety

Answer 17

1. Variance in terms of the contract without the knowledge of the surety
2. If the creditor by any act/omission releases the principal debtor or enters into a new contract to release the PD then the surety is discharged.
3. If The creditor compounds, gives more time to or promises not to sue the debtor then the surety is discharged
   4.Discharge of surety by creditors act impairing surety’s remedy like negligence by creditor.

Question 18

When is surety not discharged

Answer 18

Mere forbearance to sue does not discharge the surety, only a promise to not sue the debtor does.

If the creditor enters into a contract with a third party to give the principal debtor more time for debt. The surety is not discharged.

Question 19

Invalidation of contract of guarantee - Discharge of surety

Answer 19

1. Guarantee obtained by misrepresentation/concealment
   -keeping silent on material circumstances or creditor or by his knowledge there is some representation
2. Guarantee is not valid until co-surety has given his guarantee

Question 20

Rights of surety as against

Answer 20

Creditor
Principal Debtor
Co-sureties

Question 21

Right of surety as against the principal debtor

Answer 21

Right of subrogation
- After performing his obligation under guarantee contract, the surety gets rights of creditor as against the PD. He steps in shoes of creditor

Implied right to be indemnified
- If the surety discharges PD’s liability then there is an implied promise that PD has to indemnify the surety.

Question 22

Right of surety as against the creditor

Answer 22

Surety has
-Right to share reductions in case PD is insolvent
-Right to set off
-Right to enjoy benefit of security given by PD

Question 23

Right of surety as against co-sureties

Answer 23

-Equal contribution
-Contribution upto maximum limit the co-sureties agreed for.