What is the Contract of Indemnity and Guarantee?

Two special contracts are listed under the Indian Contract Act, 1872. These are the contract of indemnity and the contract of guarantee. A contract in which one of the individuals compensates for the loss of another individual, it is known as a contract of indemnity, while a contract of three individuals in which the third individual wishes to pay the debt for a debtor who is at default in paying back, is known as a contract of guarantee. In this blog, we will discuss the contract of indemnity and the contract of guarantee.

Contract of indemnity

A contract in which one of the individuals tries to help the other party and compensates the other individuals for the loss, is known as a contract of indemnity. Individual who gives the indemnity is known as the indemnifier whereas the individual who receives the indemnity order to pay the loss is known as an indemnity-holder or an indemnified.

Rights of the indemnified

The indemnified possesses certain rights using which he can enforce the following from the contract of the indemnifier:

1. Pay for damages of a suit no matter what the manner.
2. Amount to the sums for any suit's compromise.
3. Pay all the cost which is needed in order to defend the suit legally against him.

Commencement of liability

The indemnity is not given only for repaying after the payment. Rather it is needed that the indemnified can never come up to pay. Most of the courts state that once the liability to pay is accurate and clear by the indemnified, he will have the right to make the indemnifier meet the claims of repayment.

An indemnity bond

This bond allows an employee to leave the employment before the agreed period. It is valid only if the bond money and the restriction period are reasonable; this withdrawal can be applied only at the forfeiture cost of the  bond money.

Contract of guarantee

A contract in which a third party discharges the debtor's liability to the creditor. The individual who is given the guarantee to repay his debt is known as the principal debtor and the individual to whom the guarantee is to be paid by the principal debtor is known as a creditor. The guarantee can be either written or oral. With the help of the contract the principal debtor can provide employment, loan or goods on credit and ensure repayment for any default of the debtor.

Features of a guarantee

A principal debtor: A guarantee is only given to secure a debt. A guarantee is important for a recoverable debt to exist. The contract of guarantee must consist of the essentials of a valid contract. The guarantee will be valid even if the principal debtor is incompetent. However, if the surety is incompetent then the contract will be invalid.

Consideration: Valid consideration is required for a contract to be valid. the principal debtor's consideration is sufficient enough for the surety to give a guarantee.

Misrepresentation: A contract will be considered invalid if it is Misrepresented. This misrepresentation can be the fault of the creditor. Also, if the creditor doesn't speak up on the material circumstances then the guarantee will be invalid.

Surety 's liability

The liability of the surety and of the principal debtor are coextensive unless provided by the contract. This is the maximum surety's liability. But the surety can limit his liability with the help of a contract. The contract can state that the surety will be liable only for a specific extent of the principal debtor's liability.

Coextensive with the principal debtor's liability

According to the general rules, all the debts of the principal creditor will be paid by the surety. The principal debtor is allowed to recover interests, damages and costs from the surety, however there can be some exceptions to it.

Commencement

It commences right after the principal debtor's default exceeds the responsibility of the surety. The creditor may or may not sue or send a notice to the principal debtor. The liability and guarantee of the surety will be effective only till such limits.

Continuing guarantee

A continuing guarantee is the guarantee which continues for a series of transactions.

Joint debtor and surety-ship

A contract between two people with a third party in order to take specific liability is known as a joint-debtor and surety-ship. The two individuals will come into a contract with each other in such a way that one of them will be liable for the default of the other individual. The second contract will not concern the third party. The liability of the two people with the third party will not be affected even with the existence of a second contract.

Discharging liability of surety

A surety will only be free from the liability after the limit of his liability ends. The surety can be discharged from his liabilities through the following:

1. Revocation: Thee surety has the right to revoke the continuing guarantee at any point of time by sending a notice to the creditor.
2. Death of Surety's: The continuing guarantee for future transactions will be revoked in case of the death of the surety.
3. Contract variance: Any sort of variance which is made in the contract between the principal debtor and the creditor will end up releasing the surety from his liability.
4. Releasing of principal debtor: In case the principal debtor is discharged by the contract, then the surety will be freed from his liabilities. This can be done by act or omission of the creditor.
5. Composition, extension of time or promise not to sue: If any changes are made in the contract by the creditor without consulting the surety, then the surety will be freed from such liabilities.
6. Forbearance of the creditor to sue: The surety will not be discharged of his liability just because of the forbearance of the creditor to sue the principal debtor.
7. A promise with the third person: The surety will not be discharged of his liabilities due to an agreement with a third person. This is because the agreement is between the creditor and the third party.
8. Impairing remedy of the surety: In case the creditor performs an inconsistent act or does not perform an act, then in such a case the surety will be discharged of his liabilities as the remedy of the surety stands impaired against the principal debtor.

Rights of the surety:

1. Rights of subrogation: The surety exercises the right of the creditor against the principal debtor only after repaying the default of the principal debtor.
2. Right to indemnity: A promise by the principal debtor to indemnify the surety is present in every guarantee contract. The principal debtor will have to repay all the sums of money which the surety has paid. However, the wrongly paid amount does not need to be repaid.
3. Rights to set off: The surety can set off in case the creditor sues him.
4. Rights to the securities of the creditor: Every Security that the credit has against the principal debtor is beneficial to the surety. The surety will have rights over all the securities of the creditor.
5. Release of  co-surety: In case of more than one co-surety, the release of one of them will not lead to the discharge of the other co-surety.
6. Rights to contribution: If the co-surety are of the same debt, then they are liable to themselves. Also, they will have to pay equal share for the debt which has not been paid by the principal debtor.

Conclusion

In this blog, we discussed in detail the contract of indemnity and guarantee, the rights of the indemnity holder, commencement of the liability and indemnity bonds. We also discussed the contract of guarantee under which we discussed the principal debtor, consideration  and misrepresentation. We also came across liability of a surety, joint-debt and surety-ship and the rights of the surety and discharging the liability of a surety.