MB0051-Unit-03-Contracts of Guarantee and IndemnityUnit-03-Contracts of Guarantee and IndemnityStructure:3.1 Introduction

Objectives

3.2 Purpose and Meaning of the Contract of Guarantee

Purpose of guarantee

Definition and nature of the contract of guarantee (Sec.126)

Fiduciary relationship

3.3 Kinds of Guarantee

Oral or written guarantee

Specific and continuing guarantee

A guarantee may either be for the whole debt or a part of the debt

3.4 Rights and Obligations of the Creditor

Rights of a creditor

Obligations imposed on a creditor in a contract of guarantee

3.5 Rights, Liabilities and Discharge of Surety

Rights against the creditor

Rights against the principal debtor

Rights against co-sureties

Liability of surety

Discharge of surety

3.6 Contract of Indemnity

Meaning of indemnity

Rights of the indemnified (i.e., the indemnity holder)

Rights of the indemnifier

Commencement of indemnifier’s liability

3.7 Summary

3.8 Terminal Questions

3.9 Answers

3.1 IntroductionIn the previous units, you came to know about the law and the contract of law. In this unit you will study about the guarantee and indemnity of contracts.

In this unit you come to know when a company needs some money for its business it approaches a bank. The bank requires that the managing director M promises to repay the loan personally should the company default. When the directors of the company including M execute the promissory note on behalf of the company, they sign as company’s officials. M, the managing director signs again as an individual.

The relationship between M and the bank is called a guarantee or suretyship. It is a contractual relationship resulting from the unconditional promise of M (known as the surety or guarantor) to repay the loan to the creditor (the bank) for the obligation of the principal debtor (the company) should it default. If the company fails to repay the loan, the bank can approach M for the payment.

Sometimes the banks (lenders) ask for more security for the loans in addition to the personal guarantee of an official of the borrowing company. The company may agree that a particular machinery in its factory would serve as collateral security for the loan. If the company defaults, the bank now has three options: to compel the principal debtor to pay, demand payment from the surety, or obtain a court order to either claim or sell the collateral. The bank need not look to the collateral first. But if M pays the money to the bank, then the right of the bank on the collateral gets transferred to him.

The bank has yet another alternative for securing its loan to the company. It could ask that all the three directors (including M) sign the promissory note as co-sureties. If they do so and the company defaults, the bank may seek payment from any one or any two of them or all of them.

The law relating to the contracts of guarantee is given in the Indian Contract Act, 1872 (Secs.126-147). The sections quoted in this chapter refer to the Act unless otherwise stated.

ObjectivesAfter studying this unit, you should be able to:

· Explain the contract of guarantee

· Describe the types of guarantee

· Explain the rights and obligations of creditor

· Enumerate the contract of indemnity

3.2 Purpose and Meaning of the Contract of Guarantee3.2.1 Purpose of guaranteeThe contracts of guarantee are among the most common business contracts and are used for a number of purposes. These are:

i) The guarantee is generally made use of to secure loans. Thus, a contract of guarantee is for the security of the creditor.

ii) The contracts of guarantee are sometimes called performance bonds. For example, in the case of a construction project, the builder may have to find a surety to stand behind his promise to perform the construction contract.

Also employers often demand a type of performance bond known as a fidelity bond from employees who handle cash, etc., for the good conduct of the latter. If an employee misappropriates then the surety will have to reimburse the employer.

iii) Bail bonds, used in criminal law, are a form of contract of guarantee. A bail bond is a device which ensures, that a criminal defendant will appear for trial. In this way a prisoner is released on bail pending his trial. If the prisoner does not appear in the court as desired then the bond is forfeited.

In this unit our primary concern is with the contracts of guarantee which are used for securing loan.

3.2.2 Definition and nature of the contract of guarantee (Sec.126)A contract of guarantee is defined as “a contract to perform the promise, or discharge the liability, of a third person in case of his default”. The person who gives the guarantee is called ‘surety’; the person for whom the guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given is called the ‘creditor’. A contract of guarantee may be either oral or in writing.

From the above discussion, it is clear that in a contract of guarantee there must, in effect, be two contracts, a principal contract between the principal debtor and creditor, and a secondary contract between the creditor and the surety. In a contract of guarantee there are three parties, viz., the creditor, the principal debtor and the surety. Therefore, there is an implied contract also between the principal debtor and the surety.

Example: When A requests B to lend Rs10,000 to C and guarantees that C will repay the amount within the agreed time and that on C failing to do so, he will himself pay to B, there is a contract of guarantee.

The contract of surety is not a contract collateral to the contract of the principal debtor, but is an independent contract. There must be a distinct promise on the party of the surety to be assumable for the debt. It is not necessary that the principal contract, between the debtor and the creditor, must exist at the time the contract of guarantee is made; the original contract between the debtor and creditor may be about to come into existence. Similarly, under certain

circumstances, a surety may be called upon to pay though principal debtor is not liable at all.

Also, 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 co-surety, the guarantee is not valid if that other person does not join (Sec.144).

3.2.3 Fiduciary relationshipA contract of guarantee is not a contract “uberrimae fidei” (requiring utmost good faith). Nevertheless, the suretyship relation is one of trust and confidence and the validity of the contract depends upon good faith on the part of the creditor. A creditor must disclose all those facts which, under the circumstances, the surety would expect not to exist. So where guarantee is given for good conduct of an employee, the employer’s failure to inform the surety of any breach on the part of employee, will discharge the surety. Similarly, where X guarantees the existing and future liabilities of A to B upto a certain amount which limit has already been exceeded, the contract of guarantee can be avoided on the ground of concealment of a materiel fact. However, it should be noted that it is no part of the creditor’s duty to inform the surety about all his previous dealings with the debtor.

Self Assessment Questions1. As per the Indian law, a contract of guarantee must be in writing. (True/False)

2. Specific guarantee is different from continuing guarantee. (True/False)

3. For a contract of guarantee, the primary liability is of the surety. (True/False)

3.3 Kinds of Guarantee

3.3.1 Oral or written guaranteeA contract of guarantee may either be oral or in writing (Sec.126), though a creditor should always prefer to put it in writing to avoid any dispute regarding the terms, etc. In case of an oral agreement the existence of the agreement itself is very difficult to prove.

3.3.2 Specific and continuing guaranteeFrom the point of view of the scope of guarantee a contract of guarantee may either by specific or continuing. A guarantee is a “specific guarantee”, if it is intended to be applicable to a particular debt and thus comes to end on its repayment. A specific guarantee once given is irrevocable.

Example: A guarantees the repayment of a loan of Rs. 10,000 to B by C (a banker). The guarantee in this case is a specific guarantee.

A guarantee which extends to a series of transactions is called a “continuing guarantee” (Sec.129)

Example: A guarantees payment to B, a tea-dealer, to the amount of Rs. 10,000 for any tea he may from time to time supply to C. B supplies C with tea of the value above Rs. 10,000 and C pays B for it. Afterwards B supplies C with tea to the value of Rs. 15,000. C fails to pay. The guarantee given by A was a

continuing guarantee and he is accordingly liable to B to the extent of Rs. 10,000.

A guarantee regarding the conduct of another person is a continuing guarantee. Unlike a specific guarantee which is irrevocable, a continuing guarantee can be revoked regarding further transactions (Sec.130). However, continuing guarantee cannot be revoked regarding transactions that have ready taken place.

The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions. (Sec.131).

3.3.3 A guarantee may either be for the whole debt or a part of the debtDifficult questions arise in case of guarantee for a limited amount because there is an important distinction between a guarantee for only a part of the whole debt and a guarantee for the whole debt subject to a limit.

For instance, where X owes Y Rs 50,000 and A has stood as surety for Rs. 30,000, the question may arise whether A has guaranteed Rs. 30,000 out of Rs. 50,000 or whether he has guaranteed the full amount of Rs. 50,000 subject to a limit of Rs. 30,000. This matter becomes important if X is adjudged insolvent and Y wants to prove in X’s insolvency and also enforce his remedy against A. If A stood surety only for a part of the debt and if X’s estate can pay only 25 paisa dividend in the rupee, then Y can get Rs. 30,000 the full amount of guarantee from A and Rs. 5,000 from X’s estate, being ¼ of the balance, i.e., Rs. 50,000 – Rs. 30,000 = Rs. 20,000 which was not guaranteed. Since after paying Rs. 30,000 to Y, A can claim from X’s estate, he will get Rs. 7,500 being ¼ of Rs. 30,000 paid by A to Y. If on the other hand, A had stood surety for the whole debt of Rs 50,000 subject to a limit of Rs. 30,000 then Y can recover from A Rs. 30,000 and from X’s estate Rs. 12,500, i.e., ¼ of Rs. 50,000. A will not get any dividend unless Y has been fully paid. This can happen only if X’s estate declares a higher dividend.

Self Assessment Questions4. A contract of guarantee is for the security of the ………………

(a) Buyer

(b) Seller

(c) Debtor

(d) Creditor

5. Continuing guarantee is a:

(a) Guarantee which extends to a series of transactions

(b) Guarantee which limited access of transactions

(c) Guarantee not related to transactions

(d) None of the above

3.4 Rights and Obligations of the Creditor

3.4.1 Rights of a creditor1. The creditor is entitled to demand payment from the surety as soon as the principal debtor refuses to pay or makes default in payment. The liability of the surety cannot be postponed till all other remedies against the principal debtor have been exhausted. In other words, the creditor cannot be asked to exhaust all other remedies against principal debtor before proceeding against surety.

The creditor also has a right of general lien on the securities of the surety in his possession. This right, however, arises only when the principal debtor has made default and not before that.

2. Where surety is insolvent, the creditor is entitled to proceed in the surety’s insolvency and claim the pro rata dividend.

3.4.2 Obligations imposed on a creditor in a contract of guarantee1. Not to change any terms of the original contract. The creditor should not change any terms of the original contract without seeking the consent of the surety. Sec.133 provides. “any variance made, without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to the transactions subsequent to the variance”.

Example: A banker contracts to lend X Rs. 5,000 on March 4. A guarantees repayment. The banker pays X Rs. 5,000 on January 1. A in this case is discharged from his liability as the contract has been varied as much as the banker might sue X before March 4, but it cannot sue A as the guarantee is from March 4.

2. Not to release or discharge the principal debtor. The creditor is under an obligation not to release or discharge the principal debtor. Sec.134 states: “The surety is discharged by a contract between the creditor and 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”.

Example: A gives a guarantee to banker C for repayment of the debt granted to B. B later contracts with his creditors (including C, the banker) 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 A is discharged from his suretyship.

3. Not to compound, or give time to, or agree not to sue the principal debtor. Sec.135 provides, “A contract between the creditor and the principal debtor, by which the creditor makes a composition with or promises to give time to, or not to use the principal debtor, discharges the surety, unless the surety assents to such contract”.

If the time for repayment is extended, the debtor may die or become insane or insolvent or his financial position may become weaker in the meanwhile, with one effect that the surety’s remedy to recover the money in case the principal debtor defaults, may be impaired. However, there are certain exceptions. These are:

a) Sec.136 states that if the creditor makes an agreement with a third party, but not with the principal debtor, to give extension of time to the principal debtor, surety is not discharged even if his consent has not been sought.

b) Mere forbearance on the part of creditor to sue the principal debtor, or to enforce any other remedy against him, does not, in the absence of a provision to the contrary, discharge the surety (Sec.137).

c) If the creditor releases one of the co-sureties, the other co-surety (or co-sureties) thereby is not discharged. The co-surety released by the creditor is also not released from his liability to the other sureties (Sec.138).

4. Not to do any act inconsistent with the rights of the surety (Sec.139). Where C lends money to B on the security of a joint and several promissory note made in C’s favour by B and by A as surety for B, together with a bill of sale of B’s furniture, which gives power to C to sell the furniture and apply the proceeds in discharge of the note. Subsequently, C sells the furniture, but owing to his misconduct and willful negligence, only a small price is realised, then A is discharged from liability on the note.

Self Assessment Questions

6. In the event of principal debtor being a minor, creditor cannot recover his money from the surety. (True/False)

7. The creditor does not a right of general lien on the securities of the surety in his possession. (True/False)

3.5 Rights, Liabilities and Discharge of Surety

Rights of a surety may be classified under three heads: (i) rights against the creditor, (ii) rights against the principal debtor and (iii) rights against co-sureties.

3.5.1 Rights against the creditorIn case of fidelity guarantee, the surety can direct creditor to dismiss the employee whose honesty he has guaranteed, in the event of proved dishonesty of the employee. The creditor’s failure to do so will exonerate the surety from his liability.

3.5.2 Rights against the principal debtora) Right of subrogation: Sec.140 lays down that where a surety has paid the guaranteed debt on its becoming due or has performed the guaranteed duty on the default of the principal debtor, he is invested with all the rights which the creditor has against the debtor. In other words, the surety is subrogated to all the rights which the creditor had against the principal debtor. So, if the creditor loses, or without the consent of the surety parts with any securities (whether known to the surety or not) the surety is discharged to the extent of the value of

such securities (Sec.141). Further, the creditor must hand over to the surety, the securities in the same condition as they formerly stood in his hands.

b) Right to be indemnified: The surety has a right to recover from the principal debtor the amounts which he has rightfully paid under the contract of guarantee.

3.5.3 Rights against co-suretiesa) Right of contribution. Where a debt has been guaranteed by more than one person, they are called co-sureties. Sec.146 provides for a right of contribution between them. When a *surety has paid more than his share or a decree has been passed against him for more than his share, he has a right of contribution from the other sureties who are equally bound to pay with him.

Example: A, B and C are sureties to D for the sum of Rs. 3,000 lent to E. E defaults in making payment. A, B and C are liable, as between themselves to pay Rs. 1,000 each and if any one of them has to pay more than his share, i.e., Rs. 1,000 he can claim contribution from the others, for the amount paid in excess of Rs. 1,000.

b) Where, the co-sureties have guaranteed different sums, they are bound under Sec.147 to contribute equally, subject to the limit fixed by their guarantee and not proportionately to the liability undertaken.

Examples: (i) A, B and C as sureties for D, enter into three several bonds, each in a different penalty, namely, A in the penalty of Rs 10,000, B in that of Rs 20,000, C in that of Rs 40,000, conditioned for D’s duly accounting to E. E makes default to the extent of Rs 30,000. A, B and C are each liable to pay Rs 10,000. (ii) In the above example, if D makes default to the extent of Rs 40,000, A is liable to pay Rs 20,000 and B and C Rs 15,000 each.

3.5.4 Liability of suretyUnless the contract provides otherwise, the liability of the surety is co-extensive with that of the principal debtor (Sec.128). In other words, the surety is liable for all those amounts the principal debtor is liable for.

Example: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable not only for the amount of the bill but also for any interest and charges which may have become due on it.

The liability of a surety is called as secondary or contingent, as his liability arises only on default by the principal debtor. But as soon as the principal debtor defaults, the liability of the surety begins and runs co-extensive with the liability of the principal debtor, in the sense that the surety will be liable for all those sums for which the principal debtor is liable. The creditor may file a suit against the surety without suing the principal debtor. Further, where the creditor holds securities from the principal debtor for his debt, the creditor need not first exhaust his remedies against the securities before suing the surety, unless the contract specifically so provides. The creditor is even not bound to give notice of the default to the surety, unless it is expressly provided for.

Position of surety in case of a minor principal debtor. According to the decision of the Bombay High Court in Kashiba v. Shripat I.L.R. 10 Bom. 1927 the surety can

be held liable, though a minor debtor is not liable. But the later decisions of the Bombay High Court have taken a contrary view. In Manju Mahadeo v. Shivappa Manju and in Pestonji Mody v. Meherbai it was held that as under Sec.128, the liability of the surety is co-extensive with that of the principal debtor, it can be no more than that of the principal debtor and that the surety therefore cannot be held liable on a guarantee given for default by a minor. If a minor could not default, the liability of the guarantor being secondary liability does not arise at all. The same view has been endorsed by the Madras High Court in the case of Edavan Nambiar v. Moolaki Raman (A.I.R. 1957 Mad. 164). It was held that unless the contract otherwise provides, a guarantor for a minor cannot be held liable.

3.5.5 Discharge of suretyThe liability of surety under a contract of a guarantee comes to an end under any one of the following circumstances:

1. By notice of revocation (Sec.130). A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.

Example: A, in consideration of B’s discounting, at A’s request, bills of exchange for C, guarantees to B, for twelve months, the due payment of all such bills to the extent of Rs 5,000. B discounts bill for C to the extent of Rs 2,000. Afterwards, at the end of the three months, A revokes the guarantee. The revocation discharges A from liability to B for any subsequent discount. But A is liable to B for Rs 2,000 on default of C.

2. By the death of surety (Sec.131). The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.

3. By variance in terms of the contract (Sec.133). Any variance, made without the surety’s consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.

Example: A becomes surety to C for B’s conduct as a manager in C’s bank. Afterwards B and C contract, without A’s consent, that B’s salary shall be raised and that he shall become liable for one-fourth of the losses on overdrafts. 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.

4. By release or discharge of principal debtor (Sec.134). The surety is discharged by any contract between the creditor and 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.

5. By compounding with, or giving time to, or agreeing not to sue, principal debtor (Sec.135). A contract between the creditor and the principal debtor by which the creditor makes a composition with, or promises to give time to, or not to sue the principal debtor, discharges the surety. The surety shall, however, be not discharged if (a) he assents to such contract, (b) the contract to

give time to the principal debtor is made by the creditor with a third person and not with the principal debtor.

6. By creditor’s act or omission impairing surety’s eventual remedy (Sec.139). If the creditor does any act which is inconsistent with the right of the surety, or omits to do any act which his duty to the surety requires him to do and the eventual remedy of surety himself against the principal debtor is thereby impaired, the surety is discharged.

7. Loss of security. If the creditor loses or parts with any security given to him by the principal debtor at the time the contract of guarantee was made, 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).

Self Assessment Questions8. The liability of a surety is secondary. (True/False)

9. The surety is a favoured debtor. (True/False)

10. Between co-sureties there is equality of burden and benefit. (True/False)

3.6 Contract of Indemnity

3.6.1 Meaning of indemnitySecs.124 and 125 provide for a contract of indemnity. Sec.124 provides that a contract of indemnity is a contract whereby one party promises to save the other from loss caused to him (the promisee) by the conduct of the promisor himself or by the conduct of any other person. A contract of insurance is a glaring example of such type of contracts. A contract of indemnity may arise either by (i) an express promise or (ii) operation of law, e.g., the duty of a principal to indemnify an agent from consequences of all lawful acts done by him as an agent. The contract of indemnity, like any other contract, must have all the essentials of a valid contract. These are two parties in a contraction of identity indemnifier and indemnified. The indemnifier promises to make good the loss of the indemnified (i.e., the promisee).

Example: A contracts to indemnify B against the consequences of any proceeding which C may take against B in respect of a certain sum of Rs 200. This is a contract of indemnity.

3.6.2 Rights of the indemnified (i.e., the indemnity holder)He is entitled to recover from the promisor: (i) All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies; (ii) All costs of suit which he may have to pay to such third party, provided in bringing or defending the suit (a) he acted under the authority of the indemnifier or (b) if he did not act in contravention of orders of the indemnifier and in such a way as a prudent man would act in his own case; (iii) All sums which may have been paid under the terms of any compromise of any

such suit, if the compromise was not contrary to the orders of the indemnifier and was one which it would have been prudent for the promisee to make.

3.6.3 Rights of the indemnifierThe Act makes no mention of the rights of indemnifier. However, his rights, in such cases, are similar to the rights of a surety under Sec.141, viz., he becomes entitled to the benefit of all the securities which the creditor has against the principal debtor whether he was aware of them or not.

3.6.4 Commencement of indemnifier’s liabilityIndemnity requires that the party to be indemnified shall never be called upon to pay. Indemnity is not necessarily given by repayment after payment. The indemnified may compel the indemnifier to place him in a position to meet liability that may be cast upon him without waiting until the promisee (indemnified) has actually discharged it.

Distinction between a contract of guarantee and a contract of indemnity. L.C. Mather in his book “Securities Acceptable to the Lending Banker” has very briefly, but excellently, brought out the distinction between indemnity and guarantee by the following illustration. A contract in which A says to B, ‘If you lend £20 to C, I will see that your money comes back’ is an indemnity. On the other hand undertaking in these words, “If you lend £20 to C and he does not pay you, I will is a guarantee. Thus, in a contract of indemnity, there are only two parties, indemnifier and indemnified. In case of a guarantee, on the other hand, there are three parties, the ‘principal debtor’, the ‘creditor’ and the ‘surety’. Other points of difference are:

1. The liability of a promisor is primary and independent in a contract of indemnity. In a contract of guarantee, the liability of the surety is secondary, the primary liability being that of the principal debtor.

2. In the case of guarantee, there is an existing debt or obligation, the performance of which is guaranteed by the surety. In case of indemnity the possibility of any loss happening is a contingency against which the indemnifier undertakes to indemnify.

3. In a contract of guarantee, after discharging the debt, the surety is entitled to proceed against the principal debtor in his own name while in case of indemnity, the indemnifier cannot proceed against third parties in his own name, unless there is an assignment in his favour.

 Self Assessment Questions11. Contract of indemnity come under which section:

(a) Secs. 124 and 126

(b) Secs. 126 and 127

(c) Secs. 124 and 125

(d) Secs. 125 and 126

12. A contract of indemnity may arise either by an express promise or _______________.

3.7 SummaryThe contract of surety is not a contract collateral to the principal debtor, but it is an independent contract. There must be a distinct promise on the party of the surety to be assumable for the debt. It is not necessary that the principal contract, between the debtor and the creditor, must exit at the time the contract of guarantee is made, the original contract between the debtor and creditor may be about to come into existence. Similarly, under certain circumstances, a surety may be called upon to pay though principal debtor is not liable at all.

GlossaryIndemnity: Indemnity means to make good the loss or to compensate the party who has suffered some loss.

Contract of Indemnity: A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself or by the conduct of any other person.

Contract of Guarantee: A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.

Continuing Guarantee: A guarantee which extends to a series of transactions is called a continuing guarantee.

Discharge of Surety from Liability: A surety is said to be discharged when his liability as surety comes to an end.

3.8 Terminal Questions

1. What do you mean by contract of guarantee?

2. What is a ‘Continuing guarantee’? When it can be worked?

3. Explain the circumstances under which a surety may be discharged from the liability by the conduct of the creditor.

4. Define contract of indemnity. Describe the rights of the indemnifier and the indemnity holder.

5. Distinguish between a contract of guarantee and a contract of indemnity.

3.9 Answers

Answers to Self Assessment Questions1. False

2. True

3. False

4. (d)

5. (a)

6. True

7. False

8. True

9. True

10. True

11. (c)

12. Operation of law

Answers to Terminal Questions

1. Refer 3.2 – The contracts of guarantee are among the most common business contracts and are used for a number of purposes.

2. Refer 3.3 – The scope of guarantee a contract of guarantee may either by specific or continuing.

3. Refer 3.5 – Rights of a surety may be classified under three heads: (i) rights against the creditor, (ii) rights against the principal debtor and (iii) rights against co-sureties.

4. Refer 3.6 – A contract of indemnity may arise either by (i) an express promise or (ii) operation of law, e.g., the duty of a principal to indemnify an agent from consequences of all lawful acts done by him as an agent.

5. Refer 3.6 – Student describe own.

Mini-case"I didn’t receive the products. The supplier said the goods were detained in the Customs Office because Customs didn’t find the original invoice attached to the goods. The supplier explained that it’s his company’s policy was to issue original invoices only when quantities are above 5 units. He told me to pay for another 2 units for another $150 USD, but I have refused. I paid by Western Union. He registered on your website as a US company, but actually it is Chinese Company.

All his information is fraudulent. His is a fraudulent company!"

If you think their price is very attractive and want to deal with them, it is very necessary for you to verify that they are legitimate company and their contact information is correct. In this case, the fraudster is pretending to be a US company, but all his registered information is false. This can be judged easily by calling his company telephone number or by searching the company name on related state government websites.

Western Union is a dangerous payment method, it can be picked up anywhere in the recipient’s country, with no way of tracing the person who picked it up. The criminal remains anonymous. So it is a commonly used payment method for con-artists. So try to avoid adopting this payment method and consider other more secure payment methods like escrow.

Questions1. What would you understand if the seller requests you to send payment to another country instead of his registered country showed on the website? (Hint: Refer First Para of case)

2. Analyze the ways in which a person can find out the whether the company is fraudulent. (Hint: Take full knowledge about the product and company if you use virtual mode of transaction).

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