The special contracts under the Indian Contract Act, 1872 are the contract of indemnity and the contract of guarantee. The indemnification contract is one in which one party compensates the other for their loss. A contract of guarantee is a three-party agreement in which the third party agrees to pay the debt if the debtor defaults on payment. The contract of indemnification and the contract of the guarantee are discussed in this article.
An Indemnity is a contract in which one party tries to assist and recompense the other for a loss. The indemnifier is the individual who provides the indemnification. The indemnity-holder or indemnified is the individual who receives the indemnification to reimburse the loss.
Rights Of Indemnity-Holder
The Indemnity-holder has the authority to compel the Indemnifier to perform the following:
- Pay for any suit damages, regardless of how they were caused.
- Pay for all costs associated with defending himself against the legal action brought against him.
- Amount of money required to settle a lawsuit
Commencement Of Liability
The indemnity is not granted solely for repayment after the payment has been made. It stipulates that the insured party must never make a payment. The indemnity-holder has the right to put the indemnifier in a position to fulfil the claims of repayment as soon as the duty to pay is exact and unambiguous, according to major courts.
The indemnification bond allows an employee to leave their job before the end of the agreed-upon tenure. This withdrawal is only valid at the bond money forfeiture cost, which is only good when the bond money and the restriction time are fair. Only that portion of the bond money is kept to compensate for the employer’s loss.
Contract Of Guarantee
A contract in which the debtor’s duty to the creditor is discharged by a third party. The surety is the individual who provides a guarantee. The principal debtor is the individual who receives the promise to fulfill his loan. The creditor is the individual to whom the major debtor must pay the guarantee. A guarantee might take the shape of a written or verbal promise. This contract allows the principal debtor to obtain employment, a loan, or commodities on credit, with the surety ensuring repayment in the event of the debtor’s default.
Features Of Guarantee
The guarantee or guarantee is sole to secure the debt. It is required for the existence of a recoverable debt to exist. The guarantee contract should have all of the key elements of a legitimate contract. Even if the principal debtor is incompetent, the guarantee is still legal. However, if the surety is incompetent, the contract is null and void.
There must be a valid consideration for a contract to be valid. For the surety to make a guarantee, the consideration of the principal debtor should be sufficient.
A contract obtained through misrepresentation becomes null and void. The misrepresentation may be made by the creditor, or the transaction of the substantial component may remain invalid without his awareness. Furthermore, the guarantee is nullified by the creditor’s silence on the material circumstances.
Unless the contract specifies otherwise, the surety’s liability is co-extensive with the principal debtor’s. This is the surety’s maximum responsibility. The surety, on the other hand, can set a limit on his liability. The contract may provide that the surety is only liable to a particular extent of the principal debtor’s liability.
Coextensive With Liability Of Principal Debtor
According to the usual rule, the surety is responsible for paying all of the major creditor’s debts to the creditor. The surety can be sued by the principal debtor for costs, damages, and interest. Only when the contract applies to it may there be an exception to these standards.
The surety assumes responsibility immediately after the principal debtor defaults. The creditor is not required to sue or notify the major debtor first. The surety restricts his obligation, and his guarantee is only valid until that limit is reached.
The ongoing guarantee is a guarantee that lasts for several transactions.
Joint-Debtor And Surety-Ship
A two-person contract with a third party in which the third party assumes certain liability. The two people will then make a contract with each other that one of them will be responsible for the other’s failure. The second contract will not include the third party. Even though the third party is aware of the second contract, it has no bearing on the liability of the two parties to the third party.
Discharge Of The Surety From Liability
Only when the surety’s limit of liability has run out is he no longer liable. The surety is released from his or her obligations in the following ways:
By delivering a notice to the creditor, the surety can revoke the continuing guarantee at any moment. This is a placeholder for future transactions.
When a surety dies, the continuous guarantee in future transactions is revoked.
When the creditor and the major debtor agree to a contract variation, the surety is released from liability.
Discharge Or Release Of Principal Debtor:
If the principal debtor is discharged under the contract, the surety is likewise released from his obligations. A creditor’s act or omission results in the discharge of the major debtor. The major debtor will be discharged as a result of this.
Composition, Promise Not To Sue, Or Time Extension:
If the creditor modifies the contract without consulting the surety, the surety is released from liability. Furthermore, these modifications will reflect differences in the original contract.
Forbearance To Sue By A Creditor:
A creditor’s forbearance to sue the principal debtor does not discharge the surety.
A Promise Made To A Third Party:
A commitment made to a third party does not release the surety. The agreement is started to provide the major debtor some breathing room. In addition, the contract is between the creditor and a third party.
Impairing Surety’s Remedy:
If a creditor acts inconsistently or fails to act, the surety will be discharged because the surety’s remedy against the principal debtor is impaired. Furthermore, the creditor must adhere to the surety’s rights.
Rights Of Surety
The surety’s rights are divided into three groups. The categories are as follows:
Defendant’s Rights Against The Principal Debtor
The surety has creditor rights against the principal debtor. However, the surety acquires such rights only once the principal debtor’s default is repaid.
Right To Indemnity:
A guarantee by the principal debtor to indemnify the surety is included in every guarantee contract. The major debtor is responsible for repaying the surety in full. However, the cash paid incorrectly does not have to be reimbursed.
Rights Against Creditor
Right To Creditor’s Securities:
At the time the surety enters into a contract, the surety enjoys the benefit of every security that the creditor possesses against the principal debtor. Even if he is unaware of the existence of the securities at the time of the contract, the surety retains rights to them. If the creditor loses or surrenders the security, the surety is released to the extent of the security’s value.
Right To Set-Off:
If the creditor sues the surety, he has the right to set off.
Rights Against Co-Sureties
When there are multiple co-sureties, releasing one of them does not discharge the others. Furthermore, it does not relieve the surety of his or her obligations to the other sureties.
Right To Contribution:
If the co-sureties are co-sureties of the same debt, they are liable to each other. Furthermore, they must pay an equal proportion of the whole debt or a portion of the amount that the principal debtor has not paid. This is true regardless of whether a contract’s liability is the same or different. It also doesn’t matter if the liability is with or without the co-sureties’ knowledge.
Those who seek to dodge blame or a waiver of responsibility for their actions will find that the law is not on their side. The basic rationale is that a negligent party should not be allowed to shift all claims and damages against him to a non-negligent party.
Hello, I am Jyoti Bhardwaj, an lawyer pursuing LLB, having completed Bachelor of Commerce (B.Com) and Post Graduate Diploma in Computer Applications (PGDCA). I am a professional working with Finaxis Business Consultancy Pvt. Ltd. who believes that reading is a bliss and sharing knowledge is the virtuous way of acquiring knowledge. Thus, an avid reader who loves blogging and writing pretty much sums up who I am.