Law of Contract - II Guarantee

7/29/2019 Law of Contract - II Guarantee

1/36

LAW OF CONTRACT - II

Faculty Shradha Baranwal

Assistant Professor, [email protected]
mailto:[email protected]:[email protected]


2/36

CONTRACT OF INDEMNITY AND

GUARANTEE

Section 124 promise to save the other from losscaused

By the conduct of the promisor himself,

By the conduct of any other person, is called a

contract ofindemnity.

English Lawcovers loss caused

By any act done at the request of Promisor

By any accident, event not dependent on theconduct of any person

INDEMNIFIER ANDINDEMNIFIED


3/36

Promise of indemnity could be in three ways

Express or implied contract of indemnity

Relation of the parties By statute

EXAMPLES OF INDEMNITY

A, a joint Promisor pays off the whole debt and sues B forhalf the due amount.

Liability of directors of the company to compensate forthe loss suffered by a person whose name appears asdirector without his consent or the consent has been

withdrawn.


4/36

Liability towards partner of a firm in respect of

payments made by him on behalf of the firm in

the ordinary course of business.

COMMENCEMENT AND EXTENT OF LIABILITY

Earlier position in English Law

no indemnity till the actual losses

have been suffered

Difficulty with the earlier position

Equitable Principle


5/36

Law commission of India observed that indemnity

is a claim and not mere reimbursement. (Seethirteenth report)

Osman Jamal And Sons Ltd. vs Gopal Purshottam

AIR 1929 Cal 208

Gajanan Moreshwar Parelkar vs MoreshwarMadan Mantri (1942) 44 BOMLR 703


6/36

LIMITATION ON CONTRACT OF INDEMNITY

Indemnifier cannot sue the debtor in his own

name for want of Privity of contract

Creditor also cannot sue the promisor of the

contract of indemnity


7/36

RIGHT OF INDEMNITY HOLDER WHEN SUED

Section 125 reads,

The promisee in a contract of indemnity, acting within the scopeof his authority is entitled to recover from the promisor

All damages (judgment is conclusive for indemnification)

All costs (to be reasonable)

All sums (notice may be given)

Limitation Act3 years time limit for recovery

Conditions are

Orders of the promisor should not have been contravened

Action of a prudent man in absence of contract of indemnity


8/36

Rights of the indemnifier

Based on the natural equity

Where one person has agreed to indemnify

another, he will, on making good the

indemnity, be entitled to succeed to all the

ways and means by which the person

indemnified might have protected himself

against, or reimbursed himself for the loss.


9/36

CONTRACT OF GUARANTEE

Sec. 126 defines contract of guarantee

Includes

Performance of a promise corresponds to a duty

Discharge of a liabilitycorresponds to a debt

Either oral or written

Operative only in case of default

Surety

principal debtor creditor


10/36

Essentials of contract of guarantee

Three necessary parties debtor, surety,creditor

Default by principal debtor

Liability voluntarily taken by another person

Contract of Guarantee by Company

By writing under its common seal By any person on behalf of a company viz.,

Director


11/36

129. Continuing guarantee

A guarantee which extends to a series of

transaction, is called, a "continuing guarantee". The nature of Guarantee is a question of the intention

inferred by language, surrounding circumstances and relative

position of the parties.

Guarantee and indemnity (similarity)

Broadly both insures against losses


12/36

Differences Guarantee and Indemnity

1. Parties and formation

2. Difference in liability

3. Existing debt or duty

4. Formalities

Contract of Guarantee with the knowledge of the principle

debtor (can avail 140, 141 and 145)

Without the knowledge of principal debtor (can not avail

145)


13/36

Nature of contract of Guarantee

Collateral or conditional contract

Something auxiliary to an antecedent obligation.

There are two classes of guarantee a promise

which becomes effective if the debtor fails to

perform his obligation and a promise that the

debtor will perform his obligation. Guarantee in

the latter case are effectively unconditional.

A contract of Guarantee is not one uberrimae

fidei, but a contract ofstrictissima juris.


14/36

An arrangement under which the promisor

undertakes an obligation which replaces and/or

extinguishes the principal-debtors liability, whether

by novation or otherwise, is not a guarantee.

The principal-debtor may be a party to the contract

by implication.

Surety against minors contract is treated as

Principal debtor.

Liability should be legally enforceable

Suretys liability equivalent to that of a principal.

Liability subject to condition if provided Hence can

be limited.


15/36

For filing the suit for enforcing entitlement it is

not necessary for the creditor to exhaust suit

against principal debtor. Liability to be proved in the same manner as PD

Contract of guarantee without consideration

voidCriteria to determine whether contract of

Guarantee or Indemnity

Use and frequency of use of words

Nature of liability


16/36

CONSIDERATION

Section 127 Consideration for guarantee

Anything done, or any promise made, for the

benefit of the principal debtor, may be a

sufficient consideration to the surety for givingthe guarantee.

Legal detriment incurred by the Promisee at the

promisors request-irrespective of benefit to thepromisor


17/36

LIABILITY UNDER CONTRACT OF GUARANTEE

Section 128 Surety's liability

The liability of the surety is co-extensive with

that of the principal debtor, unless it is

otherwise provided by the contract.

Section 132

Liability of two persons primarily liable, not

affected by arrangement between them that

one shall be surety on others default.


18/36

Section 144. Guarantee on contract that

creditor shall not act on it until co-surety

joins

Section 146. Co-sureties liable to contribute

equally

Section 147. Liability of co-sureties bound in

different sums


19/36

Liability for void or voidable contract (surety

against minors debt)

Discharge of principal debtor by operation of lawdoes not discharge the surety e.g. insolvency.

Statutory reduction or extinguishment of liability

Filing a suit and execution of a decree Effect of acknowledgement by a principal debtor

does not bind the surety unless specifically

empowered.

Document of release in favour of PD without

reserving right against surety.


20/36

REVOCATION OF CONTRACT

130. Revocation of continuing guarantee

A continuing guarantee may at any time be revoked by thesurety, as to future transactions, by notice to the creditor.

By giving notice guarantor can avoid future liability.

Where a continuing relationship is constituted on the

faith of guarantee, it cannot be revoked during thecontinuance of that relationship. However a materialchange in the guaranteed situation may justify revocationviz., proved misconduct of servant.

Prescribed mode of revocation Change in the status of creditor would terminate the

guarantee unless agreed otherwise.


21/36

131. Revocation of continuing guarantee by

surety' death -

The death of the surety operates, in the absenceof any contract to the contrary, as a revocation

of the continuing guarantee, so far as regards

future transactions.

In the absence of any contract in contrary

Joint and several liability


22/36

DISCHARGE OF SURETY (SEC 133-135 &139)

Also consider General ways for discharge of contract

Section 133

Discharge of surety by variance in terms of contract(variance without the consent of surety) Rule of strictinterpretation

Variance should be substantial

Cases of ambiguity rule ofcontra preferentem

Section 134Discharge of surety by release or discharge of principal

A surety is discharged if the creditor without his consent,unconditionally release the principal debtor.


23/36

Release of the principal debtor by a complete

novation or otherwise terminates the

guarantee Acceptance of second surety by the creditor

Consent decree/ Compromise

Sec. 135 Contract between principal debtor and

the creditor to give time to, agreement not to

sueetc would discharge the surety.


24/36

Section 139. discharge of surety by creditors act of

omission impairing suretys eventual remedy

Section 139 includes -does an act inconsistent with the rights of the surety;

or

- Omits to do any act which his duty to the suretyrequires him to do, and as a result the suretys

eventual remedy against the principal debtor is

thereby impaired.

Section 139 is residuary in nature which ensures that

no contrary arrangement is made


25/36

Cases which can be covered under section 139

Where the creditor consented to the release ofattachment over the properties;

Where creditor failed to convey property in purchase, theprice of which was guaranteed by the guarantor ;

Sale of mortgaged property in favour of creditor withoutthere being any occasion for the same;

Loss of pledged goods; Failure of creditor to bring on record the LRs of the dead

principal debtor resulting into abatement of proceedingsagainst him.

Security not returned in the same condition as given to

the creditor

THE ONUS LIES ON SURETY


26/36

Essentials

Guarantee for several and distinct contracts.

Waiver of right.

Liability to remain when change is inoperative.

Only substantial variance need not to be the

actual case of prejudice.

Effect of novation.

Surety is the best judge of his interest.


27/36

SURETY WHEN NOT DISCHARGED

Section 136. Surety not discharged when

agreement made with third person to give time

to principal-debtor-

Section 137. Creditorsforbearance to sue does

not discharge surety

Section 138. Release of one co-surety does not

discharge others


28/36

RIGHTS OF THE SURETY

Section 140. Rights of surety on payment or performance

.Surety becomes invested with all the rights which the

creditor had against the principal debtor.

Entitlement for part payment

Based on the principal of equity

In counter guarantee for reimbursement the rights aretransferred to the counter guarantor.

Priority in cases of liquidation and winding up. Rights before demand of payment once the liability

accrues

Injunction even before the payment


29/36

Section 141. Suretys right to benefit of creditors

security-

Surety is entitled to all the securities creditor hadat the time of entering into contract of surety

irrespective of the knowledge of the same any

impairment in the same would discharge thesurety


30/36

Section 145. Implied promise to indemnifysurety

Based on equity

Rightfully paid

Includes property, assignment of rights Entitlement runs till full indemnification is

done including payment towards interest.

Recovery of cost

Includes cases where surety has defended thedebtor under his authority, for his benefit, orunder circumstances which were unavoidable


31/36

GUARANTEE OBTAINED BY

MISREPRESENTATION

Section 142. Guarantee obtained by

misrepresentation, invalid

Section 143. Guarantee obtained by

concealment, invalid


32/36

Circumstances in which necessary disclosure ismade to the surety

Where the surety has asked specific question tothe creditor;

Where the bank misleads the surety byvolunteering only part of the truth;

Where the surety makes a statement in thecreditors presence that demonstrates that the heentirely misunderstood the principal debtorsposition;

Where there is anything that might not naturallybe expected to take place between the principaldebtor and the creditor


33/36

CASE LAWS ON GUARANTEE

Gas Authority of India Ltd., New Delhi v OfficialLiquidator, Mumbai AIR 2004 Bom 220

Syndicate Bank v Pamidi Somaiah (Died) AIR 2002 AP 12

M. S. Anirudhan vs The Thomco'S Bank Ltd on 1963 AIR746

Ram Narain vs Lt. Col. Hari Singh And Anr. AIR 1964 Raj76

State Bank Of India & Anr vs Mula Sahakari Sakhar

Karkhana Ltd on 6 July, 2006 Syndicate Bank vs Channaveerappa Beleri & Ors on 10

April, 2006

United Bank Of India vs Satyawati Tondon & Ors. on 26

July, 2010

Cl i


34/36

Class exercise

1. A, introduced B to C for certain business leading

to execution of a contract between B and C.Later C breached the contract Decide theliability of A

Whether A is liable for indemnify or stands asGuarantee (Refer Chanana Steel Tubes Pvt. Ltd. v.Messrs Jaitu Steel Tubes Pvt. Ltd. AIR 2000 HP 48)

2. X invited Y for celebrating his marriage. Y

promised to gift X a watch. Z a common friendto X and Y guaranteed the same in case Ydefaults. Y defaulted in his promise. Decide theliability of Z.


35/36

3. X agreed to sell 500 pieces of shoes to Y for aconsideration of 30,000 Rs. Y received the goodsbut failed in payment of the amount. Z a friend to

Y entered into a contract with X for the paymentof the due amount in consideration of dischargingthe liability of Y. Decide the status of Z whether hestands as surety to the contract between X and Y?

4. A agreed with B to pay off all the losses B wouldsuffer due to payment against sale B concludedwith C. The agreement between A and B was

worded as follows:This Agreement of Guarantee is been concluded between A andB whereby A guarantees to make payment in case of losssuffered by B on account of payment against sale concludedbetween B and C.

Decide the nature of contract between A and B


36/36

5. X borrowed Rs. 50,000 from Y. Z deposited his

property papers to secure the payment without

there being any express agreement. Decide theliability of Z in case of non payment by X.

6. In a writing by X to Y in the presence of Z:

Please lend Rs. 1200 to Z; there will be notrouble in the payment of your money. Be

assured, if there by any trouble, I undertake to

indemnify you and would stand as equally

liable. Decide whether contract of Guarantee

or indemnity?

Documents

Law of Contract - II Guarantee