Indemnity:-
A contract of
indemnity is one whereby a person promises to save the other from loss caused
to him by the conduct of the promisor himself or of any third person. (Sec.
124)
The person who gives
the indemnity is called the ‘indemnifier’ and the person for
whose protection it is given is called the ‘indemnity holder’ or ‘indemnified’.
A contract of
indemnity is restricted to cover the loss caused by the promisor himself or by
any third person. The loss must be caused by some human agency. The loss
arising from the accidents like fire or perils of the sea are not covered by a
contract of the indemnity. Thus, a contract of insurance is not one of
indemnity, it is a contingent contract.
Rights of the
Indemnity Holder:
An indemnity holder
may recover from the indemnifier:
a) All the damages which the indemnity holder may have been compelled
to pay in any suit in respect of any matter covered by the contract;
b) The costs of the suit filed or defended; and
c) The sums paid under the terms of the compromise effected in such
suit, provided the compromise was an act of prudence; or was authorised by the
indemnifier. (Sec. 125)
Guarantee:-
A contract of
guarantee is a contract, whether oral or written, to perform the promise, or
discharge the liability, of a third person in case of his default. A contract
of guarantee is generally made to secure a loan or goods on credit or an
employment.
A contract of
guarantee involves three persons, viz., a person who gives the
guarantee called the ‘surety’; the person in respect of whose
default the guarantee is given called the ‘principal debtor’; and
the person to whom the guarantee is given called the ‘creditor’. A
contract of guarantee is a conditional promise by the surety that if the
principal debtor defaults he shall be liable to the creditor.
The Surety’s
Liability:-
1. The liability of the surety is co extensive with that of the
principal debtor, unless it is otherwise provided by the contract. (Sec. 128)
2. Where there is a condition precedent to the surety’s liability, he
will not be liable unless that condition is first fulfilled. (Sec. 144)
3. A surety may expressly declare his guarantee to be limited to a
fixed amount. A major case law in this regard is: Yarlagadda Bapanna
vs. Devta China Yerkayya, AIR 1966 AP 151.
4. The death of the surety will revoke a continuing guarantee unless
there is a contract to the contrary.
5. Where the arrangement between the principal debtor and the
creditor is void, then a guarantee to that agreement shall also be void and the
surety shall not be bound.
The Continuing Guarantee:-
A ‘continuing
guarantee’ is a standing guarantee to a series of transactions that shall take
place between the principal debtor and the creditor, in future. A continuing
guarantee may be for specified period and may be renewed from time to time. A
continuing guarantee may be revoked at any time by the surety, as to the future
transactions, by giving a notice to the creditor. But the surety shall remain
liable for all the transactions that had taken place before the notice. A
continuing guarantee is also revoked by the death of the surety, as to the
future transactions, unless there is contract of the contrary. A continuing
guarantee is automatically revoked by the substitution of a new contract of
guarantee.
Bank Guarantee:-
A bank guarantee is a
sort of an absolute undertaking on the part of the bank under an arrangement
with its customer to pay to the creditor whenever the guarantee is invoked by
the latter.
Letter of Credit:
A letter of credit may
be defined as an agreement shared by the bank guaranteeing on behalf of its
customers, that is the buyers, to make payments to the seller of the goods,
upon the presentation of the documents specified in the credit.
The Discharge of the
Surety:-
1. By revocation: Normally,
a guarantee is not revocable, once it is acted upon. However, a continuing
guarantee may be revoked at any time by the surety, as to future transactions,
by the notice to the creditor. (Sec. 130)
2. By death: A
continuing guarantee is automatically revoked on the death of the surety,
unless there is a contract to the contrary, with respect to future transactions
only. (Sec. 131)
3. By variance in the terms of
Contract: A surety is discharged from his liability (as to the future
transactions) when the creditor makes a change in the nature or terms of his
contract with the principal debtor, without the consent of the surety. (Sec.
133)
4. By release of the Principal
debtor: If the creditor makes a contract with the principal debtor,
whereby the latter is released from his liability, the surety is also
discharged. (Sec. 134)
5. By an act or the omission of the
Creditor: When the creditor does any act or the omission, the legal
consequence of which is the discharge of the principal debtor, the surety would
also be discharged from his liability. (Sec. 134)
6. By the arrangement between the
Creditor and the Debtor: When a creditor makes
a composition with, or allows an extension of time to, or agrees not to sue the
principal debtor, without obtaining the consent of the surety, the surety will
be discharged from his liability. (Sec. 135)
7. By impairing the Surety’s Remedy: 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, thereby
impairing the surety’s remedy against the principal debtor, the surety will
stand discharged of his liability. (Sec. 139)
8. By Concealment or
Misrepresentation: Where a guarantee is obtained by
the means of misrepresentation or concealment of the material facts, by the
creditor, the guarantee is invalid and the surety is discharged by such
invalidation. (Sec. 142 & 143)
When a Surety is not
Discharged:-
A surety is not
discharged from his liability in the following circumstances:
i.
When the creditor enters into an
agreement with a third person to give time to the principal debtor;
ii.
When the creditor forbears to sue the principal debtor; and
iii.
When any of the co-surety is released, the other co-sureties are
not discharged.
The Rights of a
Surety:-
The Rights against the
Principal Debtor:
1. The Right of Subrogation:
When the surety pays
the guaranteed debt, he is entitled to take such legal actions as the creditor
would have taken against the principal debtor. The surety steps into the shoes
of the creditor and is vested with the rights of the creditor. (Sec.
140)
2. The Right to Indemnity:
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 no sums which he has paid
wrongfully. (Sec. 145)
The Rights against the
Creditors:-
A surety is entitled
to the benefit of every security which the creditor has against the principal
debtor at the time when the contract of guarantee is entered into. If the
creditor loses, or without the consent of the surety is discharged to the
extent of the value of that security. (Sec. 141)
The Rights against the
Co-Sureties:-
Unless there is an
agreement to the contrary, the co- sureties, as between themselves, shall share
equally the debt which remains unpaid by the principal debtor. Thus, a surety
can claim the contribution from the other co-sureties.
Bailment:-
A ‘bailment’ is the
delivery of the goods by one person to the other for some purpose upon a
contract that they shall, when the purpose is accomplished, be returned or
disposed of according to the directions of the person delivering them.
The person delivering
the goods is called the ‘bailor’ and the person to whom the
goods are delivered is called the ‘bailee’. (Sec.148)
For example: delivering
a watch or a radio for repair, or leaving a car or scooter, etc. at a parking
stand, or delivering the gold to the goldsmith for making the ornaments, or
leaving the garments with a dry cleaner, etc.
The Essential elements
of the Bailment:-
a) There
must be at least two parties for a bailment, that is, the bailor and the
bailee.
b) The
delivery of the possession of the goods for the bailor to the bailee. The
delivery of the possession may be either actual or may be constructive. E.g.: the
delivery of a railway receipt is the constructive delivery of the goods.
c) The
delivery of the goods should be made for some purpose, and under a contract of
bailment.
d) The
bailment is always subject to the conduction that when the purpose is accomplished
the goods will be returned to the bailor or disposed of according to his
directions. For instance, a post office is a bailee of the letters, packets or
the articles posted by a sender and are under an obligation to deliver them as
per the directions of the sender.
The duties of the
Bailor:-
The primary duty of
the bailor is to disclose, to the bailee, the faults or the defects in the
goods bailed of which the bailor has knowledge and which might interfere with
their use or expose the bailee to extra ordinary risks. If the bailor fails to
disclose the defect and the bailee suffers any injury or loss due to such non
disclosure, the bailor must compensate the bailee. (Sec.150)
The duties of the
Bailee:-
1. The
bailee should take care of the goods bailed to him, in the same manner as a man
of ordinary prudence would do to protect his own goods (Sec. 151)
However, the bailee is not responsible for the loss or damage to the
goods, due to the events beyond his control. (Sec. 152)
2. The
bailee must use the goods strictly for the purpose for which they have been
bailed to him. Any unauthorised use of the goods would make him liable for any
loss of or damage to the goods. (Sec. 154)
3. The
bailee should not mix the bailor’s goods with his own goods, without his
consent. If he mixes the goods with the bailor’s consent, both will have a
proportionate interest in the mixture thus produced. (Sec. 155)
If the bailee mixes the goods, without the bailor’s consent, and if the
goods can be separated, they will be owner of their respective properties.
However, the bailee is bound to bear the expenses of separation or any damage
arising from the mixture. (Sec. 156)
If the goods are mixed without the bailor’s consent and cannot be separated,
the bailee is liable to compensate the bailor for the loss of the goods. (Sec.
157)
4. The
bailee should return the goods, or deliver them as per the bailor’s directions,
as soon as the time for which they were bailed has expired, or the purpose for
which they were bailed has been accomplished. (Sec. 160)
If the bailee fails to return the goods, he will keep them at his own
risk and will be liable for any loss to the goods arising howsoever. (Sec.
161)
5. The
bailee should return to the bailor natural increases or profits accruing to the
goods during the period of bailment. (Sec. 163)
6. Where
the bailor has no title to the goods, the bailee cannot refuse to return the
goods to the bailor on the ground that the goods do not belong to the bailor.
Pledge:-
A pledge is a bailment
of goods wherein the goods are delivered as a security for the payment of a
debt or performance of a promise. The bailor is called the ‘pledgor’ or ‘pawnor’ and
the bailee is called the ‘pledgee’ or the ‘pawnee’.
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