Chapter 13 AND GUARANTEy CONTRACTS pMNITY CONTRACTS OF INDEM spony tat yo d to him by the conduct of the promisoy racts to indemnify Q against the gin respect of a certain sum of Rs, 200 Q the Indemnity-holder. Definition os a contract Section 124 of the Contract Act defines 8 “ne party promises to save the other party mn person. P. 7 i himself. or by the conduct of any ol ins take a consequences of any proceeding which R may ae fer This is a Contract of Indemnity. P is called the Ine conti and Characteristics ity are as follows : 4 ‘act of indemnity ar Characteristics (or the requisites) of a Contr til elements of a contract. For example 1. A contract of guarantee must satisfy all the essen the object must be lawful, there must be free consent efc. 7 2. The Contract may be express or implied. An express contract is by word or by writing. An implied contract of indemnity comes from the circumstances of the case or the relationship between the parties. 3. Section 69 implies a promise to indemnify (See p. 103) Definition not exhaustive express promise to indemnify. The followin, 2 is an ex; 7 eres = Signature of the holder of Government 7 y tote recovered ee ME Note renewed from the oye SSOLY note and endorse it ment and recovered damages. The G e Government. The h Council decreed the suit, quoting with approval rene Sued the b eee crane oval the follow @ general principle of | 5 ‘Ollowing observati turns out t0 be injurious to the Tighe on 10 the knowledge of Haas at the request of another from him who requested that it should be aycesPA the person qe." HOing it, and such ac Under English law, contracts of inden, SSTHAY Of State ee ge ited to indemnity section 124 of the Indian Contract Act In England a much wider fi cl ak of Inia! and implied, to indemnify a person from Ig. td Contracts gf indemnity yea that included i upon the conduct of any person. Ina Bomn ents or aie include promises, express idents which May not depend * Caused by ey, —— ay Case it way 8 hel ey *Sctions 124 and 125 of the ank for indemnity. The Privy 1. (1938) 65 1. A. 286 (Privy Councity 106ne peMnty AND GUARANTEE 107 0 Contract Act are not exhaustive of the law of indemnity and the courts here would apply the same equitable principles that the courts in England do.” Gajanan v. Moreshar of the Indemnity-holder ights es ction 125 of the Contract Act lays down that the indemnity-holder is entitled to get from the Set indemnifier: : Pall damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies: all costs which he may be compelled to pay in such suits (provided he acted prudently or with the authority of the indemnifier); and 3, all sums which he may have paid upon compromise of such suit (provided the compromise was prudent or was authorised by the indemnifier, rvmmments : Khas been held that the rights of the Indemnity-holder. under Section 125, are not exhaustive. The indemnity-holder may be entitled to other equitable reliefs also. Bombay and Nagpur High Courts have held the indemnifier will be liable only after the actual low was incurred, But according to the High Courts of Calcutta. Madras and Allahabad, the jindemnity-holder can compel payment from the indemnifier even before he (the indemnity-holder) has met his liability. Osman Jamal & Sons v. Gopal.> CONTRACTS OF GUARANTEE Detowien , 7 "A contract of guarantee is a contract to perform the promise or discharge the liability, of 3 third person in case of his default—Sec. 126. P lends Rs. 5,000 to @ and R promises to P that if Q does not pay the money R will do so. This is contract of guarantee. Q is called the Principat Debtor, P the Creditor, and R the Guarantor or the surety. ee Contracts of guarantee may be of three types : (1) for payment to the Creditor to the Principal Debtor by the Guarantor; (2) payment of price for goods sold and (3) “fidelity guarantee’ ‘-e. to discharge the liability of a person for good conduct of a service-holder. A contract of guarantee may be for (1) a future debt or obligation or for (2) an existing debt, ‘A guarantee can also be (1) a Simple Guarantee or (2) a Continuing Guarantee (See p- 109) Essentials of a Valid Guarantee 1. A contract of guarantee must satisfy all the essential elements of a contract (For example, the object must be lawful; there must be free consent etc.) But the following points are to be noted. 2. A contract of guarantee may be either oral or written.—Sec 126. 3. In a contract of guarantee there are three parties i.e., the creditor, the principal debtor and the surety. All the parties must join the contract. 4. In a contract of guarantee, the primary liability is that of principal debtor. ‘The liability of surety arises only when there is a default of the principal debtor. ‘Therefore, the liability of the surety is secondary. __ 5. Ina contract of guarantee the principal debtor may be a minor. In this eave the surety is liable to pay even though the minor may not be. The contract will be enforced as between the surety and the creditor. 2. (1942) Bom 402, 670 3. 1919) 56 Cal108, the consideration received by the pring, “Anything done, or any promise Pee sideration t0 the surety for iyi ig 6. Consideration = In a contract of guarantee. debtor is taken to be sufficient consideration for the surely. for the benefit of the principal debtor may be sufficient co! guarantee.”"—Sec. 127 Examples | (i) B requests P to sell and deliver to him goods on credit. P agrees to do So, provides ¢ will guarantee the payment of the price of goods. C promises to guarantee the paymen, in consideration of P's promise to deliver the goods. This is a sufficient consideration fo, C's promise. P sells and delivers goods to B. C afterwards requests “P to forbear to sue B for the deby (ii) for a year and promises that if he does so, C will pay for them in default of payment 5, B. P agrees to forbear as requested. This is a sufficient consideration for C's promise (iii) P sells and delivers goods to B. C afterwards, without consideration agrees to pay for them in default of B. The agreement is void. Contracts of Guarantee which are invalid A contract of guarantee is invalid in the following cases : 1. Misrepresentation : Any guarantee which has been obtained by means of misrepresentation made by the creditor. or with his knowledge and assent, concerning a material part of the transaction, is invalid—Sec. 142. 2. Concealment : Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid. — Sec. 143. Examples = (i) D engages B as clerk to collect money for him. B fails to account for some of his a ca are ee See als NY cee ee C gives his guarantee for B’s duly accounting. D does not acquaint C with B's previow conduct. B afterwards makes default. The guarantee is invalid. G guarantees to C payment for iron to be supplied by him to B to the amount of 2000 tons. B and C have privately agreed that B should pay five rupees per ton beyond the market price, such excess to be applied in liquidation of an old debt. This agreement is concealed from G, G is not liable as a surety. 3, When Co-surety does not join : Where a person gives a guarantee upon a contract that the creditor shall not act upon it until another person has joined in it as eo-surety, the guarantee is cid if that other person docs not join.—Sec, 144. 4. Lack of essential elements : A contract of guarantee is invalid if it lacks one or more of the essential elements of a contract (A, ere is want of free consent or ifthe object is illegal (ii) DIFFERENCES BETWEEN INDEMNITY AND GUARANTEE 1. In a contract of indemnity, there are two parties : the indemnifier and the indemnity-hol : guarantee there are three parties : the creditor, the principal debtor and the Surel) demnity it is necessary to have only one contract, i.e., between the Ider. In a contract of ct of 2, In a contract © oo | " 2. Im Molder and the indemnifier, in & contract of guarantse it iy necessary to pave th indemnity: een the parties, 66 between the creditors, the principal debtors and the surety: contracts, betw 4INDEMNITY AND GUARANTEE. 109 3. In a contract of indemnity, the liability of the indemnifier is primary; in a contract of guarantee, the liability of the surety is secondary i.e., the surety is liable only if the principal debtor fails to perform his obligations. 4, In a contract of guarantee there is an existing debt or duty, the performance of which is guaranteed by the surety. In a contract of indemnity, the liability of the indemnifier arises only on the happening of a contingency. 5. Ina contract of indemnity the indemnifier can sue only the indemnity-holder for his loss. because there is no contract between the indemnified and other parties unless there is an assignment on his favour; in a contract of guarantee the surety can proceed against principal debtor. 6. In a contract of guarantee the surety, after he discharges the debt owing to the creditor, can proceed against the principal debtor, in a contract of indemnity the loss falls on the indemnifier except in certain special cases. CONTINUING GUARANTEE Definition A guarantee which extends to a series of transactions is called a Continuing Guarantee. (Sec. 129). A guarantee covering a single transaction may be called a Simple Guarantee or Specific Guarantee. Examples : (i) D, im consideration that B will employ C in collecting the rents of B’s zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by C of those rents. This is a continuing guarantee. (ii) P guarantees payment to B a tea dealer, to the amount of Rs. 1000 for any tea he may from time to time supply to C. B supplies C with tea to the value of Rs. 1000 and C pays B for it. Afterwards B supplies C with tea to the value of Rs. 2000. C fails to pay. ‘The guarantee given by P was a continuing guarantee, and he is accordingly liable to B to the extent of Rs. 1000. (iii) P guarantees payment to B of the price of five sacks of flour to be delivered by B to C to be paid for in a month. B delivers five sacks to C, C pays for them. Afterwards B delivers four sacks to C, which C does not pay for. The guarantee given by P was not a continuing guarantee and accordingly he is not liable for the price of the four sacks. How a Continuing Guarantee is Revoked A continuing guarantee is revoked under the following circumstances. 1. By notice of revocation by the surety : The notice operates to revoke the surety’s liabilities as regards transactions entered into after the notice. He continues to be liable for transactions entered into prior to the notice —Sec. 130. 2. By the death of the surety : “The death of the surety operates, in the absence of a contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transaction: Sec. 131, The estate of the surety is liable for all transactions entered into prior to the death of the surety unless there was a contract to the contrary. It is not necessary that the creditor must have Rotice of the death. A continuing guarantee is terminated under the same circumstances under which a surety’ liability is discharged. (See below.) Law (WPY17 a110 eTY e ET » THE SUR! THE EXTENT OF THE LIABILITY ort Surety’s Liability is coextensiv' he principal debtor, unless ce with that of iti, The liability of the surety 6 ENS otherwise provided by the contract by C. the acceptor. ‘The pi Di f exchange 7 « Mi ae euarantees to 8 the payment of As the amount of the bill but also for any ine, . ly pat onl dishonoured by C. G is liable not due on it. and charges which may have BECO inet the principal debtor. Beas 7 Surety 7 inci a co~ ant. wheat Sane te peter getter or thot making the principal debtor HED the vthout suiny ; the creditor. principal debtor is a minor, the surety alone is liable (0 Lisbaity of t primarily liable, not affected by arrangement between them that on ty of two persons, . ee person to undertake a certain liability and ajsy Where t ‘sons contract with a third contract with cach other that one of them shall be liable only on the default of the other, the thin, Person not being a party to such contract, the liability of each of such two persons to the third person under the first contract is not affected by the existence of the second contract, although such third person may have been aware of its existence —Sec. 132. Example A and B made a joint and several promissory note to C. A makes it, in fact, as surety for 8 and C knows this as the time when the note is made. The fact that A, to the knowledge of C made the note as surety for B, is no answer to a suit by C against A upon the note WHEN IS A SURETY DISCHARGED FROM LIABILITY? 3. Variation of contract Any variance, made without the su, principal debtor and the creditor, variance.—Sec. 133. Tely’s Consent ji discharges the ae ‘he terms of the contract between tt ¥ a8 to transactions subsequent (0 Examples (i) A becomes surety to C for g ‘ S Conduct contract, without A’s consent, a tas a mana . a TINS A'S salary haiti C's bank, Afterwards B an ¢ be raised and that he shall beco!INDEMNITY AND GUARANTEE . liable for one-fourth of the losses on overdraft. B allows a customer to overdraw and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent and is not liable to make good this loss (ii) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A’s becoming surety to C for B's accounting for moneys received by him as such clerk. Afterwards, without A’s knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary, A is not liable for subsequent misconduct of B. (iii) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil supplied by C to B on credit, Afterwards B becomes embarrassed and without the knowledge of A, B and C contract that C shall continue to supply B with oil for ready moncy and that the payments shall be applied to the then existing debts “between B and C. A is not liable on his guarantee for any goods supplied after this new arrangement. (iv) C contracts to lend B 5,000 rupees on the Ist March. A guarantees repayment. C pays the 5,000 rupees to B on the Ist January. A is discharged from his liability, as the contract has been varied in as much as C might sue B for the money before the Ist March. 4, Release or discharge of Principal Debtor The surety is discharged by any contract between the creditor and the principal debtor, by which the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor—Sec. 134. Effect of Debt Relief Acts : The Madras High Court held that if the liability of the principal debtor is reduced under the provisions of an Act for debt relief, the surety is liable only for the reduced amount. Subramania Chettiar v. M. P. Narayanswami Gounder:* The Nagpur and the Kerala High Courts have held similar decisions. Examples (i) G gives a guarantee to C for goods to be supplied by C to B. C supplies, goods to B and afterwards B becomes embarrassed and contracts with his creditors (including C) to assign to them his property in consideration of their releasing him from their demands. Here B is released from his debt by the contract with C and G is discharged from his suretyship. (ii) A contracts with B to grow a crop of sugarcane on A’s land and to deliver it to B at fixed rate and C guarantees A’s performance of this contract. B diverts a stream of water which is necessary for irrigation of A's land and thereby prevent him from raising the crops. C is no longer liable on his guarantee. (ili) D contracts with B for a fixed price to build a house for B within a stipulated time. B supplying the necessary timber. C guarantees D's performance of the contract. B omits to supply the timber. C is discharged from his suretyship 5. Arrangement 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, oF not to sue, the principal debtor, discharges the Surety, unless the surety assents to such contract.—Sec. 135. +-AIR (1951) Mad. 48. eu412 7 “Op, with a Third Perso” 14 give time (0 the principal debtor is made by the rea C! y is not discharged.—Sec, 136 itor wih . i But where a T debtor, the suret pill of exchange drawn by D as surety f for in overdue B. D is not discharged. Bang Ace, Example C. the holder of a | th M to give time tO by B, contracts wil does not Discharge Surety 6. Creditor’s forbearance to sue , Pe f the creditor to sue the principal debtor T OF to enf; Once Mere forbearance on the part of A remedy against him does not, in the absence 0! any provision in the a guarantee to the ae discharge the surety.— Sec. 137- Examples (i) Bowes to Ca debt guaranteed by G. The debt becomes payabl year after the debt has become payable. G is not discharged from ae Not sue Bs i) Faire to sve the principal debtor until recovery is barred by St is Suretyship, | var operate as a discharge ofthe surety. Mohant Singh v. Ber ¥i se OF Limitatin 7. Release of one Co-surety Where there are i ae cosets: a release by the creditor of one of them doe: 7 Sec. 138 surety so released from his responsibility to fe oe dischae 1e other sureties - 8. Act or Omission Impairi If the creditor cers Sarety’s Eventual Remedy any oct which his duty 10 the sun ich is inconsistent with the ri himself against the evaaaee requires him to do aaa ie eae ae jebtor is thereby impaired, the we eventual remedy of te Examples : , the surety is discharged. — Sec. 13? (i) B contracts to bui to build a shi reaches certain stages, § resale for a given sum, to be paid by instalments as th" les surety to C for B’s due perfananea of the contra without the know) Prepayment, ledge of S, prepays to B thi ¢ last two instalments. $ is dischare!”” (ii) C lends m loney to B favour b on the securi fives pews, maby S a8 surety urity ofa joint and several promissory note mate Subsequently, Coen 9 sor Bs together with a bill of sale of Bs furniture: » C sells : et only & small price ig ang curmiture, but, apply the proceeds in discharg* ee 8 realised. § io fone OMIME to his misconduct and wilful nee"® (iti) § Puts M as a i PPrenti 8 disch: his part that he will, at logs ad Bives ee from liability on the note- gst! least once & month see Arron M's fidelity. BON et : , see M make B omits es. Sis nor 1 e up the cash. is not liable to B on his guarantee: done as lone as promised and M embe ‘mbezz\INDEMNITY AND GUARANTEE a Loss of security if the creditor loses or parts with any security gi i yy given to him by the principal debtor at the time the contract to guarantee was entered into, the surety is discharged to the extent of the value of the security, unless the surety consented to the release of such security —Sec. 141 10, Miscellaneous ‘A contract of guarantee is invalid if itis obtained by means of misrepresentation (Sec. 142), silence as to material circumstances (Sec. 143), or if a co-surety fails to join according to the terms rthe contract (Sec. 144). See p. 108 ‘THE RIGHTS OF THE SURETY A surety has the following rights : Against the Principal Debtor 1. Right of Subrogation : Upon payment of performance of all that he is liable for, he is invested wit all the rights which the creditor had against the principal debtor.—Sec. 140. © Right to Indemnity : In every contract of guarantee there is implied promiie by the principal debtor to indemnify the surety and the surety is entitled to recover from the principal debtor eutever sum he has rightfully paid under the guarantee, but no sums which he has paid wrongfully—Sec. 145. Examples : fi) Bis indebted to C and A is surety for the debt. C demands payment from A, and on his refusal sues him for the amount, A defends the suit, having reasonable grounds for doing so, but is compelled to pay the amount of the debt with costs He can recover from B the rout paid by him for cost, as well as the principal debt (ii) C lends B a sum of money and A, atthe request of B accepts a bill of exchange drawn by B upon A to secure the amount, C, the holder of the bill, demands payment of it from A and on A's refusal to pay, Sues him upon the ill, A not having reasonable grounds for so doing, defends the suit, and has to pay the amount of the bill and costs. He can id for costs, as there was no recover from B the amount of the bill, but not the sum paic real ground for defending the action. (ii) A surety settled with the creditor by paying a Su smaller than the amount guaranteed. Held, he ean recover only what he paid. Reed v. Norris. 6 Against the Creditor Right of Security : A surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship is entered into. Whether the surety knows of the existence of security oF not IS immaterial —Sec. 141. “The expression ‘security’ in Section 141 is not used in any technical sense; it includes all tights which the creditor had against the property of the principal debtor at the date of contract.” State of M. P. v. Kaluram. een 6.2 Bing 361 7. AIR (1967) Supreme Court 1105of A, C has also a fy 14 yarantee e B cancels the moriga ®t on Examples 2 1s furniture I ie advances to B his tenant Bs Ig ischareed from labily oat security for the 2 ee the becomes insolvent and © 8 receives also a guar . cree, an amount of the value a a is secured bY # a execution under the deere, fa (ii) C, a creditor whose on 5 takes ecution. A is discharged. a that advance ban eae re ction cure a oan 0M Cy then, without the kno . wit! . 5 jointly t, Subsequently, ¢ (iii) A is surety for B, makes - net security for the same deb! QUERY, C gi, ‘Afterwards, C obtains from up the further security: A 1S ™ Against the Co-surety—See Below: CONTRIBUTION BETWEEN CO-SURETIES ion ‘Where several persons guarantee @ debt oF duty, they are called Defi co-sureties. Co-sureies lable to contribute equal! same debt or duty, either jointly : _ cons are co-sureties for th ; paar ‘he ‘same or different contracts, and whether with or without the Knowledge of each other, the co-suretes in the absence of any Contract to the contrary, are liable as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor —Sec. 146. Examples 12) A,B and C are sureties to D for the sum of 3,000 rupees lent to E. E makes default in fayment. A, B and C are lible as between themselves, to pay 1000 rupees each, ‘A, B and C are sureties to D for sum of 1000 rupees lent to E and there is a contract between A, B and C that A is to be responsible to the extent of one-quarter, B to the extent of one-quarter, and C to the extent of one-half. E makes default in payment. As between the sureties A is liable to pay 250 rupees, B 250 rupees and C 500 rupees. (ii) Liability of Co-sureties bound in different sums Co-sureties who are bound in different sums are liable to pay equally as far as the limits of their respective obligations permit—Sec. 147. Examples : 11). A. Band C as sureties for D, enter into th ray 4 in the peay at 10000 rapes. Tiare ae ae : site na rupees, conditioned for ’s duly secountin OO cubes ee 30,000 rupees. A, B and C are each liable to ni pes default to the extent o (ii) AB sol 6. suai for D, enter into three several bond namely A in the penalty of 10,000 rupees. B in the onds, each in a different pens! 40,000 rupees, conditioned for D's duly a that of 20,000 rupees, C in that © of 40,000 rupees. A is liable to pay 10,000