INDEMNITY AND GUARANTEE – NOTES
Indemnity
Promise to save someone from loss/harm
Protection against loss, “make good” on loss
Indemnifier – Promiser
Indemnify – Action of promise to protect
Indemnified/Indemnity holder – Promisee
Sec 124 – Contract of Indemnity
“A contract by which one party promises to save another from loss caused to him by the conduct of the promisor or any other person”.
One party promises
To save other from loss
Caused by conduct of:
Promiser
Any other person
Adamson v Jarvis
Facts: The plaintiff, an auctioneer, sold certain cattle on instruction if the defendant. It subsequently turned out that the livestock did not belong to the defendant but to another person who made the auctioneer liable and the auctioneer in his turn sued the defendant for indemnity for the loss he had suffered by acting on the defendant’s directions.
Held: The court laid down that the plaintiff having acted on the request of the defendant was entitled to assume that, if, what he did, turned out to be wrongful, he would be indemnified by the defendant.
Dugdale v Lovering
Chagla J said that Sec 124 deals with only one kind of indemnity, which arises when loss is occasioned by the conduct of the indemnifier or of a third party.it does not cover indemnity by plaintiff doing something at defendant's request.
Example : Bond between employee and employer, asking salary from employee if they leave before decided time period finishes
Scope of indemnity – loss caused by indemnifier or any other person
Exceptions for scope – indemnified himself, by act of God or accident
Must fulfil essentials of contract
Can be expressed or implied
Old common law rule – the loss occurred needs to be compensated first by indemnified before claiming the promise from the indemnifier
Gajanan Moreshwar Parelkar v Moreshwar Madan Mantri
Facts: Plaintiff (P) got a plot of land on lease from municipal corp. of Mumbai. P allowed Defendant (D) to erect building on that land. D, in this course, incurred debt of Rs.5ooo from building material supplier (K), twice. On both the occasion, P mortgaged part of the land to K. P, on D’s request transferred the land to D, on the consideration that he (P) would be discharged of all the liabilities arising out of that land. D failed to adhere to his consideration. P filed a suit for discharge of liabilities on him, alleging D to be indemnifier.
Legal Issue: When does the liability of indemnifier commence? Should the indemnity holder be payable only after he has suffered actual loss by paying off the claim? Maxim of English law: “you must be damnified before you can claim to be indemnified”.
Judgment: Process of transformation in law observed by J. Chagla of Bombay High Court as he held in relation to the case: “… if his(indemnity holder) liability had become absolute then he was entitled either to get the indemnifier to pay off the claim or to pay into court sufficient money which would constitute a fund for paying off the claim whenever it was made.” Thus, an indemnity-holder can compel the indemnifier to indemnify even before the indemnity holder has actually suffered the loss. Sections 124 and 125 are not exhaustive on the law of indemnity.
Prafulla Kumar v Gopi Ballabh
Sec 125 – Rights of Indemnity Holder
All damages he is compelled to pay
In any suit related to promise to indemnify
In bringing/defending the suit
In compromise under terms of any such suit
Guarantee
Sec 126 – Contract of Guarantee
“A contract of guarantee is a contract to perform the promise, or discharge the liability of a 3rd person in case of his default. the person who gives the guarantee is called the surety; the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is called is the creditor. a guarantee may be either oral or written.”
Perform promise or discharge liability
Discharge – Of third person in case of his (3rd) default
Surety – Who gave it
Principal debtor – For whom given
Principal creditor – To whom given
3 Contracts created :
Principal contract – Principal debtor & creditor
Secondary contract – Creditor & surety
Implied contract – Surety & debtor (Obligation to indemnify surety)
Sec 127 – Consideration need not just be monetary, any act/promise in benefit of debtor
Sec 142 – Obtained by misrepresentation, invalid
By creditor, his assent or knowledge
Sec 143 – Obtained by concealment, invalid
Obtained through the silence of creditor
Guarantee is Collateral agreement to original contract (pc and pd)
If contract is original contract, no guarantee
Taylor v Lee
Mountstephen v Lakeman
Sec 128 – Liability of Surety
Co-extensive with PD unless mentioned otherwise
What – All liability of PD is that of surety
How much – Maximum extent of PD liability, not more
When – As soon as PD defaults, not before
After default, PC may raise liability suit against PD or surety. Cannot go to PD then later to surety, unless mentioned differently in agreement.
Indian Overseas Bank v Ramulu (liable for interest as well, surety amount increases)
Hargopal Agarwal v SBI (goods sold, surety amount reduces)
Syndicate Bank v K Manohara (PD & Surety – joint & severally liable)
Central Bank of India v Antony Hardware Mart (no condition to send legal notice to PD)
Sec 144 – Guarantee to be invalid unless all co-sureties joins into contract, no action can be taken by PC against surety (can be taken against PD)
National Provincial Bank of England v Brackenbury (one party didn’t sign, thus no sureties)
Global Trade Finance Ltd v Sudharshan Overseas Ltd
James Graham and Co Ltd v Southgate Sands (forged one sign, thus no sureties)
Union Bank of India v Noor Dairy Farms (suit without surety as party, cannot be dismissed)
Kurnool Chief Funds Ltd v P Narasimha (dismisses suit against PD, surety still liable – unless in apex court)
Syndicate Bank v A P Manjunath (PD dies before suit filed, surety still liable – can implead reps)
Habson v Bass (surety can limit liability – partial amount guaranteed for)
Nanyang Insurance Co v A Chin Kim Hin
Sec 129 – Continuing Guarantee
Extends for series of transactions
Specific number not given, liable for unpaid balance at end of particular period
Kay v Groves (number given, not continuing so not liable)
Durga Priya Chowdhury v Durga Pada Roy (rent collection, no limit thus continuing)
Sec 132 – Joint debtors and Suretyship
2 Contracts:
A+B with C – Getting amount from C
A with B – One pays on default of other (Surety)
C not party in surety contract, knows or doesn’t know about surety
Either way, Contract 2 will not affect Contact 1
Privity of contract – thus surety will not stop C from acting against both
Ducan Fox & Co v Nothand South Wales Bank
Creditor not affected by private arrangements within debtors
Discharge of Surety from Liability
By Revocation of guarantee
Of continuing contract
Death of surety
By Conduct of creditor
On Validation of contract of guarantee
Sec 130 – Revocation of Continuing contract of guarantee
May be revoked at any time as to future transactions
Offord v Davies (revoked provision of discount thus valid revocation)
Sec 131 – Revocation of guarantee by death of surety
Death counts as revocation for future transactions
“Absence of contract to the contrary”
Till death what is due is liable
Notice about death to PC is not mandatory
Legal heirs – Liable for pending amount before death (only up to property inherited)
Sec 133 – Conduct of the Creditor
Change in terms of contract between PC & PD
Without Surety’s consent or knowledge
Will discharge all liability which is subsequent to the change
Bonar v Macdonald
Lloyds Steel Industries v Indian Oil Corp (prior or subsequent authorization for alteration allows liability to remain)
Sec 134 – PD is released
Surety liability discharged if
PD is released from contract
Any act or omission of PC, consequently discharging PD
Radha Thiagarajan v South Indian Bank Ltd (release not voluntary from PC, but operation of law = surety not discharged)
Bank of India v Rustom Fakirji Cowasjee (release along with conditions made for PD, surety not released)
Aypunni Mani v Devassy Kouchuseph (protanto release of Surety liability, what extent PD is reduced
same extent Surety’s releases)
Gopulal J Nachani v Trac Industries and Components Ltd (suspension of debt for short period,
limitation doesn’t run thus liability of surety not affected)
Maharashtra SEB v Official Liquidator (liquidation/insolvency does not absolve liability of PD, surety liable)
Sec 135 – Compounds or Extent time or promise not to sue
PC makes promise to extend time/not to sue or a composition
Composition – Settlement, compromise
Surety should’ve had knowledge about promise
Bolton v Salmon (without knowledge of surety leads to discharge for surety)
Sec 136 – Extension to happen with PD
If PC agrees to extend time with third party and not PD, then surety not discharged
Sec 137 – Mere forbearance doesn’t discharge surety
Forbearance – PC does not exercise any legal right to claim or sue after default
“Absence of contract to the contrary”
Union of India v Modern Stores India Ltd
Time Barred Debt & Discharge of Surety
Earlier – unpaid debt time barred, limitation will not operate as discharge (like England)
Ranjit Singh v Naubat (if PC does not sure before limitation, surety discharged)
Punjab National Bank v Surendra Prasad Sinha (overruled previous, securities deposited can be realised instead by PC)
Release of one co-surety – Surety A released by PC, his liability ends to PC but still exists with Sureties B and C
Multiple sureties = 2 implied contracts; between PD and sureties, between sureties themselves. For second one, liability continues.
Sec 139 – PC does/omits act which goes against rights of surety
Right of surety gets impaired = will be discharged
SBI V Praveen Tannaries (goods easily decayable was not preserved properly, negligence from bank (PC) thus surety discharged)
State Bank of Saurashtra v Chitranjan Ranganath Raja (PC the bank loses securities, surety discharged)
Darwen v Pearce Re (guaranteed payment of shares, PD shareholder defaulted so they forfeited shares without asking surety, thus discharged)
Vose v Florida Railroad Co (improper dealing of collateral by PC = a defence for surety)
Rights of Surety
Against PC
Right of subrogation
Right to indemnity
Against PD
Right to securities
Right to share reduction
Right to setoff
Against Co- Sureties
Effect of releasing a surety
Right to contribution
Sec 140 – Right to Subrogation
Debt become due/default of duty by PD, once surety performs the guarantee
Invested with all rights PC has against PD (claim, etc)
“Surety steps into shoes of PC”
Babu Rao Ramachandra Rao v Babu Manaklal Nehmal (if liability of PD and Surety is coextensive, so are rights of Surety and PC)
Lamplugh Iron Ore Co Re (director can stand as PC against liquidator, this is subrogation)
Amritlal Goverdhan Lalan v SBT (without necessity to transfer rights, law itself does so)
Aboobacker v Ayishu (only 30% was paid by surety, thus only 30% can be indemnified from PD)
Sec 145 – Right to Indemnify
Third contract – implied contract between surety and PD to indemnify
Only what was rightfully paid, none done wrongfully (etc, without evidence, more than required)
Sri Vishwakarma Furniture Shop v Santanu Sankar (PD cannot argue that there was no written
contract, third is an implied contract under guarantee)
Sec 141 – Right to securities
Surety entitled to all securities PC has against PD
Whether knows about them or not does not matter
Without consent of surety acts on securities = discharge of surety
Forbes v Jackson (PD repeatedly borrowed from PC without surety knowledge, claim valid because it is
duty of PC to keep security intact, or burden with further advances on same security)
Amritlal Goverdhan Lalan v SBT (security ceased at default and returned to PD when partial amount paid by him, surety discharged)
Wuff & Billing v Jay (business premises were given as security, PC may sell securities with 1 month notice after default, PD went insolvent before claim so receiver sold it, since creditor omitted to take control when he should have the surety is discharged)
Right to Share Reduction
Insolvency of PD leading to official receiver selling assets
Amount covered by receiver to PC will be reduced from surety’s liability
Bardwell v Lydall (PD becomes insolvent, receiver gives 25% of amount due to PC, surety owes only 75%)
Right to Set Off
Set off – reduction/discharge of debt by setting off against claim in favour of PD
Counter claim against the PC
Surety may also claim this against PC
Right to Contribution
Sec 138 – Release of one co-surety does NOT discharge
other co-sureties
his liability to rest
Sec 146 –
2 or more co-sureties
Same debt/duty
Jointly or severally liable
Under same or different contracts
With or without knowledge of each other
Liable to pay in equal share
Whole debt to PC
Part remaining unpaid by PD
Sec 147 – Bound by different sums
Maximum limit decided in contract
Co-sureties liable equally up to limits of respective obligations
Example – S1 10k, S2 20k, S3 30k maximums. If it’s 30k, it will be 10k each. If it is 40k then S1 will pay
his 10k, the remaining will be equally divided. If it is 60k then it will be original amount.
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