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UNIT 1
INDEMNITY
The Contract of Indemnity and Contract of Guarantee are
specific types of Contract. The specific provisions relating to
these contracts are contained in Sections124 to 147 of the
Indian Contract Act, 18 7 2. In addition to these specific
provisions, the general principles of contracts are also applicable to such specific
contracts.
CONTRACT OF INDEMNITY [Section 124] 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, is called a "contract of indemnity".
Example A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of Rs 200. This is a contract of indemnity.
Meaning of Indemnifier and Indemnity-holder The person who promises to make good the loss is called the 'indemnifier': In the aforesaid example, A is the indemnifier. The person whose loss is to be made good is called 'indemnity-holder'. In the aforesaid example, B is the indemnity-holder.
Rights of Indemnity Holder [Section 125]
Whether Contract of Indemnity Covers the Cases of Loss Caused by the Events or Accidents which do not Depend upon the Conduct of the Promisor or any other Person If the definition of contract of indemnity as per Section 124 is strictly interpreted, it would not cover the cases of loss caused by the events or accidents which do not depend upon the conduct of the promisor or any other person. In other words, contracts of insurance would be outside the purview of the contract of indemnity. Since the intention of law makers had never been to exclude the contracts of insurance from the purview of contracts of indemnity, the courts in India have decided to apply the same equitable principles that the courts in England do. As per English law, a contract of indemnity is defined as "a promise to save another harmless from loss caused as a result of a transaction entered into at the instance of the promisor." This definition covers a promise to make good the loss arising from any cause whatsoever. Thus, Indian courts follow the English law in respect of contract of indemnity which covers the contracts of insurance also.
Meaning of Indemnity The term 'indemnity' means to make good the loss or to compensate the party who has suffered some loss.
An indemnity holder is entitled to recover the following amounts from the indemnifier provided he acts within the scope of his authority.
All 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 bringing or defending such suit if, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit.
All sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.
Mode of Contract of Indemnity A contract of indemnity may be express or implied.
(a) A contract of indemnity is said to be express when a person expressly promises to compensate the other from loss.
When does the Liability of Indemnifier Commence
The Indian Contract Act, 1872 is silent on the time of
commencement of liability of indemnifier. On the basis of
judicial pronouncement of courts, it can be said that the
liability of an indemnifier commences as soon as the liability of
the indemnity holder becomes absolute and certain. In other
words, if the indemnity-holder has incurred an absolute
liability even though he has himself paid nothing, he is entitled
to ask the indemnifier to indemnify him.
Example:- X promises to compensate Y for any loss. that he may suffer by filing a suit against Z. The court orders Y to pay Z damages of Rs 5,000. As the loss has become certain, Y may claim the amount of loss from X and pass it on to Z.
PARTIES TO CONTRACT OF GUARANTEE
There are three parties to a contract of Guarantee-Principle debtor, Creditor and Surety.
Meaning of Principal Debtor [Section 126] The person in respect of whose default the guarantee is given is called the 'Principal debtor'. Y is the principal debtor in the aforesaid example.
Meaning of Creditor [Section 126] The person to whom the guarantee is given, is called the 'creditor'. Z is the creditor in the aforesaid example.
Meaning of Surety [Section 126] The person who gives the guarantee is called the 'Surety'. X is the surety in the aforesaid example.
ESSENTIAL FEATURES OF A CONTRACT OF GUARANTEE
1. ALL THE ESSENTIALS OF A VALID CONTRACT.
However, the following points are worth noting in this regard: (i) The principal debtor need not be competent to contract. In case the principal debtor is not competent to contract, the surety would be regarded as the principal debtor and would be personally liable to pay. (ii) Surety need not be benefited. According to Section 127, "Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee." (iii) A guarantee need not be in writing. According to Section 126, a guarantee may be either oral or written.
All Essentials of a Valid Contract
Tripartite Agreement
Consent of Three Parties
Existence of a Liability
Guarantee not to be Obtained by Misreprese -ntation [Section 142]
Guarantee not to be Obtained by Concealme -nt of material facts [Section 143 ]
2. GUARANTEE NOT TO BE OBTAINED BY MISREPRESENTATION [SECTION 142]
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.
- GUARANTEE NOT TO BE OBTAINED BY CONCEALMENT [SECTION 143] Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid.
- TRIPARTITE AGREEMENT A contract of guarantee is a tripartite agreement between the principal debtor, creditor and surety. There are three contracts as under: (i) Contract between creditor and the principal debtor out of which the guaranteed debt arises. (ii) Contract between surety and the principal debtor by which the principal debtor undertakes to indemnity the surety if surety is required to pay. (iii) Contract between surety and the creditor by which the surety guarantees to pay the principal debtor's debt if the principal debtor fails to pay.
- THERE MUST BE CONSENT OF ALL THE THREE PARTIES.
Example :- X sells and delivers goods to Y. X afterwards requests Z to pay in default of Y. Z agrees to do so. Here, Z cannot become surety without the consent of Y.
- EXISTENCE OF A LIABILITY There must be an existing liability or a promise whose performance is guaranteed. Such liability or promise must be enforceable by law. Hence, guarantee can be given only for liability or promise which is enforceable by law. But there is an exception to this rule. The exception is a guarantee given for minor's debt. Though minor's debt is not enforceable by law, yet the guarantee given for minor's debt is valid. Example:- X took a loan of Rs 10 , 0 00 from Y on 1st January 1993 and paid nothing on
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IS A CONTRACT OF GUARANTEE A CONTRACT OF UBERRIMAE FIDEI
A contract of guarantee is not a contract of uberrimae fidei (i.e. a contract of absolute good faith) and hence, it is not necessary for the principal debtor or the creditor to disclose all the material facts to the surety before he enters into a contract. For Example:- in case of guarantee given to a bank, bank need not inform the surety of matters affecting the credit of principal debtor.
However, the provisions of Sections 142 and 143 give some protection to the surety by making the following guarantee as invalid. (a) a guarantee obtained by misrepresentation (b) a guarantee obtained by concealment of material facts.
KINDS OF GUARANTEE
Guarantee may be classified under the following two categories: I. Specific guarantee II. Continuing guarantee
I. SPECIFIC GUARANTEE
A guarantee which extends to a single debt or specific transaction is called a specific guarantee. The liability of the surety comes to an end when the guaranteed debt is duly discharged or the promise is duly performed.
Example:- X guarantees payment to Y of the price of the five bags of flour to be delivered by Y to Z and to be paid for in a month. Y delivers five bags to Z, Z pays for them. This is a contract of specific guarantee because X intended to guarantee only for the payment of
price of the first five bags of flour to be delivered at one time. [Kay v. Groves)
II. Continuing Guarantee Meaning of Continuing Guarantee [Section 129]: A Guarantee which extends to a series of transactions is called a 'continuing guarantee'. A surety's liability continues until the revocation of the guarantee.
Example I:- On S’s recommendation, C employed P for the collection of rent from his tenants. S promised to make good any default made by P This is a contract of continuing guarantee.
Example II:- A guarantees payment to B, a tea-dealer to the extent of Rs 100, for any tea he may supply to C from time to time. B supplies C with tea to the above value of Rs 100, and C pays B for it. Afterwards, B supplies C with tea to the value of Rs 200. 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 1 00.
NOTE: A continuing guarantee may be given for a part of the entire debt or for the entire debt subject to a limit.
REVOCATION OF CONTINUING GUARANTEE
1. BY NOTICE OF REVOCATION [SECTION 130] A continuing guarantee may at any time be revoked by the surety as to the future transactions by notice to the creditor. However, the surety remains liable for the past transactions which have already taken place.
Example X gives guarantee to the extent of Rs 60,000 for the loans given from time to time by Y to Z. Y gave a loan of Rs 20,000 to Z. Afterwards, X gives notice of revocation. X is discharged from all liability to Y for any loan granted after the revocation of guarantee but he is liable to Y for Rs. 20 ,000 on default of Z.
2. BY DEATH OF SURETY [SECTION 131] In the absence of any contract to the contrary, the death of surety operates as a revocation of a continuing guarantee as to the future transactions taking place after the death of surety. However, the surety's estate remains liable for the past transactions which have already taken place before the death of surety. 3. BY MODES OF DISCHARGING THE SURETY A continuing guarantee is also revoked in the same manner in which the surety is discharged such as: (i) Novation [Section 62] (ii) Variance in terms of contract [Section 133] (iii) Release or discharge of principal debtor [Section 134] (iv) When the creditors enter into an arrangement with the principal debtor [Section 135] (v) Creditor's act or omission impairing surety's eventual remedy [Section 139] (vi) Loss of security [Section 1 41 ]
RIGHTS OF SURETY
I. RIGHTS AGAINST THE PRINCIPAL DEBTOR
(a) Right to Subrogation [Section 140] On payment of the guaranteed debt or performance of the guaranteed duty; the surety acquires all the rights which the creditor had against the principal debtor. Thus, the surety steps into the shoes of creditor. (b) Right to Indemnity [Section 145] In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety; and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but not those sums which he had paid wrongfully.
Rights Against The Principal Debtor
RIGHT TO SUBROGATION
RIGHT TO INDEMNITY
RIGHTS AGAINST CREDITOR
RIGHT TO SECURITIES
RIGHT TO CLAIM SET-OFF
RIGHT AGAINST CO-SURITES
RIGHT TO CLAIM CONTRIBUTION
Right to Claim Contribution:- If a co-surety pays more than his proportionate share of liability, he has a right to claim contribution from the other co-surety or co-sureties. Right to Share the Security:- If a co-surety obtains any security of principal debtor, the other co-surety (or co-sureties) has (or have) a right to share such security.
Liability of co-sureties is summarized as under:-
WHERE THERE IS NO CONTRACT
TO THE CONTRARY
WHERE THE CO-SURETIES HAVE
AGREED TO GUARANTEE DIFFERENT
SUMS
The co-sureties are liable to contribute equally to the extent of default of principal debtor [Section 1 46 ]
The co-sureties are liable to contribute equally subject to the maximum amount guaranteed by each one. [Section 14 7] They are not liable in proportion to the amount guaranteed by them
NOTE:- Matters Immaterial for the aforesaid Principal The aforesaid principal regarding the liability of co-sureties is applicable- (a) whether the sureties are liable jointly or severally. (b) whether the sureties are liable under the same or different contracts. (c) whether the sureties are liable with or without the knowledge of each other.
Example I:- A, Band C are sureties to D for a sum of Rs3,000 lend to E. E makes default in payment. A, Band C are liable, as between themselves to pay Rs 1,000 each.
Example II:- A, Band C are sureties to D for a sum' of Rs 1,000 lent to E, and there is a contract between A, Band 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 Rs 250, B Rs 250 and C Rs 500.
Example III:- A, B and C as sureties for D, enter into three separate bonds, of different amounts - A for Rs 10, 000 , B for Rs 20,000 and C for Rs 40 , 000. The liability of A, B, C will be as under if D makes default to the extent of (a) Rs 30,000 (b) Rs 40,000 (c) Rs 70, 000
NOTE:-Thus, as between the co-sureties there is equality of burden
and benefit.
Effect of Release of One Co-surety [Section 138]
Where there are co-sureties, a release by the creditor of one of them does not discharge the others; neither does it free the surety so released from his responsibility to the other sureties. However, under English law the release of one co-surety shall release all the other co-sureties since the liability of co- sureties under English law is only joint and not joint and several.
DISCHARGE OF SURETY
A surety is said to be discharged when his
Liability as surety comes to an end.
BY REVOCATION OF CONTRACT OF GUARANTEE
BY NOTICE [SECTION 130] A specific guarantee may be revoked by a surety by notice to the creditor if the liability of the surety has not yet accrued. A continuing.guarantee may at any time be revoked by the surety as to future transactions by notice to the creditor. However, the surety remains liable for the past transactions which have already taken place.
BY REVOCATION BY CONDUCT OF THE CREDITOR
By invalidation of contract
BY NOTICE [SEC 130]
BY DEATH OF SURETY
[SEC 131]
BY NOVATION
[SEC 62]
By variance in terms of contract
[sec 133]
Release or discharge of principal debtor [ sec 134]
Arrangement between principal debtor and creditor [sec 135]
Creditor's act or omission impairing surety’s eventual remedy [sec 139]
Loss of security
[sec 141]
Guarantee obtained by misrepresentation
[section 142]
Guarantee obtained by concealment of material facts
[ section143]
Failure of co-surety to join surety [ section 144]
MODES OF DISCHARGE OF SURETY
A contract between the creditor and 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, unless the surety assents to such contract.
CASES WHERE SURETY IS DISCHARGED (i) Where a contract to give time to the principal debtor is made by the creditor with a third person, and not with the principal debtor, the surety is not discharged.
Example:- C, the holder of an overdue bill of exchange drawn by A as surety for B , and accepted by a,· contracts with M to give more time to a. A is not discharged.
(ii) Mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him, does not, in the absence of any provision in the guarantee to the contrary, discharge the surety.
Example:- B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a year after the debt has become payable. A is not discharged from his suretyship.
(iii) Where there are co-sureties, the release by the creditor of one of them does not discharge the other nor does it free the surety so released from his responsibility to the other sureties. [Section 138]
(d) By Creditor's Act or Omission Impairing Snrety's Eventual Remedy [Section139] If a creditor does any act which is inconsistent with the rights of the surety, or omits to do an act which is his duty to the surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is discharged.
Example I:- B contracts to build a ship for C for a given sum, to be paid by installments as the work reaches certain stage. A becomes surety to C for B's due performance of the contract. C, without the knowledge' of A, pre·pays to B the last two instalments. A is discharged by this prepayment.
Example II:- C lends money to B on the security of a joint and several promissory note, made in Cs favour by B, and by A as surety for B, together with a bill of sale of Bs 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 realized. A is discharged from liability on the note.
(e) Loss of Security [Section 141] If the creditor loses, or without the consent of the surety, parts with security given to him, the surety is discharged from liability to the extent of the value of security.
Example:- A gave a loan to B on the guarantee of C as well as on the mortgage of Bs furniture. Afterwards, A cancels the mortgage. B becomes insolvent and A sues C on this guarantee. C is discharged from liability to the value of furniture.
BY INVALIDATION OF CONTRACT
(a) Guarantee Obtained by Misrepresentation [Section 142] Any guarantee which has been obtained by means of misrepresentation made by a creditor or with his knowledge and assent, concerning a material part of the transaction, is invalid.
(b) Guarantee Obtained by Concealment [Section 143] Any guarantee which a creditor has obtained by means of keeping silence to material circumstances is invalid.
Example:- X employs Y as a clerk to collect money for him. Y fails to account for some of his receipts and X , in consequence calls upon Z to furnish security for his duly accounting. Z gives guarantee for Ys duly account. X does not inform Z about Ys previous conduct. Y , afterwards, makes default. 'z is not liable because the guarantee was obtained by concealment of facts.
(c) Failure of Co-surety to Join a Surety [Section 144] Where a person gives a guarantee upon a contract that a creditor shall not act upon it until another person has joined in it as co-surety
A BAILMENT IS NOT THE SAME AS A SALE
SALE is an intentional transfer of ownership of personal property in exchange for something of value. A bailment involves only a transfer of possession or custody, not of ownership. A rental or lease of personal property might be a bailment, depending upon the agreement of the parties. A bailment is created when a parking garage attendant, the bailee, is given the keys to a motor vehicle by its owner, the bailor. The owner, in addition to renting the space, has transferred possession and control of the vehicle by relinquishing its keys to the attendant. If the keys were not made available and the vehicle was locked, the arrangement would be strictly a rental or lease, since there was no transfer of possession.
ESSENTIAL ELEMENTS OF BAILMENT
• RETURN OF • PURPOSE
SPECIFIC GOODS[SAME GOODS]
- DELIVERY OF POSSESSION
- ESSENTIALS OF VALID CONTRACT
BAILMENT BAILMENT
BAILMENT BAILMENT
- ESSENTIAL OF VALID CONTRACT: A Bialment is usually created by agreement between the bailor and the bailee hence it should contain all essentials of a valid contract viz. Free consent, Parties competent to contract, lawful object and consideration ( except without consideration as explained in point no. 5 here) etc. The agreement may be express or implied. In certain cases. It may be quasi contract also for example if someone is finder of lost goods belonging to other.
- DELIVERY OF POSSESSION: There must be delivery of goods in form of transfer of possession of goods by bailor to bailee. The term possession here means not just a custody it means temporary transfer of control over the goods also (not ownership). Hence merecustody of goods does not create relationship of bailor and bailee.
Delivery of possession may be actual, symbolic or constructive.
- DELIEVERY MUST BE FOR SOME PURPOSE: The delivery of goods from bailor to bailee must be for some purpose. If goods are delivered by mistake to a person , there is no bailment.
- RETURN OF THE SAME GOODS OR DISPOSAL IN ACCORDANCE WITH THE DIRECTIONS OF BAILOR: It is the main purpose of contract that as soon as the purpose is achieved, the same goods shall be returned or disposed of or transformed or altered according to the directions of the bailor. If the goods are not to be specifically returned, there is no bailment.
Illustration 1: Ajay went to cinema hall to watch movie, he parked his
vehicle in allotted parking slot. A security guard is there to look after.
Ajay did not handed over keys. This means this is mere custody not
bailment.
CASE LAW: KALIPERUMAL V. VISALAKASMI, A.I.R (1938) In such case
a lady engaged a goldsmith for making new jewelry by melting the old
one. Every evening she received the unfinished jewelry and put the same
into a locked box (retaining keys with herself) kept at the goldsmith’s
premises. One night the jewelry was stolen from the box. Held, there was
no bailment as the goldsmith had re-delivered to the lady ( The bailor )
the jewelry bailed with him by her.
Bailment can be classified on following 2 bases:
ON THE BASIS OF BENEFIT TO THE PARTIES:
FOR THE EXCLUSIVE OF THE BAILOR:
For eg: Leaving a pet with neighbor when we are out of the town is a bailment for THE EXCLUSIVE benefits of ours that somebody is taking care of our pet
FOR THE EXCLUSIVE OF THE BAILEE:
For eg: Your friend borrow your bike for some specific purpose, this bailment is from your side(as bailor) for the exclusive benefit of your friend (as bailee).
FOR THE MUTUAL BENEFIT OF BOTH:
For eg: Giving a bike for repair to mechanic in which the consideration passes between the bailor and the bailee.
ON THE BASIS OF REMUNERATION:
Bailments may also be classified into:
GRATUITOUS BAILMENT:
It is bailment where no consideration passes between the bailor and the bailee.eg. where you lend your book to a friend free of charge.
NON- GRATUITOUS BAILMENT:
It is bailment where no consideration passes between the bailor and the bailee. Eg: where you run a library by charging a fee. Someone (may be your friend) get issued some books and he will pay the charges.
DUTIES OF BAILOR
DUTY TO DISCLOSE KNOWN FAULTS: Whether the bailment is gratuitous or non gratuitous it is the duty of bailor to disclose the known faults about the goods bailed to the bailee. If bailor does not make such disclosure he is responsible to indemnify the bailee for any damage caused to him directly from such faults. Further it should be noted that if the contract of bailment is non gratuitous the duty of bailor is greater. He is responsible even for those faults which are not known to him.
DISCLOSE
KNOWN
FAULTS
BEAR
EXPENSES OF
BAILMENT
RECIEVE BACK
THE GOODS
INDEMNIFY
BAILEE
Illustration 1: Ashok lends a bike to Mukesh which he knows is difficult to control as breaks are not working properly. He does not disclose that braking system of bike is not proper. Mukesh met an accident and injured. Ashok is responsible to Mukesh for damage sustained.
Illustration 2: Gagan hires a racing car from Tikuchand to participate in formula-1 racing. The car caught fire during race and Gagan was unable to extinguish it as the fire- fighting equipment was out of order. As such he was injured and suffered loss. Hence Tikuchand is responsible to indemnify Gagan even if it was not in his knowledge that fire – fighting equipment is empty.
