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MBA

SUBMITTED TO:
JJ

LOP
ROLL NUMBER 2

2020
 BUSSINESS
Q1. WRITE DOWN IN OWN WORDS YOUR COMMENTS ON INDEMNITY AND

LAW
GUARANTEE?

1. What's an indemnity?
An indemnity is a pledge by one party to reimburse another for the loss suffered as a
consequence of a specific event, called the ''trigger event''.
This event can be anything defined by the parties, including:
INDEMNITY & GURANTEE ASSIGNMENT
 A breach of contract;
 A party's fault or negligence;
 A specific action.

An indemnity runs as a transfer of risks between the parties, and changes what they would
otherwise be responsible for or sanctioned to under a normal damage claim.

Contract of Indemnity:
The meaning of a contract of indemnity as laid down in Section 124 – “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.
It does not cover the loss caused by – Conduct of promisee, Accident and An act of God, i.e. any kind
of natural calamity such as earthquake, floods etc. Nevertheless, the contracts of insurance, i.e. Fire
and Marine Insurance comes under the contract of indemnity, but life insurance is not covered in it.

Parties to Contract of Indemnity:

There are only two parties in a contract of indemnity, explained as under:

 Indemnifier: The promisor, who promises to make upright the loss caused to the other party,
is called as Indemnifier.
 Indemnified: The person who is confident to be compensated for the loss caused is called as
indemnified or indemnity holder.

Examples:

 Suppose Ali sold a house to Rehman on the instruction of Juniad. Afterwards, it is disclosed
that Tamim is the registered owner of the house. Junaid recovered the amount from Ali for
selling his house. Now, Ali can recover the compensation from Junaid. This is an understood
form of a contract of indemnity.
  Jublee Insurance Company entered into a contract with Atco Ltd., to compensate for loss
caused by accidental fire to the company’s stock of goods up to Rs. 50,000 for a premium of
Rs. 1,00,000. This is an understood form of a contract of indemnity.

Right of the indemnity holder – (Section 125):

An indemnity holder (i.e. indemnified) has following rights:

 Right to recover damages – he is granted to recover all damages which he might have been
managed to pay in any suit in regard of any matter covered by the contract.

 Right to recover costs – He is granted to recover all costs subordinate to the institution and
defending of the suit.

 Right to recover sums paid under compromise – he is granted to recover all amounts which he
had paid under the terms of the compromise of such suit. However, the compensation must
not be against the conducts of the indemnifier. It must be careful and authorized by the
indemnifier.

 Right to sue for specific performance – he is granted to sue for specific performance if he has
suffered absolute liability and the contract covers such liability.

Right of the indemnifier:

Once the indemnity holder is compensated for the loss caused, the indemnifier reserves all the
rights to all the methods and resources that can save the indemnifier from loss.
The essence of the contract of indemnity is the loss to the party, i.e. Indemnification can be done
only if the loss is suffered to the other party, or if it is sure that the loss will incur.

Limitation:

In certain cases, the risk of loss caused by a breach of contract may exceed the contract price, and
the indemnifying party may not afford an uncapped indemnity. That is why the parties will often
negotiate to limit the liability of the indemnifying party, by capping it to a certain amount or
restricting it to certain circumstances.  

2. What's a Guarantee?

It is a contract to carry out the promise or discharge the liability of a third person in case of his
default. It is made to allow a person to get a loan or goods on credit or an employment.
There are three parties that include i.e. the person who offers the guarantee known as the surety,
the person in favor of whose default the guarantee is given known as the principal debtor and the
person to whom the guarantee is set known as the creditor.
There are three ways of contracts first b/w creditor & principal debtor, second b/w surety & creditor,
third b/w surety & principal debtor.
The primary liability is of principal debtor and secondary liability is of surety, which means that the
payment is to be made by the surety only if the debtor does not pay. This contract is for the safety of
the creditor.

Types of Guarantee:
There are two types as follows:

 Specific guarantee:
It is offered for single debt or obligation and comes to an end when the debt guaranteed has
been paid or obligation guaranteed has been discharged.
Thus, where A offers a loan to B for which C stands guarantee, it is a case of a specific guarantee.
In this case, there is a specific debt and the guarantee shall come to an end the moment the loan
is pay back. A specific guarantee cannot be reversed. Once the guarantee is offered it cannot be
introverted or reversed and even after the death of the Surety (guarantor), it continues to
operate making his legal representatives responsible for the same.

 Continuing guarantee:
Continuing guarantee is one where the guarantee offered is not for a single or specific debt or
obligation, but for a series of debts.

Rights And Liabilities of Surety:

1) RIGHTS:

 Right of subrogation (interchange):

When the surety has paid the guaranteed debt on default of the principal debtor he is then
authorize to all the rights which the creditor had against the principal debtor. The surety is
authorize to all the remedies which are available to the creditor against the principal debtor

 Right to securities:
Surety is authorizing to the benefit of all the safeties given by the principal debtor to the
creditor. The surety at the time of payment can demand the safeties, which the creditor
has received from the principal debtor. Surety can recover the safeties only after making
full payment. He cannot claim the benefit of a part of the safeties if he has paid a part of
the debt.
  Right of surety when the creditor loses or parts with the securities of the principal
debtor:
If the creditor by carelessness loses any security held by him, or if the creditor parts with
the security, the liability of the surety is reduced to the extent of the value of those
securities.
 Right of reimbursement (compensation) from the principal debtor:
A surety is allowed to recover from the principal debtor whatever amount, he has
rightfully paid to the creditor.

2) LIABILITIES:
The liabilities of the surety are organized which those of the principal debtor unless it is
otherwise provided.

Example:
If A guarantees to B the amount of a Bill of Exchange by C, the acceptor. The bill is dishonored by
C. A is liable not only for the payment of the bill but also for any interest or charges which may
have become due on it.

DISCHARGE OF SURETY:

 Change in the terms of the contract:

If the principal debtor and the creditor make any changes, without the agreement of the
surety, the surety is discharged from the contract.

 Discharge by death of the surety:

In specific guarantee the surety is not discharged from his liability on his death if the liability
has already taken place. But the death of surety operates as reversal of a continuing
guarantee as to future transactions. The deceased surety’s estate will not be accountable
for any transaction after the death, even if the creditor has no knowledge of surety’s death.

 Release or discharge of principal debtor:

A surety is discharged by any contract between the creditor and the principal debtor, or any
act or omission of the creditor by which the principal debtor is released or discharged.

 Compounding of creditor with principal debtor:

A contract between the creditor and the principal debtor, by which the creditor makes a
constitution with, or promises to give time to, or not to sue, the principal debtor, discharge
the surety.