MBA Legal framework of bussiness
Guarantee
and idemnity
Definition
A Guarantee is an agreement by which the Guarantor
accepts the responsibility for a debt owed by someone (the borrower) to someone
else (the lender) if the borrower fails to do so.
The Guarantor can then claim the money back from the
borrower. “A contract of guarantee is a contract to perform the promise or
discharge the liability of a third person in case of his default”. For example
- A and B go into a shop. A says to the shopkeeper, C, “Let B have the goods,
and if the does not pay, I will”. This is a contract of guarantee
Ò Indemnity:
The term ‘Indemnity’ means to make good the loss or to compensate the party who
has suffered some loss. “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”. For example -
A and B go into a shop. B says to the shopkeeper “Let A have the goods, I will
see you paid”. The contract is one of Indemnity.
Ò Difference
between a Guarantee and an Indemnity
Ò Guarantees
and indemnities are very similar in nature. In both cases the person providing
the guarantee or indemnity will ultimately become liable for the debt if the
original borrower does not satisfy it
Ò In
the case of a guarantee the guarantor only becomes liable if the borrower
refuses to pay.
Ò With
an indemnity the "guarantor" becomes liable if the original borrower
has not satisfied the debt regardless of whether any demand has been made
directly upon the original borrower or not.
Ò In
the case of a guarantee the guarantor only becomes liable if the borrower
refuses to pay.
Ò With
an indemnity the "guarantor" becomes liable if the original borrower
has not satisfied the debt regardless of whether any demand has been
made directly upon the original borrower or not.
Ò Therefore
in short, the major difference between a Guarantee and an Indemnity is as
follows:
Ò For
a Guarantee the Bank must first exhaust its rights of recovery from the Borrower.
Under an Indemnity, the Bank has a direct right of recovery against the Guarantor
with no need to pursue or exhaust any rights that it may have against the Borrower.
Ò It
is common for documents to refer to a person as being a "guarantor"
whether they are in fact a guarantor or whether they are indemnifying the
lender for the borrowers liability
Ò Guarantor's
Obligation
Ò Under
this agreement the Guarantors obligation is to pay the amount specified as
owing plus interest on that amount and all bank fees and taxes. This agreement
distinguishes between your "basic liability" and "additional
liability". The Guarantor is liable to pay both of these, so it is
necessary to examine what is involved in each of them
Ò Parties
to a Contract of Guarantee
Ò There
are three parties to a contract of gaurantee.
Ò i.
Principal Debtor: The person in respect of whose default the guarantee
is given is called the principal debtor. In the above example B is the
principal debtor.
Ò ii.
Creditor: The person to whom the guarantee is given is called the
‘creditor’. C is the creditor in the above said example.
Ò iii.
Surety: The person who gives the guarantee is called the ‘surety’ A is
the surety in the above said example.
Ò Kinds
of Guarantee
Guarantee may be classified under the following two
categories:
- Specific Guarantee: A guarantee
which extends to a single debt or specific transaction is called a
‘specific guarantee’. The liability of the surety comes to an end when the
guaranteed debt is duly discharged or the promise is duly discharged.
- Continuing
Guarantee: A guarantee which extends to a
series of transactions is called a ‘continuing guarantee’. A surety’s
liability continues until the
revocation of the guarantee
Discharge of Surety from Liability
A surety is said to be discharged when his liability
as surety comes to an end. A surety is freed from his obligation under a
contract of guarantee under any
Ø Notice of Revocation: A specific
guarantee cannot be revoked once it is acted upon. But a continuing guarantee
may at any time, be revoked by the surety as to future transactions by giving
notice to the creditor.
Ø Death of Surety: In case of a continuing guarantee the
death of a surety also discharges him from liability as regards transactions
after his death, unless there is a contract to the contrary.
Ø Variance in Terms of Contract “Any
variance made without the surety’s consent, in the terms of the contract
between the principal debtor and the creditor, discharges the surety as to
transactions subsequent to the variance”.
Ø Release or Discharge of Principal Debtor: The
surety is discharged by any contract between the creditor and the principal
debtor, by which the principal debtor is released, or by any act of omissions
of the creditor, the legal consequence of which is the discharge of the
principal debtor.
Ø Arrangement by Creditor with Principal
Debtor without Surety’s Consent : A contract between the creditor and
principal debtor, by which creditor makes a composition with, or promises to
give time to, or not to sue the principal debtor, discharges the surety, unless
the surety assents to such contract.
Ø Creditor’s
Act or Omission Impairing Surety’s Eventual Remedy: If
a creditor does any act which is inconsistent with the rights of the surety, or
omits to do any act, which is his duty to the surety requires him to do, and
the eventual remedy of the surety himself against the principal debtor is
thereby impaired, the surety is discharged
Ø Loss
of Security:If the creditor loses (by negligence or
carelessness) or without the consent of the surety, parts with security given
to him, the surety is discharged from liability to the extent of the value of
security.
Ø Invalidation of the Contract of Guarantee: (In
between the creditor and the surety) A surety is also discharged from liability
when the contract of guarantee (in between the creditor and the surety) is
invalid. A contract of guarantee is invalid where such a contract has been
obtained by means of misrepresentation or fraud or keeping silence as to
material part of the transaction, by the creditor or with creditor’s knowledge
.
Ò Distinction
Between a Contract of Indemnity and a Contract of Guarantee
Ò End
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