BCOC-133 BUSINESS LAW CHAPTER-9 IDEMNITY AND GUARANTEE

 

BCOC-133 BUSINESS LAW CHAPTER-9 IDEMNITY AND GUARANTEE

MEANING OF CONTRACT OF INDEMNITY:
Indemnity refers to a legal obligation or protection against loss or damage. In the context of contracts, it is promised by one party (indemnifier) to compensate or make good the financial loss suffered by another party( the indemnified) due to specific events or actions. essentially , indemnity serves as a form of insurance or assurance against potential losses, and it is often a key elements in various contractual agreements. The party providing indemnity commits to covering specified costs, damages or liabilities incurred by the other party under agreed-upon circumstances

RIGHTS OF IDEMNITY HOLDER:

1. Damages: the indemnity-holder can recover damages compelled to pay in any suit covered by promise

2. Costs:- recovery of costs paid in bringing or defending any suits within the scope of authority

3. Compromise:- entitled to recover amounts paid under the compromise, subject to acting prudently

4. Compliance:- must not contravene indemni9ier’s orders act prudently in legal proceeding

COMMENCEMENT OF IDEMNIFIER’S LIABILITY:

1. Timing:- indemnifier becomes liable as soon as indemnity-holder’s liability becomes certain ,even if no payment has been made

2. Absolute liability:- indemnifier is obligated when the indemnity-holder incurs absolute liability

CONTRACT OF GURANTEE:

1. Definition:- a contract to perform or discharge the liability of third person (principle debtor) in case of default. Involves three parties: surety, principle debtor and creditor

2. Formation:- requires agreements among the creditor, principle debtor, and surety

3. Consideration:- surety need not directly bene9it, sufficient that something is done

   or promised for the principle debtor’s bene9it

4. Competency:- creditor and surety must competent , principle debtor’s competence

   is not necessary

5. Misrepresentation:- guarantee obtained by misrepresentation or concealment of

   facts is invalid

6. The person who gives guarantee is called ”surety”

   • Principle debtor:- id individual or entity that owes a financial obligation or debt to another party

   • Creditor:- the party whom the principle debtor owes money or has a financial obligation

   • Guarantee:- it means obtain an employment, a loan or goods on credit

DISTICTION BETWEEN CONTRACT OF IDEMNITY AND CONTRACT OF GUARANTEE:

1. Parties:-
• indemnity involves two parties (indemnifier and indemnified)
• guarantee involves three (surety, principle debtor, and creditor)

2. number of contract:

• indemnity has one contract ,

• guarantee involves three separate contacts among the parties                                               3. liability type:

• indemnifier’s liability is primary and independent,

• while surety’s liability in guarantee is secondary to the principle debtor                                4. triggering of liability:

• indemnifier’s liability is contingent on a specific event,

• in guarantee there is an existing duty or debt                                                                          5. initiation:-

• indemnifier acts independently,

• while surety guarantees at the request of the principle debtor                                               6. legal action:-

• in guarantee, if the surety pays, they can pursue the principle debtor

• in indemnity legal action may require an assignment in favor of the

  indemnifier

  EXTENT OF SUERTY’S LIABILITY:

• asper section 128 of the contract Act, the surety’s liability is co-extensive with the

  principal debtor , unless a contract specifies otherwise

• if the surety guarantees a fixed amount, their liability is limited to the amount

• the surety’s liability persists even if the principal debtor’s liability is reduced or

  terminated, ensuring an independent nature of surety’s contract                               KINDS OF GUARANTEE:

  1. specific guarantee:- applies to a single debt or transaction, ending when the guaranteed debt is paid or the promises fulfilled

  2. continuing guarantee:- extends to a series of transactions, remaining in force until terminated by guarantor or all transactions are completed

  3. fidelity guarantee:- a type of continuing guarantee, commonly seen in employment situations, lasting for specific period

  REVOCATION OF CONTINUING GUARANTEE:

  1. By notice:- a surety can revoke a continuing guarantee for future transactions by giving notice to the creditor

  2. Death of surety:- unless specified otherwise, the death of surety revokes the guarantee for future transaction

  3. Other modes:- similar to ways in which a surety is discharges( novation, variance in terms, release of principal debtor, loss of security) etc. a continuing guarantee can be revoked .

RIGHTS OF SURETY:

1. Right against principal debtor:

• Right of subrogation: upon payment, the surety acquires right against the principal debtor

• Right of indemnity: implied right for the principal debtor to indemnify the surety for payments made

  2. Against creditor:

• Right to security:- the surety, after setting liabilities, is entitled to claim any securities held by the creditor

• Right to set off:- the surety can claim set off against any counterclaims the principal debtor had against the creditor

  3. Against co-surety:

• Right to contribution:- when there are co-sureties, those who paid more than their share can claim contribution from others

• Equal liability:- in the absence of a contract stating otherwise, co-sureties are generally liable to contribute equally

  DISCHARGE OF SURETY FROM LIABILITY:

  1. By revocation of the contract of guarantee:

• Notice by surety:- a continuing guarantee can be revoked by the surety

  giving notice to the creditor

• Death of surety:- in the absence of a contract stating otherwise, the death of

  surety revokes a continuing guarantee for future transaction

  2. By conduct of the creditor:

• Variance in terms:- if the creditor materially alters the terms without the

  surety’s consent , the surety is discharged

• Release of principal debtor:- if the creditor releases the principal debtor

  without the surety’s consent , the surety is discharged

• Arrangement between principal debtor and creditor:- if the creditor ,

  without the surety’s consent , makes an arrangement with the principal

  debtor for composition or promises no to sue, the surety is discharged

• Creditor’s Act or omission impairing surety’s eventual remedy:- if the

  creditor does an act against the surety’s rights or omits an act that is their duty, impairing the surety’s eventual remedy against the principal debtor, the surety is discharged

• Loss of security:- if the creditor losses or parts with any security given by the principal debtor without the surety’s consent , the surety is discharged to the extent of the value of the security

  3. By the invalidation of the contract:-

• Misrepresentation:- if the contract is based on material misrepresentation by

  creditor , it is invalid

• Concealment:- if the creditor obtains the guarantee by concealing important

  facts , the contract is invalid

• Failure of co-surety:- if the contract stipulates co-surety involvement and

  they don’t join, the guarantee is invalid
  (these principles provide a framework for understanding the dynamics and legal aspects of suretyship)