Indeminity And Guarantee

Question 1

Contract of indeminity

Answer 1

Defined under sec 124

Where I promises to save the IH from loss caused to him by the conduct of promisor or any other person

Question 2

Contract of guarantee

Answer 2

Sec 126

Contract to perform the promise or discharge the liablity of a 3rd person in case of his default

Question 3

Difference between COI and COG

Answer 3

1. Def
2. No of people 2,3
3. No of contracts - 1 3 ( 2 express and one implied)
4. Primary liablity - promisor vs principal debtor
5. Purpose- reimbursement of loss vs security of the creditor
6. Primary debt is pre-existing in contract of guarantee but not on contract of indeminity

Question 4

For COG - pre existence of primary debt/ principal debtor

Answer 4

1. If no such debt exists, there is nothing left for the surety to secure
2. Swan vs bank of Scotland held that of there is no PD no valid guarantee can exist.
3. Sec 134 - a surety will be discharged when
   -Creditor makes any contract with PD by which the latter is discharged
   - Creditor does any act or omission, the legal consequence of which is the discharge of PD
   Ex: contract for ship building, creditor had to supply timber

Question 5

Invalid agreement

Answer 5

Sec 142 to 144

1. Misrepresentation of creditor wrt material part
2. By means of keeping silence as to material circumstances
3. Co surety

Question 6

Liablity of surety is coextensive with liablity of PD

Answer 6

1. Sec 128- coextensive - same amount and in the same manner

Nature of laiblity
1.** Secondary / Collateral Liability**:Surety’s obligation arises only on default of the principal debtor.
2. Maybe made less, but never greater. When the surety has undertook liablity only for principal amount , cannot be made liable for interest ( SN PRASAD vs MONNET FINANCE )
3. On debtor’s default-Liability of principal debtor and surety is joint and severall , creditor can directly sue the surety without first suing the principal debtor. Bank of Bihar v. Damodar Prasad
3. Continues Till Discharged by Law-until debt is paid or legally discharged (e.g., discharge under Sec. 133‑141).

Question 7

1. Liability of surety is secondary
2. Liability of pd and surety is joint and several

Answer 7

1. Put it simply, Surety’s liability is secondary and not primary, therefore, his liability arises immediately on default of the principal debtor:
2. But once the default arises - The liability of the surety is joint and connected with the principal debtor. It is the choice of the creditor to recover the amount either from the principal debtor after his default or from surety
3. In BANK OF BIHAR vs DAMODAR PRASAD - it was held that the view that creditor can move aganist surety only after he has exhausted his remedies against PD was held to be wrong.
4. Medisetti Ravi vs Pramida chit funds - even in the first instance , creditor can move against the surety to the same extent as if he were himself the PD. Would not be necessary to first realise the amount from PD

Question 8

Circumstances where surety is discharged of liability

Answer 8

1. 133- performance of obligation, EXPIRATion of time, variation of terms without suretys consent
2. 134- agreement that principal debtor is released, the surety is also released.
3. 134 - act or omission of the creditor, legal consequence is discharge of PD
4. Creditor’s agreement with debtor to give time, accept part payment, or not sue without surety’s consent discharges the surety-135
5. If creditor does something that prejudices the surety’s right to recover from the debtor, surety is discharged.
6. If the creditor loses security given by debtor without surety’s consent, surety is discharged to that extent.

Question 9

Rights of surety in a contract of guarantee

Answer 9

Intro - sec 126 of ICA 1872

1. Right of surety against the creditor- on payment of the debt by surety, entitles to all the securities with the creditor against the Pd, if he loses or parts away with security without the consent of surety, S is discharged off his liabilities to the extent of the value of security
2. Right against PD
   A. Right of subrogation - he comes into the shoe of creditor upon payment of guaranteed debt or discharge of guaranteed promise
   B. Right to indemnity- in every cog there is an implied COI ,, reviver from PD whatever he has lawfully paid to the creditor
3. Right against co- sureties
   If had to discharge pd debt on his own, entitled to get compensation from co- sureties who are equally liable to pay, along with him

Right even before discharge of liabilities by surety
The Court granted an injunction to the surety in the case of Mamta Ghose vs. United Industrial Bank (1987), where the principal debtor began selling off his property after discovering that the obligation had become due in order to avoid seizure by the surety.