Download LAW NOTES for the students pursuing ba llb degree or llb degree and more Study notes Law in PDF only on Docsity!
Contract II --- Special Contract/Sales of Goods/Partnership
Contract of Surety and Guarantee
Q: Define Contract of Indemnity. What are its essentials?
What are the rights of Indemnity holder?
A: The term indemnity literally means security or protection against a loss or compensation.
Indemnity means making compensation payments to one party by the other for the loss occurred.Contract of indemnity is a special kind of contract. According to Section 124 of the Indian Contract Act, 1872: 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. However, in the English law it had a much wider meaning than this. indemnity in English law means a promise to protect the other party harmless from the repercussions of an act. Thus, the English law is wide enough to include any type of actions such as fire or flood, but the Indian act allows protection against only human made losses.
Objective of Contract of Indemnity
The objective of entering into a contract of indemnity is to protect the promisee against unanticipated losses. A contract of indemnity has two parties. The promisor or indemnifier The promisee or the indemnified or indemnity-holder The promisor or indemnifier: He is the person who promises to bear the loss. The promisee or the indemnified or indemnity-holder: He is the person whose loss is covered or who are compensated.
Example : P contracts to indemnify Q against the consequences of any proceedings which R
may take against Q in respect of a certain sum of money.
In the above-stated example, P is the indemnifier or promisor as he promises to bear the loss of Q.Q is the promisee or the indemnified or indemnity-holder as his loss is covered by P.
Essentials of Contract of Indemnity
i. There must be two parties, namely, promisor or indemnifier and the promisee or indemnified or indemnity-holder. ii. Protection from Loss :A contract of indemnity is entered into for the purpose of protecting the promisee from the loss. The loss may be caused due to the conduct of the promisor or any other person. iii. Express Or Implied contract :The contract of indemnity may be express (i.e. made by words spoken or written) or implied (i.e. inferred from the conduct of the parties or circumstances of the particular case). iv. Essentials of A Valid Contract :A contract of indemnity is a special kind of contract. The principles of the general law of contract contained in Section 1 to 75 of the Indian Contract Act, 1872 are applicable to them. Therefore, it must possess all the essentials of a valid contract. v. Number of contracts : In a contract of Indemnity, there is only one contract that is between the Indemnifier and the Indemnified
Rights of a Promisee/The Indemnified/Indemnity holder
As per Section 125 of the Indian Contract Act, 1872 the following rights are available to the promisee/the indemnified/ indemnity-holder against the promisor/indemnifier, provided he has acted within the scope of his authority. Right To Recover Damages Paid In A Suit [Section 125(1)]: An indemnity-holder has the right to recover from the indemnifier all damages which he may be compelled to pay in any suit in respect of any matter to which the contract of indemnity applies. Right To Recover Costs Incurred In Defending A Suit [Section 125(2)] An indemnity-holder has the right to recover from the indemnifier all costs which he may be compelled to pay in any such suit if, in bringing or defending it, 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. Right To Recover Sums Paid Under Compromise [Section 125(3)] An indemnity-holder also has the right to recover from the indemnifier 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
If a suit was filed against him, he had to wait till the judgement and pay the damages upfront before suing the indemnifier. He may not be able to pay the judgement fees and could not sue the indemnifier. Thus, it was held that if his liability has become absolute, he was entitled to get the indemnifier to pay the amount.
II
Whether insurance and indemnity are same/Difference
between contract of indemnity and contract of insurance
A contract of indemnity is one in which one party promises another part y to save him from loss caused to him by the promisor himself, or by the conduct of any other person. �' This has been defined under article 124 of the ICA, 1872. An insurance is also a contract in which one party takes a fixed sum of money(premiums) from the other part y on a regular basis, to pay the other party a fixed amount of sum on the happening of a certain event. Insurance is also a protection against loss.
Differences between contract of indemnity and insurance
- One of the main differences between a contract of indemnity and a contract of insurance is that in the indemnity clause given in section 1 24 of ICA protects the promisee only from the loss and damage caused by the actions of indemnifier or a third party. Whereas, in an contract of insurance for life or personal accident, it is covered under section 31 of ICA which defines contingent contracts. For example, if a building catches fire, the indemnifier is not responsible to pay for the loss of the indemnified because the action by which the damage is caused is not one of the indemnifiers or any third party, as it is an uncontrollable event.
- While with an insurance policy, the premium will be paid on a regular basis to protect against damages, and in an indemnity contract, the affected person will be compensated after the loss has occurred.
Dugdale v. Lovering 2: The plaintiffs possessed some trucks in their hands that were alleged by both the defendants and one K.P. Co. The plaintiffs requested an indemnity bond and the defendants ordered delivery, but got no response. Nonetheless, the trucks were shipped to the defendants. The defendant was found to be liable to indemnify the plaintiff because the indemnity bond created an implied promise. Gajanan Moreshwar vs. Moreshwar Madan: The plaintiff leased a piece of land from the Mumbai Municipal Corporation. Plaintiff granted defendant permission to construct a structure on the property. Defendant incurred a loan of Rs.5ooo from a construction material supplier twice during this course. Plaintiff mortgaged a portion of the property to building material supplier on both occasions. Plaintiff, at defendant's behest, sold the property to defendant in exchange for plaintiff being relieved of all obligations resulting from the transaction. Defendant didn't follow up with his promise. Plaintiff sued for his liabilities to be discharged, arguing that the defendant was his indemnifier. This case held that, the indemnifier is liable to pay as soon as the loss of the indemnity holder is certain and absolute. United India Insurance Co. vs. Ms. Annan Singh Munshilal 4: The consigned address was stated on the cover note. Furthermore, the goods had to be deposited in a godown on their way to the destination before being transported there. The products were lost by fire when they were in the godown. The products were deemed to be lost in transit, and the insurer was held liable by the terms of the insurance policy. This case held that in case of fires etc., it is called a contingent contract and not of indemnity. To conclude we can say that the purpose of entering into an indemnity contract is to protect the promisee against unplanned damages whereas insurance, is an underwriting by a company, society or a state, to the insured person to provide or safeguard him against the loss or damage of any kind in return for a regular payment i.e., premiums.
Q: Define contract of guarantee. What are its features?
When is a surety discharged from liability?
A: A guarantee can be many a things. It can be assurance of a particular outcome or that
something will be performed in a specified manner. A guarantee is a way of assuming responsibility for paying another’s debts or fulfilling another’s responsibilities.
1. Contract may be either Oral Written ; Under Indian law, contract of guarantee may be either oral or written, however under English law contract of guarantee must be in writing and signed by parties. 2. There should be a Principal debt ; One of essential feature in a contract of guarantee is existence of principal debt or liability, which at first instance is required to be discharged by principal debtor. Surety is liable under the contract, only when principal debtor fails to discharge his obligation. If principal debt is not there and one party makes promise to other to compensate for loss, it will be a contract of indemnity and not the contract of indemnity. 3. Benefit to the principal debtor is sufficient consideration. - As in any other contract, the consideration is also needed for a contract of guarantee. For the surety's promise it is not necessary that there should be direct consideration between the creditor and the surety, it is enough that the creditor has done something for the benefit of the principal debtor. Benefit to the principal debtor constitutes a sufficient consideration to the surety for giving the guarantee. 4. Consent of the surety should not have been obtained by misrepresentation or concealment. - The creditor should not obtain guarantee either by any misrepresentation or concealment of any material facts concerning the transaction. If the guarantee has been obtained that way, the guarantee is invalid. The position is explained by Sections 142 and 143 which run as follows : Guarantee obtained by misrepresentation invalid. - Any guarantee which has been obtained by means of misrepresentation made by the creditor, or which his knowledge and assent, concerning a material part of the transaction, is invalid." Guarantee obtained by concealment invalid. - Any guarantee which the creditor has obtained by means of keeping silence as to material circumstance is invalid."
Illustration : If a clerk in an office occasionally fails to account for some of the receipts for money collected, he may be asked for surety. In case the person who steps up to be a surety for the clerk in the office is not informed of the occasional lapses on part of the clerk which lead to the requirement of a surety, any guarantee given by him is invalid as something of importance and directly affecting his decision to act as a surety was concealed from him. In WYTHES vs. LABON CHARE , Lord Chelmsford held that the creditor is not bound to inform the matters affecting the credit of the debtor or any circumstances unconnected with the transaction in which he is about to engage which will render his position more hazardous. Since it is based on good faith, a contract of guarantee becomes invalid if the guarantee is obtained from the surety by misrepresentation or concealment. In Nagpur N.S. Bank v. Union of India, AIR 1981 A.P. 153 it was observed that.
In every contract of guarantee there are three parties, the creditor, the principal debtor and the surety. There are three contracts in a contract of guarantee. Firstly, the principal debtor himself makes a promise in favour of the creditor to perform a promise, etc. Secondly, the surety undertakes to be liable towards the creditor if the principal debtor makes a default. Thirdly, an implied promise by the principal debtor in favour of the surety that in case the surety has to discharge the liability on the default of the principal debtor, the principal debtor shall indemnify the surety for the same. Discharge of Surety from Liability: A surety is said to be discharged from liability when his liability comes to an end. Indian Contract Act 1872 specifies the following conditions in which a surety is discharged of his liability -
1. Section 130 - By a notice of revocation. If the parties to the contract serve a notice of
revocation of the contract of guarantee the Surety is discharge from liability. However he or she would be liable for all the contracts that were entered into before the serving of the notice of revocation.
2. Section 131 - By death of surety - As in the case of any contract a Contract of
guarantee will end and the surety will be discharged from liability upon one’s death. However, his successors etc will and estate will remain liable for all the contracts entered into before his death.
3. Section 133 - By variance in terms of contract - A variance made without the
consent of the surety in terms of the contract between the principal debtor and the creditor, discharges the surety as to the transactions after the variance.
Illustrations :
a) A becomes a surety to C for B's conduct as manager in C's bank. Afterwards, B and C contract without A's consent that B's salary shall be raised and that B shall be liable for 1/4th of the losses on overdrafts. B allows a customer to overdraft and the bank loses money. A is not liable for the loss. b) A guarantees C against the misconduct of B in an office to which B is appointed by C. The conditions of employment are defined in an act of legislature. In a subsequent act, the nature of the office is materially altered. B misconducts. A discharged by the change from the future liability of his guarantee even though B's misconduct is on duty that is not affected by the act.
6. Section 139 - By imparing surety's remedy - If the creditor does any act that is
inconsistent with the rights of the surety or omits to do an act which his duty to surety requires him to do, and the eventual remedy of the surety himself against the principal debtor is thereby impaired, the surety is dischared.
Illustrations :
a) C contracts with B to build a ship the payment of which is to be made in installments at various stages of completion. A guarantee's C's performance. B prepays last two installments. A is discharged of his liability. b) A lends money to B with C as surety. A also gets as a security the mortgage to B's furniture. B defaults and A sells his furniture. However, due to A's carelessness very small amount is received by sale of the furniture. C is discharged of the liability. In the case of State Bank of Saurashtra vs Chitranjan Ranganath Raja 1980, the bank failed to properly take care of the contents of a go-down pledged to it against a loan and the contents were lost. The court held that the surety was not liable for the amount of the goods lost.
7. By loss of Security by Creditor: Section 141 of Indian Contract Act says that surety is
entitled to all the securities which the creditor has against principal debtor, if creditor loses or without consent of surety parts with the security surety is discharged to the extent of value of security.
Q: “Liability of the surety is co-extensive with that of the
principal debtor.” Explain.
A: Section 128 of Indian Contract Act lays down that "The liability of surety is co-extensive
with that of principal debtor unless it is otherwise provided by the contract". So term "Co-extensive" indicates that Surety and principal debtor stands at par as far as liability towards creditor is concerned. Surety is as much liable for debt or any liability as the principal debtor is liable. So if the liability of Principal debtor is scaled down then liability of surety will also be reduced. Illustration ; A guaranteed to B the payment of a bill of exchange by C the acceptor. The bill is dishonoured by C, the acceptor. A is liable not only for the amount of bill but also for any interest and charges which may have become due on it.
In Kelappan Nambiar v. Kunbi Raman, AIR 1957 Mad. 176 , it has been held that a surety guarantees a debt by minor, he incurs no liability as his liability is co-extensive with that of principal debtor, whose contract is void. So in view of provisions of Section 128 of the Act the liability of surety is joint and several with the principal debtor, if principal debtor makes a default in discharging his liability, creditor can enforce it from surety or both. Creditor can sue surety alone without even exhausting his right to sue principal debtor, unless, however contrary is agreed upon under the contract. In Bank of Bihar v. Damodar Persad, AIR 1969 SC 297 , plaintiff bank advanced loan to D' (Principal debtor) andP' was surety upon failure of repayment of loan by D' andP'. Bank filled suit for recovery against with principal debtor and surety (D and P). Suit was decreed with condition that creditor (Plaintiff) shall enforce its dues against surety only after having exhausted it's remedies against principal debtor. This condition was challenged till Supreme Court and Apex Court while accepting the appeal Hon'ble Sh. Bachawat J. observed - "Before payment, the surety has no right to dictate terms to creditor and ask him to pursue his remedies against the principal debtor in the first instance. In the absence of some special equity, the surety has no right to restrain an action against him by the creditor on the ground that the principal debtor is solvent or that creditor may have relief against the principal debtor in some other proceeding." So as a general rule liability of surety is co-extensive or joint and several with principal debtor. However there can be limit on surety's liability upon express term or condition, under the contract.
Illustrations –
1. A promises to pay B for all groceries bought by C for a period of 12 months if C fails to pay. In the next three months, C buys 2000/- worth of groceries. After 3 months, A revokes the guarantee by giving a notice to B. C further purchases 1000 Rs of groceries. C fails to pay. A is not liable for 1000/- Rs of purchase that was made after the notice but he is liable for 2000/- of purchase made before the notice. This illustration is based on the old English case of Oxford vs Davies. In the case of Lloyd's vs Harper 1880, it was held that employment of a servant is one transaction. The guarantee for a servant is thus not a continuing guarantee and cannot be revoked as long as the servant is in the same employment. However, in the case of Wingfield vs De St Cron _1919, it was held that a person who guarateed the rent payment for his servant but revoked it after the servant left his employment was not liable for the rents after revocation.
- A guarantees to B, to the amount of 10000 Rs, that C shall pay for the bills that B may draw upon him. B draws upon C and C accepts the bill. Now, A revokes the guarantee. C fails to pay the bill upon its maturity. A is liable for the amount upto 10000Rs. As per_ section 131, the death of the surety acts as a revocation of a continuing guarantee with regards to future transactions, if there is no contract to the contrary. It is important to note that there must not be any contract that keeps the guarantee alive even after the death. In the case of Durga Priya vs Durga Pada AIR 1928, Cal HC held that in each case the contract of guarantee between the parties must be looked into to determine whether the contract has been revoked due to the death of the surety or not. If there is a provision that says death does not cause the revocation then the contract of guarantee must be held to continue even after the death of the surety.
Fidelity Guarantee: Consult ND Kapoor
Q: State the right of surety against
a) The creditor. b) The Principal Debtor. c) The Co-sureties
A: In a Contract of Guarantee, there are three parties involved; Surety, who provides the guarantee; the
person for whom the guarantee is given is called the principal debtor; finally, the person to whom the guarantee is given called the creditor. The Surety has various rights in a contract of guarantee, they can be classified into 3 groups: Rights against the Principal Debtor, Rights against the creditor, Rights against the co-sureties.
Right against Creditor :
Right to securities : Section 141 of the Indian Contract Act,1872 talks about the right of the surety to benefit of creditor’s securities. It explains that the surety is entitled to benefit of all the securities which the creditor has against the principal debtor at the time when the contract of suretyship was entered. Here, it does not matter whether the surety knew of the existence of the securities or not; also, if the Creditor loses, without the consent of the surety, the surety is thereby discharged of the extent of the value of the security. For example, A who is the surety for B, makes a bond jointly with B to C, for securing a loan from C. Later, C obtains from B a further security for the same debt. Subsequently, C gives up the security. Here, in this case, A is not discharged. In the case of Industrial Finance Corp. of India Ltd v Cannanore Spg & Wvg Mills Ltd, (2002) 5 SCC 54: AIR 2002 SC 1841: (2002) 110 Comp Cas 685, the court observed that on paying off the creditor, the surety steps into his shoes and gets the right to have the securities of the creditor, which he has against the principal debtor. Right to set off: In a particular situation, in which the Creditor sues the surety, the surety may have the benefit of the set-off, if any, that the principal debtor had against the creditor. This means that the surety has the entitlement to use the defenses of the debtor against the creditor. For example, A is the surety, B is the principal debtor, and C the Creditor. So, if C owes A something, or if C has in his possession something belonging to B, for which C could have counter-claimed, the surety can also put up for his claim on that thing. Other than that, the Surety can also claim a right against the third parties who have derived the principal debtor’s title from the creditor. In the case of Wolmershausen v Gullick, (1893) 2 Ch 514, it was understood that if in the case that the creditor of a contract of guarantee, sold the goods of his principal debtor, and the surety of the contract paid the dues, he was held to have become entitled to the unpaid seller’s lien against the buyer.
Rights before payment: The surety may possess certain rights even before payment. We have a case where the Calcutta High Court decided on similar lines. The surety found that the amount had become due, the principal debtor was disposing of his personal properties one after the other lest the surety, after paying, may seize them and sought a temporary injunction to prevent the principal debtor from doing so. The court granted the injunction.
Rights against Co-Sureties :
In some cases, there is a debt that has been guaranteed by more people, they are called co- sureties. Some of their rights against each other are: Effect of releasing a surety (Section 138), Right to contribution. Effect of Releasing a Surety : Section 138 of the Indian Contract Act,1872, talks about the discharge of a surety by the co-sureties. It explains that where there are co-sureties in a contract of guarantee, a release of one of the sureties by the creditor does not discharge the others; neither does it free the surety who has been released from his responsibilities to the other sureties. In Sri Chand v Jagdish Parshad Kishan Chand, AIR 1966 SC 1427, it was held that the creditor may release any of the co-sureties in the contract from the liability upon his will. However, he will be liable to the other co-sureties in case of a default. Right to Contribution : Sections 146 and 147 of the Indian Contract Act,1872 explain the co- surety’s right to contribution. Section 146 includes the co-surety’s liability to contribute equally. Where there are 2 or more co-sureties for the same debt, jointly or severally, they are liable between themselves to pay an equal share of the whole debt, or the remaining part which may be left unpaid by the principal debtor. While Section 147 explains the liability of co-sureties bound in different sums. This is also known as the “Doctrine of Contribution.” This means that co-sureties if are bound in different sums, are liable to pay equally as far as the limits of their respective obligations permit. Illustration : A and B are co-sureties for the sum of 2000 rupees which has been given to D by the bank. D defaults, A and B are liable 1000 rupees each among themselves. In the case of SBI Vs Prem Dass, (AIR 1998 Del 49), a bank loan was guaranteed by more than one guarantor, they were held jointly and severally liable to pay the principal debt; this means that where there were several sureties for the same debt and the principal debtor has committed a default, each surety is liable to contribute equally to the extent of the default. If even one of them has been forced to pay more than his share, he can recover the money from the other co-sureties, as was held in the case of Shirley v Burdett , (1911) 2 Ch 418. Liability of co-sureties bound in different sums : Co-sureties who have different obligations with respect to the amount is liable to pay equally as long as it isn’t beyond their respective obligation. Illustration : A, B and C as sureties for D, enter into three several Bonds each in a different penalty, namely, A in the penalty of 10,000 rupees, B in that of 20,000 rupees, C in that of 40,000 rupees,
conditioned for D’s duly accounting to E. D makes default to the extent of 30,000 rupees. A, B and C are liable to pay 10, 000 rupees. To conclude it can be said that there are some rights available to the Surety to safeguard himself from the liabilities which may be imposed on him by the Creditor in case the principal debtor defaults on his payment.
SHORETER ALTERNATIVE ANSWER
(1) Rights against the principal debtor. - The surety who pays on default of the debtor stands in the shoes of the creditor and is invested with all the rights which the creditor had against the principal debtor. When surety seeks to enforce his remedy he shall be in the same position as if he were the original creditor still unpaid. A surety who discharged the obligation by paying less than the full amount due can claim only the amount actually paid by him and not the whole amount for which he is a surety. (Section 140). (2) Rights against the creditor. - If the surety has paid the debt of the principal debtor, he is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship was entered into whether the surety is aware of the existence of the security or not ; and if the creditor loses, or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. (Section 141). The equity between the creditor and the surety is that the creditor not do anything to deprive the surety of that right. [ Goverdhandas v. Bank of Bengal, (1891) 15 Bom. 841]. (3) Rights against co-sureties. - If there are two or more co-sureties and one of them has paid debt, he can recover from the other the excess of what he has paid above his share. They are liable to contribute equally provided they are for the same debt. The fact of their being sureties, jointly or severally, or being, so under different contracts, or without the knowledge of each is immaterial. They are to pay as between themselves in equal shares the part left unpaid - subject to the maximum of their obligation. (Sections 146- 147).
Q: Distinguish between contract of indemnity and contract
of guarantee.
A: The contracts of Indemnity and Guarantee can be distinguished as follows:
BASIS OF DISTINCTION CONTRACT OF INDEMNITY CONTRACT OF GUARANTEE Parties There are two parties in a contract There are three parties in a
pay, by telling him that, “Let Anil have the goods, I will be your paymaster”. This is a contract of indemnity as the promise to pay by Mrinal is not conditional on default by Anil. from a seller and Mrinal tells the seller that if Anil doesn’t pay you, I will. This is a contract of guarantee. Thus, the liability of Mrinal is conditional on non-payment by Anil. Principal debt No requirement of the principal debt. Principal debt is necessary. (refer to the previous example) Whether subsequent recovery is possible Once the indemnifier indemnifies the indemnity holder, he cannot recover that amount from anybody else. After the surety has made the payment, he steps into the shoes of the creditor and can recover the sums paid by him from the principal debtor. Whether a contract has to be in writing or can be oral as well In India, contracts of indemnity may be either oral or written. In India, a contract of guarantee may be either oral or written.
Bailment and Pledge
Q: Define bailment. What are its essentials?
A: The contract of bailment is a contract that is executed between two parties for a
particular purpose and when that purpose is accomplished the party to whom the
goods are delivered is bound under the law to either return back those goods to the
real owner or dispose of that goods according to directions of real owners.
The word ‘bailment’, is derived from ‘ bailler’ , a french word which means ‘to deliver’.
According to Merriam Webster Dictionary, the definition of bailment is;
“The transfer of the possession of goods by the owner (the bailor) to another (the
bailee) for a specific purpose.”
According to Section 148 of the Contract Act, 1872;
The definition of bailment is, “A bailment is a delivery of goods/products by one
person to another for some purpose, upon a contract that they shall, when the purpose
is accomplished, be returned or otherwise disposed of according to the directions of
the person delivering them.”
Example. - Where lends some ornaments to B to be used in a marriage, the transaction is one of bailment. In such a case there is an implied contract for the return of the ornaments within a reasonable time.
There are two parties in the contract of bailment:
1). Bailor:
Bailor is a person who delivers the property/goods to another.
2). Bailee:
Bailee is a person to whom the property/goods are delivered by bailor.
According to Section 148 of the contract act,1872;
Following are the essential of the bailment in law.
1). Contract:
There must be a valid contract between the bailor and the bailee. The delivery of
goods should be made under a contract. If the goods are delivered without any
contract e.g. by mistake, there is no bailment. The contract may be expressed or
implied.
2). Delivery of Goods(possession): Delivery of possession is of two kinds: Actual Delivery:
