7 QuEsTIONS & ANSWERS On Contract - II UNIT -- I INDEMNITY AND GUARANTEE Question No. 1 , 2 Define “Contract of. Indemnity”. Staté the rights of a promisee in a contract of Indemnity ? Or What is a “Contract of Indemnity”? Staté the rights of indemnifier and indemnified ? Or Explain an indemnity contract and the rights and liabi- lities of an indemnity holder against the promissor ? Answer : Contracts of Indemnity Definition of Contract of Indemnity : (Indian Law) Section 124 of the Indian Contract Act defines a Contract of Indemnity as, “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”.Questions & Answers On Contract -- Il #2 s a contingent contract. It is entered ting the promisee against ne essentials of a valid cion of or for ‘act of indemnity i the object of protec! It must satisfy all th iven under coer a contract of Acontr into with anticipated loss. Hence an indemnity g' contract. enforced. Further, an illegal object cannot Indemnity may be express oF implied. Illustration y B against consequences of any A contract to indemnit pect of a hich C may take against B in res| This is a contract of er and B the indemnified. proceedings wl certain amount of Rs. 3000.00. indemnity. Here A is the indemnifi Definition of Contract of Indemnity : (English Law) According to English Law, a contract of Indemnity is “a promise to save another harmless from loss caused as a result of a transaction entered into at the instance of the promisor.” English Law this includes the loss caused by accidents and events also. Further, the promise to save may be express or ‘ implied. As such the English Law in respect of indemnity is followed by the Indian Courts. Indian Courts, in a large number of cases, have also observed that contracts of indemnity also include implied promises to indemnify. CASE LAW Secretary of State vs. Bank of India, Brief Facts :—B, a broker forged the signatures of A, th holder of Government promissory notes and endorsed to B : of India. The Bank got them renewed from the everament A sued the Government and recovered damages. onIndemnity and Guarantee #3 Judgment :—It was held that Government could recover the damages from the Bank of India on an implied contract of indemnity. Rights of Indemnity - Holder (Indemnified /Promisee) Section 125 of the Act deals with the rights of the indemnity- holder (Indemnified/promisee). Indemnity-holder acting within the scope of his authority is entitled to the following rights :- 1. Rights to Recover Damages : Indemnity-holder is entitled to recover all damagés which he might have been compelled to pay in any suit in respect of a matter covered by the contract. 2. Right to Recover costs: Indemnity-holder is entitled to recover all costs incidental to the institution or defending of the suit. 3. Right to Recover sums paid under compromise : Indemnity-holder is entitled to Recover all sums paid unde: any compromise of any such suit. The compromise, however, should not be against to the orders of the indemnifier. It snould be prudent and authorised by the indemnifier. 4. Right to sue for specific Performance of the Contract: Indemnity-holder is entitled to sue for specific performance of the contract if he has incurred absolute liability and the contract covers such liability. In short, the indemnity holder can recover from the Indemnified all damages, all costs of the suit and compromise#4 Questions & Answers On Contract -- 1; money, if any, provided he acted prudently and with due authority of the indemnifier. Rights of Indemnifier : (Promisor) Section 125 of the Contract Act does not say about the rights of indemnifier (promisor). However, Law implies certain rights in favour of indemnifier, which are as follows : 1. Sections 124 and 125 of the Contract Act are silent with regard to the rights of indemnifier. Because an indemnifier is analogous to that of a surety. 2. The indemnifier cannot be made liable, if the promisee suffers damages on account of circumstances which really do not come within the scope of the indemnity contract. 3. The rights of the promisor are in no way affected by the provisions in Sections 124 and 125. The simple reason for this is these provisions do not contain the whole of the law of indemnity. The gap is supplied by judicial decisions. CASE LAW. Gajanan Moreshwar Parelkar vs. Moreshwar Madan Mantri, AIR 1942 Bom. 302 Brief Facts :—Gajanan Moreshwar Parelkar was the plaintiff. Moreshwar Madan Mantri was the Defendant. The plaintiff got a plot of land bearing No. 226-A of Dadar Matunga estate of Bombay from the Municipal Corporation under a long term lease for 99 years in 1934. He transferred the lease for a limited period to the Defendant. The Defendant began to construct bu8idings in the said plot. Keshavdas Mohandas was the supplier of building materials to the Defendant. The Mefendant could not pay the amount for the materialsIndemnity and Guarantee #5 supplied by Keshavdas Mohandas. Mohandass insisted for payment. The amount was for Rs. 10,000/-. On the request of the Defendant, the plaintiff agreed to execute a mortgage deed in favour of Mohandas for Defendant. The interest rate agreed was 10 annas per Rs. 100/- per Gujrathi month payable monthly rests. The plaintiff executed two deeds dated 14-1-1937 and 23.3.1937 in favour of Mohandas and put the charge over his properties. The principles amount shall be payable back on or before 14.1.1938. The Defendant agreed to pay principal and interest and to release for mortgage deed on or before 14.1.1938. The defendant did not pay any amount to Mohandas. The plaintiff paid some interest. On repeated requests and demands made by plaintiff, the defendant did not pay the principal and interest amount, and did not release the mortgage deed. Judgment : The Privy Council held that the plaintiff was entitled to be indemnified by the defendant against all liability under the mortgage and the deed of further charge. Liability of Indemnifier : The Indemnifier is liable to the indemnity-holder when only after the actual loss occurs. The indemnity-holder must have suffered actual loss. A mere remote chance of occurring loss cannot make indemnifier liable. Section 124 does not give any scope for assessment of future damages. But according to the provisions of Section 125, the indemnifier is liable to pay the damages which may occur in future. CASE LAW Osman Jamal and Sons Ltd. vs, Gopal Purshotam, 1928 ILR 56 Cal. 262, Brief Facts :—The plaintiff was acting as the commission agent of the Defendant firm, on whose order, the plaintiffne Questions & Answers On q tract -- ]y placed an order for the supply of goods to a supplier. The supplier supplied the goods to the defendant, who failed to take the delivery. The supplier sued the een for the damages for breach of contract. Meanwhile, the plaintiff companies become insolvent, and a liquidator was appointed The liquidator sued the defendant basing upon the ifdemnity. Judgment :—The Calcutta High Court heldithat the e {{quidator defendant (being indemnifier) was liable, and th: to keep the amount in trust for payment of the vendor in respect of whose supplies the company had incurred liability.Indemnity and Guarantee Question No. 2 What is meant by a contract of Guarantee ? Discuss the essentials of a contract of guarantee ? Answer : Definition of Contract of Guarantee : A contract of Guarantee is also known as “Contract of suretyship”. Section 126 of the Indian Contract Act a contract of Guarantee as “a contract to perform the promise or discharge the liability of a third person in case of a default.” The person who gives the guarantee is called the ‘surety’, the person in respect of whose default the guarantee is given is called the ‘Principal Debtor’, and the person to whom the guarantee is given is called the creditor’. A guarantee may be either oral or written. Example :—A advances a loan of Rs. 2,000/- to B and C promises to A that if B does not pay the loan amount, he Will pay the debt. This is a contract of guarantee. Here, B is the principal Debtor, C is the surety and A is the creditor. CASE LAW Karrupan vs. Nagappa, AIR 1934 Mad. 186 Where in execution of a decree there was an arrangement recorded between the decree-holder, the judgment debtor and a surety that if the debtor failed to pay within the fixed time, the decree-holder can proceed against the surety. It was a contract of guarantee,= wns. Questions & Answers On Contract -- II Essentials of a Contract of Guarantee The following are the important essentials of a contract of Guarantee : 1. A contract of guarantee may be oral or written. 2. There need not be direct consideration between the surety and the creditor. Any benefit received by the debtor is adequate consideration to bind the surety. In such a case 3. The principal debtor may be a minor. n though the surety will be liable to pay personally eve! principal-debtor may not be. 4. The liability of the surety is not primary. It is collateral or secondary. : 5. The contract of Guarantee is not a,contract of uberrimae fidei or one of absolute good faith.. Therefore, it is not obligatory on the part of the creditor to disclose all material facts to the surety. 6. There should be a liability existing or future enforceable at law. A guarantee this give n for a non- obligation is not good. n-enforceableIndemnity and Guarantee #9 Question No. 3 Distinguish between a Contract of Indemnity and Contract of Guarantee. Or How and what respects a Contract of Indemnity is different from a Contract of Guarantee ? Answer : A contract of Indemnity differs from a contract of Guarantee in the following respects :— Contract of Indemnity Contract of Guarantee In a contract of Indem- nity, there are oniy two parties; namely—the indem-nifier and the Indemnified. In a contract of Indem- nity, there is only one Original and independent contract between the indemnifier and indemnified. An Indemnity contract is a simple contract. In a contract of Gvaran- tee, there are .hree parties, namely—The creditor, Principal Debtor and the surety. In a contract of Guaran- tee, there are three contracts, one between the creditor and the Principal debtor, second between the creditor ard the surety, and the third between the principal debtor and the surety. A guarantee Contract is a compound contract.#10 4. Section 124 of the Con- tract Act defines “Con- tract of Indemnity”. Whereas Section 124 and 125 of the Act explains about the provisions of the Contract of Indemnity. 5. Acontract of Indemnity is for making good the loss suffered. by a party it. It provides security against loss. 6. Acontract of Indemnity is in the nature of an original and obligation. 7. The Indemnifier does not undertake to be answer- able for the debt of obli- gation of another. 8. The indemnifier may have the right of action against the person on whose his liability arises. account 9. Indemnifier’s liability is primary, 10. The contract of Indemnity provides security. Questions & Answers On Contract -. 9. Surety’s 1 4. Section 126 of the Con tract Act defines “contrac; of Guarantee” whereas sections from 126 to 147 of the Act explains about the provisions of the Contract of Guarantee. 5. A-contract of guarantee, on the other hand, is for the security of the creditor. 6. A contract of guarantee, the obligation arises only on the default of the principal Debtor. 7. The guarantor gives an undertaking be answer-able for the debtor or obli-gation of another. to 8. In a contract of guarantee, the right of subrogation However, it is similar to that of indemnity. arises. liability is secondary. 10. The contract of guarantee provides surety.Indemnity and Guarantee CASE LAW Rumaswamy lyyar vs, Muthukrishna Ayyar, AIR 1967 SC 359 Brief Facts :—The defendant offered to sell his property to the plaintiff. It was an ancestral property, the defendant and his minor son were the legal heirs. The defendant executed the sale deed in favour of the plaintiff (the purchaser). One of the conditions of the sale deed was that if minor son after attaining his majority set aside the sale, the defendant shall beliable. The minor son, after attaining majority, challenged the validity of the sale-deed executed by his father. Judgment :—The court held that it was an indemnity given to the purchaser. The father was liable to compensate the purchaser. CASE LAW Ramchandra B. Loyalka vs. Shapurji N. Bhownagree, (19540 Bom. 315) Brief Facts :—Under a sub-brokerage contract, the sub- broker undertook to make good the loss arising out of the default of the constituents introduced by him. By a letter the sub-broker agreed to be liable for an ascertained amount due from the various constituents introduced by him and stipulated ‘hat the amount should be debited to his account. Judgment :—The court held that the contract embodied in the letter was neither a contract of indemnity nor a contract of guarantew,y ions & Answers On Contract -- |) CASE LAW Karrupan vs. Nagappa, AIR 1934 Mad. 186 Brief Facts :—Wherein execution of a decree there was an arrangement recorded between the decree-holder, the judgment-debtor and a surety that if the debtor failed to pay within the fixed time, the decree-holder can proceed against the surety. Judgment :—The court held that it was 4 contract of guarantee.Indemnity and Guarantee #13 Question No. 4 “The liability of a surety is co-extensive with that of the Principal Debtor”... Discuss. Answer : Section 128 of the Indian Contract Act, 1872 explains the basic principle of guarantee that the liability of a surety is co-extensive with that of the principal-debtor, unless it is provided by the contract. Example :—A guarantees to B the payment of a Bill of Exchange by C, the acceptor. The Bill is dishonored by C. A is liable not only for the amount of the bill but also for any interest and charges which may have become due on it. Object of the Surety’s Liability : The liability of the surety is co-extensive with that of the Principal-Debtor. “Co-extensive” means “equally extending”. This expression with that of the principal-debtor shows that maximum extent of surety’s liability. The surety does not receive any consideration or profit. Even though, he is liable. Section 128 gives a valuable right to the creditor, that the creditor can sue either the principal-Debtor or the surety or both for the recovery of the debt. Even the creditor, can institute proceedings against the surety, without taking any exhaust remedies against the principal-Debtor. CASE LAW Sunder Singh vs. Punjab National Bank, AIR 1992 All. 132 Brief Facts :—Punjab National Bank gave loan to the X a principal-debtor. Sunder Singh was the surety. X failed toi #14 Questions & Answers On Contract __ t repay his loan. he became insolvent. The bank took leg, action against the surety, without taking any action agajn., the principal-debtor. Sunder Singh, the surety contend, that the Bank should have taken proceedings against +}, principal-debtor and hypothecated property before takin, execution proceeding against surety. Judgment : The Supreme Court held that the bank’s action was right. CASE LAW State Bank of India vs. Saksaria Sugar Ltd., AIR 1986 SC 868 Brief Facts :—Saksaria Sugar Ltd. was the principal Debtor State Bank of India was the creditor Saksaria Sugar Ltd. did not function well. It was taken over by the Government under “Sugar Undertaking (Taking over of Management) Act, 1978 The bank proceeded against the surety for the recovery of the debt. The surety contended that the principal debtor’s management was undertaken by new management, and he could not be held liable. Judgment : The Supreme Court held the survey was liable CASE LAW Yarlagadda Bapanna vs. Davata Chinna Yenkayya, AIR 1966 A.P. 151. Brief Facts : A clause in a contract of surety ship making the surety liable upto Rs. 15,000/-. The clause further declared that he would be liable for any amount that might be finally decreed, Judgment : It was held that the clause should be construed as meaning not exceeding Rs. 15,000/-.Indemnity and Guarantee #15 CASE LAW Bank of Bihar vs. Damodar Prasad, AIR 1969 SC 297 Brief Facts : The defendant guaranteed a banks’ loan. A default took place. The defendant was sued. The trial court decreed that the bank shall enforce the guarantee in question only after having exhausted its remedies against the principal-debtor. Judgment : The Patna High Court confirmed the decree. But the Supreme Court reversed the Patna High Court’s decision. CASE LAW Kashiba vs, Sripat Narshiv, ILR 1895 Bom. 697 Brief Facts : Kashiba was the plaintiff-creditor. Lakshmiammal was the principal-debtor and minor. Sripat Narshiv, the father of Lakshmiammal was the surety. Lakshmiammal took loan of Rs. 1,000/-. Sripat Narshiv executed: “should she (i.e. Lakshmiammal) fails to pay, I will pay the above mentioned amount personally without pleading her excuse and take back this bond. If it is not so paid, you should get it paid off from my income.” Later, when the plaintiff sued for the recovery of debt, Sripat Narshiv argued that the contract of guarantee was void, because of minority of Lakshmiammal. Judgment : The court held that the surety was liable to pay irrespective of minority of Principal-Debtor.Contract # as Questions & Answers OP = Question No. 5 Explain the meaning of “Continuing Guarantee”, Guarantee ? Write the essentials of a Continuine Or Define “Continuing Guarantee”: what are the guarantee can circumstances in which a continuing be revoked ? Answer : Definition of Continuing Guarantee : 29 of the Indian Contract Act, 1872 defines a “qa guarantee which extends a t exhausted by or confined to Section 1 Continuing Guarantee as series of transactions and is no a single credit transaction”. Whether a guarantee is continuing or not depends upon the terms of the contract and the surrounding circumstances. Illustrations (1) A, in consideration that B will employ C in collecting the rents of B’s zamindari, promises B to be responsible, to the amount of 5,000 rupees, for the due collection and payment by cof those rents. This is a continuing guarantee. (a) A, in oes that B will employ C in collecting the rents of ston aa promises B to be responsible, to the amount ’ pees, for the due i : those rents. This is a conti aenee andl paymen (ity ontinuing guarantee.” (2) A guarant es payment ti of Rs 1 0 B, a tea-d 00, for any tea he may from time salen, to the amount ime suppli i plies C with tea of above the value of Rs 1 supply Ge 's 101 0, and C paysIndemnity and Guarantee #17 B for it. Afterwards, B supplies C with tea of the value of Rs 200. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of Rs 100. (3) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks. (c) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.” Essentials of a continuing Guaratee : Following are the essentials of a continuing guarantee :— 1, It extends to a series of transactions some of which are known and indefinite- 2. The effect of the continuing guarantee is to extend a guarantee beyond the sum advanced to sums subsequently advanced so long as the guarantee is continued. 3. It fragmentary and divisible. 4. It is revocable. Some of the case-laws are given below which are quite sufficient to understand the nature of the continuing guarantee :-q #18 Questions & Answers On Contract _ dy CASE LAW TNS. Firm vs. Mohammed Hussain, AIR 1933 Mad. 756 Brief Facts : A was the surety of B. A executed a docume,, stating “trade credit and debit transactions of Rs. 20,000/ also requested the creditor in writing to have regular dealing with B. Judgment : Held that it was a continuing guarantee. CASE LAW Suwalal vs. Fazle Hussain, AIR 1939 Nag. 31 Brief Facts : The surety executed a guarantee. One of the terms expressed by the surety were : “please keep a Khata (Account) of the goods of Rs. 200/- of A (Principal Debtor, The responsibility for above Rs. 200/- is yours.” Judgment : Held that it was a continuing guarantee CASE LAW Wali Mohammed vs. Ganpat, AIR 1931 All. 243 Brief Facts : The surety executed a security Bond in the court under section 55 of the Code of Civil Procedure, 190 guaranteeing for the appearance of the Judgment-debtor Judgment: Held that it was a continuing guarantee. Revocation of Continuing Guarantee : A continuing guarantee can be revoked by any of the following ways ¢ 1. By Notice of Surety to the creditor :—According “ Section 130 of the Contract Act, “a continuing guarantee ™"" at any time be revoked by the surety as to futu'Indemnity and Guarantee #19 transactions, by giving notice to the creditor.” In such cases, the liability for previous transactions will continue, 2. By Death of Surety :—Section 131 of the Act lays down that the death of the surety operates as a revocation of a continuing guarantee so far as regards future transactions. This rule applies only in the absence of any contract to the contrary. It is not necessary that the creditor must have notice of the death. But, in England such notice is essential. CASE LAW Gopal Singh vs. Bhawani Prasad, In this case, a guarantee for rent due under a lease for a fixed term was held not revoked by the death of the surety. 3. By variation in Contract :—If the contract between the creditor and principal debtor is materially altered without the consent of the surety, the contract of guarantee is revoked. 4. - By Acts of creditor :—Any act or omission of the creditor which impairs the eventual remedy of the surety against the principal debtor amounts to revocation of the contract of guarantee. 5. By Novation :—Novation takes place when a new contract is substituted for an existing contract either between the same parties or between different parties. Novation will amount to revocation. 6. By Loss of Security :—If the creditor losses or parts with any security belonging to principal debtor without the consent of surety, the surety is discharged from liability to the extent of the value of security. A continuing guarantee is thus terminated under the same circumstances under which a surety’s liability is discharged.# 20 Questions & Answers On Contract ._ ,, Question No. 6 What are the Kinds of Guarantee ? Answer : Kinds of guarantee : Guarantee is a promise to answer fo, the payment of some debt or the performance of some duty in the case of the failure of another person, who, in the firs; instance, is liable to such payment or performance. The following kinds of guarantee are there : 1. Absolute guarantee : An absolute guarantee is one by which the guarantor is bound immediately upon the principal failing to perform his contract without further steps taken by any one or without further conditions to be performed. 2. Conditional guarantee : Where the guarantee is not enforceable immediately upon the default of the principal debtor but the guarantee is obliged to take some steps to fix the liability under the guarantee, such as diligently prosecuting the claim against the principal debtor, the guarantee is conditional one. 3. General guarantee : A general guarantee is one for acceptance by the public generally, and is so written that ’ guarantor responsible thereon. A general guarantee is defined as one in which none of the terms are fixed in the writin, ig and to which adds the condition thet an the law therefore re principal debtor unless it is apparent that all diligence wouldIndemnity and Guarantee #21 4. Special guarantee: A 5 the guarantor is responsib the writing itself. pecial guarantee is one on which le only to the person addressed in 5. Specific guarantee : A guarantee may be given for a simple debt, Such a guarantee is a specific guarantee and is discharged on repayment of the particular debt/advance it was given to secure. 6. Limited guarantee : Limited guarantees are those in which the guarantor specifies a time during which the guarantee shall operate or fixes a maximum amount of liability. In limited guarantees, the guarantees have some clauses either to restrict the liability of the guarantor or limit the scope. For example, a guarantor may prefer to guarantee on a particular account of the borrower, or he may guarantee only a limited amount, or may restrict the period of guarantee, say a year, and so on. 7. Unlimited guarantee : An unlimited guarantee is one which is unlimited either as to time or amount or as to both time and amount. 8. Continuing guarantee : Continuing guarantees are those unrestricted guarantees which continue in force until revoked. A guarantee extending to a series of distinct and separate transactions is said to be continuing guarantee. Such a guarantee covers the amount of the fluctuating balance on a cash credit or an overdraft account during the continuance of the guarantee. However, a guarantee for the payment by instalment of a certain sum within a definite time is not a continuing guarantee. Guarantees taken by bankers are mostly continuing guarantees. A continuing guarantee can be revoked by the surety.> # 22 Questions & Answers On Contract 5 ot 9. Temporary guarantee : Temporary guarantees are ¢},,. in which the guarantor limits the time during which re credit may be extended on the faith of the guarantee, 10. Joint and Several guarantee : Where two or mo,, persons join in executing a guarantee, their liability may j,, joint or several or joint and several depending upon th, agreement between them. In the absence of any suc} express provision in the guarantee, their liability will b. presumed to be joint and several and the banker can enforce against any one or more of the guarantors. In a join: guarantee each co-guarantor is liable for the whole of the sum which is guaranteed but all must be sued together. 11. Oral guarantee : According to Section 126 of the Contract Act, a guarantee may be either oral or written. The word ‘oral’ is used in the sense of ‘not committed in writing and delivered from the lips and includes all unwritten agreements whether come to by word of mouth or inferred from the acts and conduct of the parties. Oral-contract isa contract which is partly in writing and partly or orally, or none of which is in writing. 12. Written guarantee : Written guarantee is one in the form of document in writing and signed by the guarantors. 13. Guarantee for existing debt or retrospective guarantee : This type of guarantee is given for a debt which was already taken. 14. Guarantee for future debt or prospective guarantee ‘ This type of guarantee precedes the raising of the debt. The debt is taken after the execution of the guarantee.Indemnity anki Guarantee #23 15. Guarantee in respect of an ascertained debt : It is a guarantee given for debt made certain or determined by specification. \ \ 16. Guarantee in respect of a floating balance : It is a guarantee given to the whole debt amount.oY # 24 Questions & Answers On Contr, 2 —___Questions & Answers On Contr Question No. 7 Write a note on Termination of Bailment, Answer : Termination of bailment : A contract of bailment m, aY be terminated in the following ways : 1. Termination of bailment by bailee’s act inconsistey, with conditions : As per Section 153 of the Contract Act, ; contract of bailment is voidable at the option of the bailor. ; the bailee does any act with regard to the goods bailed inconsistent with the conditions of the bailment. Illustration A lets to B, for hire, a horse for his own riding. B drives the horse in his carriage. This is, at the option of A, a termination of the bailment. 2. Return of goods bailed, on expiration of time or accomplishment of Purpose : According to Section 160 of the Contract Act, “It is the duty of the bailee to return, or deliver according to the bailor’s directions, the goods bailed. without demand, as soon as the time for which they were bailed has expired, or the Purpose for which they were bailed has been accomplished. 3. Termination of gratuitous bailment by death : Section 162 of the Contract Act provides that, “A gratuitous bailment is terminated by the bailee”, 4 Termination of bailment in case of deterioration : I! the 800ds bailed are Perishable or of deterioration in natureIndemnity and Guarantee #25 in a certain period, then the contract of bailment is extinguished. \ 5. Mistake or coercion : As per Section 72 of the Contract Act, where a person to whom money has been paid, or anything delivered, by mistake or coercion; he must repay or return it. 6. Illegal goods bailed : If a bailor hands:over illegal goods such as explosives or smuggled goods to :the bailee for the purposes of transporting from one place to another without disclosing the contents, the contract of bailment extinguishes.# 26 Questions & Answers On Contra, ct. Bet Question No. 8 Explain the Rights of a surety as against t Principal Debtor, the Creditor and his co-sureti. % Or Explain the Right of subrogation of a surety > Or Discuss the Law relating to rights of surety ? Or What are the Rights of a surety as on payment o; performance by him of a guaranteed debt ? Answer : (A) Rights Against Principal Debtor The surety has the following rights against the princip: Debtor :- 1. Right of subrogation. 2. Right to claim Indemnity. 3. Right to demand for Relief, and 4. Right to issue notice to the Debtor. 1, Right of Subrogation : Section 140 of the Act provid® for the right of subrogation. Subrogation is the substitul’ of another person in the place of a creditor so that the pers’ in whose favour it is exercised succeeds to the rights of‘ creditor in relation to the debt, ‘The doctrine is one of &4!" and benevolence, and like contribution and other simil® aIndemnity and Guarantee #27 equitable rights was adopted from the civil law and its basis is the doing of complete, essential, and perfect justice between all the parties without regard to form and its object is the prevention of injustice. Section 140 of the Act deals with the rights of surety on payment or performance. When a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety, upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. CASE LAW Lampleigh Iron Ore Co. Ltd. Case 1927 Brief Facts : The company took loan and one of its directors gave guarantee. The company failed to pay the debt and liquidated. Before the date of liquidation, the director paid the entire debt to the creditors. Judgment : The court held that the director was entitled to recover the debt with interest from the liquidator. 2. Right to claim indemnity : Section 145 provides for the right of indemnity. In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety. This right enables the surety to recover from the principal debtor whatever sum he has rightfully paid under the guarantee but not sums which he has paid wrongfully. The surety can recover from the debtor not only the actual amount he had paid to the creditor, but also interest thereon. The reason is the surety is entitled to full indemnification.> # 28 Questions & Answers On Contract 3. Right to Demand for Relief : Before the payment has been made, the surety can compe the debtor to relieve him from liability by paying off the dep, This right can be exercised by one or several co-sureti., without consulting the others. 4. Right to issue notice to the Debtor : The surety is entitled to 8ssue a third party notice to the principal debtor when he issued by the creditor. (B) Rights against the Creditor The surety can exercise the following rights against the creditor » 1. Rights for securities. 2. Right to claim set-off. 3. Right of reduest to sue the debtor. 4. Right to insist upon the termination of services. 1. Right for securities : The Security 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. This right exists irrespective of the fact whether the surety knows of the existence of security or not However, the surety is not entitled to the benefit of any security subsequently given. But, in English Law eve! subsequent securities can be claimed by the surety. CASE LAW : (ENGLISH) Forbes us. Jackson, (1882) 19 Ch. D. 615Indemnity and Guarantee # 29 Brief Facts : A took a loan of (Pound 200) from B mortgaging his leasehold premises and a life insurance Policy. C stood as a guarantor, Later B advanced some more money to A without the knowledge of C. C paid (Pound 200) with interest and asked B to handover the securities mortgaged by A with B. B refused to do so demanding to pay the remaining debt with interest. Judgment : The court held that C the surety was entitled to have the securities and he was not liable with the amount advanced by B without consent of C. CASE LAW : (INDIAN) Amritlal Goverdhanlal vs. State Bank of Travncore, (1968) Brief Facts : The Appellant Amritlal Goverdhanlal was the guarantor of a loan granted to a firm by the Respondent bank. The Appellant claimed that he shall be discharged under Section 133. Further he claimed his rights under Sections 140 and 141. He contended that the security was lost by the creditor or parted with without the surety’s consent. He pointed out that when the quantity of the goods actually in stock was verified with the weekly statement dated 18-4- 1957 shortage of goods to the value of Rs. 35,690 was found. The weekly statement dated 15.3.1957 showed that the stock was valued at Rs. 99,991/- and odd and in the course of his evidence the Agent of the Respondent Bank said that “He did not know how the shortage occurred,” and “there was a possibility of defendants 1 to 5 taking away the goods”. Judgment :—The Supreme Court held : “Upon the evidence adduced by the parties in this case, we are satisfied that there was a shortage of the goods of the value of Rs. 35,690/-# 30 Vee fc brought about by the negligence of the Bank or for some oth, reason and to that extent there Oe nae 8 los, by the Bank of the securities which the a at th, time when the contract of surety was enter e folloy therefore that the principle of section 1 i a India, Contract Act applies to this case and the surety is discharg,, of the liability to the Bank to the extent of ee 35,690. W accordingly hold that the Respondent Bank is entitled t, decree against Respondent No. 6, the Appellant only to 4, extent of Rs. 5,243.58 and not to the sum of Rs. 40,933 5. and to proportionate costs”. 2. Right to claim set-off: The surety is also entitled to the benefit of any set-off o- counter claim which the principal debtor might posses agains the creditor in respect of the same transaction. Example :—If the creditor owed some money to the debtor the latter would certainly put forth his right of set-off agains the creditor. The same right of the debtor would be availab to the surety. 3. Right of request to sue the debtor :Indemnity and Guarantee #31 (C) Rights Against Co-surities : Where the same debt is guaranteed by two or more persons, they are called “co-sureties”. A surety enjoys the following rights against the co-sureties :— 1. Right to contribution, and 2. Right for the benefit of securities. 1. Right to Contribution : Between co-sureties there is equality of burden and benefit. If there is no agreement between the sureties, all of them are liable to bear the loss equally. If one of them is compelled to pay the whole debt, he can claim contribution from other co-suréties. According to Indian Law, where co-sureties have agreed to become liable in different sums, they should contribute equally but not exceeding the sums which they have agreed to pay. According to English Law, the co-sureties are liable to contribute proportionately and not equally. 2. Right for the benefit of Securities : All the sureties are entitled to the benefit any security which any one of them may have obtained from the principal debtor whether the sureties were aware of it or not.32 Questions & Answers On Contrag, + __Questions & Answers On Contra, Question No. 9 State the circumstances in which a Suret \ discharged from his liability in a Contract guarantee. Or In what circumstances a contract of suret discharged ? Y is Or When is surety discharged from Liability >? Or Explain what actions and omissions would discharge a surety from obligations ? Answer : The Liability of a surety comes to an end in certain circumstances recognized by law. A surety is discharged from his liability in one of the following ways :— A. By Revocation B. By the improper conduct of the creditor. C. By invalidation of the contract of guarantee. (A) By Revocation A surety is discharged by revocation in the following ways *~ 1. Revocation by Notice :—A specific guarantee cannot ¥° ‘evoked. But a continuing guarantee may be revoked by t! Surety at any time as to future transactions by giving notic®Indemnity and Guarantee # 33 to the creditor. However, the surety remains liable for transactions entered into prior to the notice. 2. Revocation by Death :—The death of surety brings an end to a continuing guarantee. No notice of death a need be given to the creditor. The surety will not be responsible for acts done after his death. However, the estate of the surety will be responsible for the transaction entered into before death. If the surety has estate, his heirs can be sued for the liability. 3. Revocation by Novation :—A contract of guarantee may be discharged by novation. Substitution of new contract for an old one either between the same or different Parties is called, “novation”. (B) Discharge of surety by improper conduct of creditor A surety is discharged by the improper conduct of the creditor. This is based on the principle of natural justice. A surety is discharged by the improper conduct of the creditor in the following manner :— 1. Variations in terms of the contract :—A surety is liable for what he was undertaken in the contract. Any variation made, without surety’s consent, in the terms of the contract between the principal debtor and creditor, discharges the surety as to transactions subsequent to variation. However, a surety will not be discharged by a variation if he has consented to the same. Section 133 of the Act deals with the discharge of surety by variance in terms of contract. CASE LAW Perumal Reddiar vs, Bank of Baroda, 1981 MLJ 419a arse Questions & Answers On Contract .. Brief Facts :—The plaintiff was the surety. The Bank officia) took the signatures of the plaintiff on blank printed forms o; contract of guarantee and other forms. After same time, ip the absence of the plaintiff, the bank officials filled the guarantee and other forms pertaining to columns of amount, interest rate, etc. Judgment :—The Supreme Court held that the plaintiff was discharged from the suretyship. Filling the blank papers does not give the meaning that the surety has assented to it. It is a material alteration. Hence the provisions of section 133 apply in such circumstances. 2. Discharge/release of the principal debtor :—If the creditor makes any contract with the principal debtor by is discharged. Release which the later is released the surety The of the principal debtor is release of the surety also. surety is also discharged by any act or omission of the creditor, the legal consequences of which is the discharge of the principal debtor. CASE LAW B.G. Venkamma vs. K. Sanyasayya, AIR 1938 Mad. 422 Brief Facts :—The guarantor had agreed to pay any amount that might be decreed against two defendants in a suit and which might not have been recovered from them. The creditor compromised with one of the defendants. As a result, a compromise decree was passed only against one defendant and the suit was dismissed against the second defendant. ii cpeurety, filed a case praying to discharge him from the iability of suretyship.Indemnity and Guarantee #35 Judgment :—The Madras High Court gave the judgment discharging the surety. 3. Impairing surety’s remedy : It is the duty of the creditor not to do anything which is inconsistent with the rights of the surety. If the creditor does any act which is consistent with the rights of the surety, the surety is discharged. Similarly, if the creditor omits to‘do any act which 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. 4. Compounding by creditor with principal debtor : Any contract between the creditor and the Principal debtor by which the creditor makes a composition with or promises to give time to pay to the principal debtor, discharges the surety unless the surety gives consent to such contract. (C) Discharge of surety by invalidation of contract : A surety is also discharged from liability when the contract of guarantee is invalid. A contract of guarantee becomes invalid in the following cases : 1. Guarantee obtained by concealment : Any guarantee which the creditor has obtained by means of keeping silence as to material circumstances is invalid surety, in such a case, will be discharged from his liability. 2. Guarantee obtained by misrepresentation : Any guarantee which the creditor has obtained by means of misrepresentation is void. Surety, in such a case, will be discharged from his liability. 3. Co-Surety not joinging ; Where a person gives a guarantee upon a condition that the creditor shall not acti #36 Questions & Answers On Contract my upon it until another person has joined in it as Co-surety the guarantee is not valid if that other person does not joj;, 4. Lack of any essential element of a contract : Whe,, the contract of guarantee lacks one oF more other essentj,) elements of a valid contract, the surety will be dischargeq WHEN SURETY IS NOT DISCHARGED A surety, however, is not discharged from his liability in the following cases as per sections 136 to 138 of the Contract Act. 1. Release of Co-Surety :—Release of one co-surety by the creditor does not discharge the other sureties. Where there are more sureties than one. Their liability is joint anc several. Therefore, if the creditor releases any one of them it does not operate as a discharge of the others. 2. Forbearance to sue :—Mere forbearance on the part of the creditor to sue the principal debtor does not discharge the surety. 3. Negligence :—Negligence and delay on the part of the creditor to sue the principal-debt. or doe: i 5 surety. 's not discharge theIndemnity and Guarantee Question No. 10 What is “Bailment” ? Explain briefly the various types of Bailments ? A Answer : The term “bailment” is derived from the French ward “Bailler” which means ‘to deliver’. It denotes a contract resulting from delivery. It involves change of possession and not transfer of ownership. Definition :—Section 148 of the Contract Act defines “Bailment’ as “the delivery of goods 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.” Examples of Bailments :— (A) A delivers a piece of cloth to B, a tailor to be stitched into a suit. There is a contract of Bailment between A & B. (B) A lends a book to B to be returned after the examination. There is a contract of Bailment between A and B. (C) A gives his T.V. set for repairs to a mechanic. Types/kinds of bailments : Bailments may be classified on the basis of benefit of benefit or reward. On the basis of benefit derived by the parties, bailments are classified into three types :— On the Basis of Benefit : 1. Bailment for the exclusive benefit of the bail or.dq # 38 Questions & Answers On Contract -. |, 2. Bailment for the exclusive benefit of the bailee. 3. Bailment for the benefit of both the bail or and bailee, On the basis of reward, bailment’s are classified into ty, types :— On'the basis of reward: 1. Gratuitous Bailment. 2. Non-gratuitous Bailment. 1. Gratuitous Bailment :—A bailment without any reward or consideration is called “Gratuitous Bailment”. 2. Non-Gratuitous Bailment :—A bailment for reward for hire is a “Non-gratuitous Bailment”.Indemnity and Guarantee #39 Question No. 11 What are the essential characteristics of a bailment? Or ay Discuss the essentials of bailment ? Or What are the important features of bailment ? Answer : The essential features/characteristics of bailment are as follows :— 1. Delivery of goods. 2. Delivery of goods must be for some purpose. 3. Contract 4. Return of goods 1. Delivery of Goods :—There must be livery of goods by one person to another. Delivery of goods may be actual or constructive. Delivery involves change of possession from one person to another and not change of ownership. 2. Delivery of Goods Must be for some purpose Bailment of goods is always for some purpose. Where goods are delivered by mistake, there is no bailment. 3. Contract :—Bailment is based upon a contract between the parties. In exceptional cases, it can also be implied by law. 4. Return of Goods :—Goods are delivered upon a condition that they are to be returned to the bail or disposed of accordingoY #40 Questions & Answers On Contract _ ss ssss$sa«>n020 to his directions. If there is no contract to deliver back ms otherwise to dispose of the goods according to directions, ther, is no bailment at all. The goods may be returned cithe, in the original or altered form. It is the characteristic Which distinguishes it from other contracts. However, the most important essential characterist;, feature of the bailment is the delivery of possession of the Property from one person to another. The delivery of the Boods is temporary and for some specific purpose only. After the Purpose is over, the goods must be returned to the bail or. “CASE LAW Kaliaperumal Pillai vs. Visalakshmi, AIR 1938 Mad. 32. Brief Facts :—Visalakshmi gave certain jewellery to Kaliaperumal Pillai (Goldsmith), for the purpose of being melted and utilized for making new jewellery. Every evening, she used to come his shop and examine the jewellery and the work done on that day. The goldsmith after, verification but them in a box, locked it, and gave the keys to her. Some days were happened like this. One day morning, when the shop was opened, it was found that the jewellery were stolen Visalakshmi sued Kaliaperumal Pillai, as a bailee. Whe i he cena or han he goods to the bailee physically je ctu; Peli In the case mentioned above 6+ Kaliaperumal Pillai ys Visalakshmi, the court held thatIndemnity and Guarantee #41 Brief Facts :—The plaintiff failed to repay his debt to the creditor (Defendant). The defendant succeeded in getting an attachment order, and took Possession of plaintiffs mare. The plaintiff paid the decretal amount, and asked for return of mare. In the possession of the defendant, it was lost. Judgment :—The court ordered the defendant to return plaintiff's mare or its equivalent value. The court held that it was an actual delivery to the defendant. CASE LAW Morvi Mercantile Bank vs. Union of India, AIR 1965 SC 1954 Brief Facts :—The goods were under the custody of the Railway Department. The Railway Receipt (R/R) was pledged with the bank. Judgment :—The Supreme Court held that though the goods were in the actual possession of the Railway, the Bankers were the real bailees and pawnees, and the Bank obtained possession of the goods was “Constructive Delivery”. CASE LAW Ram Gulam vs. Government of U.P., AIR 1950 All. 206 Brief Facts :—The plaintiff jewellery was stolen. He gave a complaint to the police. Police seized the stolen jewellery and kept in police custody. One Police Officer of that station migrated to Pakistan by taking the jewellery. The plaintiff sued the Government. Judgment :—The Supreme Court held that the Government was not liable, as there was no contract of bailment between the plaintiff and the Government.#2 Questions & Answers On Contract -- 11 Question No. 12 Write the differences between Bailment and Sale Or Distinguish between Sale and Bailment Answer : Sale Bailment eee ee 1. The object of bailment is 1. The object of sale is permanent transfer to temporary possession of the purchaser. the goods in the hands of the bailee. 2. The ownership does not change. The bail or is the owner of the goods, before, during and after the period of bailment. 3. The bail or pays some nominal charges to the baiiee for the services rendered by him. Some- times, he is not required to pay any charges. 4. In certain occasions, the bailee can exercise his right of lien over the goods bailed, 5. The bailee cannot appro- priate the property bailed to him, After the sale transaction, the purchaser becomes owner. The seller does not possess any connec-tion with property sold. The transferee shall have to pay the full market value of the property to buy property. The seller of the property has no such right of lien. However, an unpaid seller of goods can exercise lien or stoppage in transit. The purchaser can appro- priate the property pur- chased by him.Indemnity and Guarantee Question No. 13 #43 Distinguish between “Bailment and Agency” ? Answer = Bailment 1. The bailee does not represent the bail or. He does not derive any authority from the bail or. 2. A bailee cannot sell the property under bailment. 3. A bailee has no such power. 4. A bailee must have possession of the property 5. A bailee cannot transfer the ownership of the property. Agency The agent represent his principal and derives certain power from the principal. An agent can sell the property. An agent can contract with others. An agent may or may not have possession of the property. An agent can transfer the ownership of the property.B #44 Questions & Answers On Contract a Question No. 14 Discuss the duties and rights of a Bailor ? Answer : Duties of Bailor :--The duties of the bail or are the rights of the bailee. They are as follows :— 1. To Disclose faults in the goods bailed :—It is the firs, and foremost duty of the bail or to disclose the known faults about the goods bailed to the bailee. If he does not make such disclosure, he is responsible for any damage caused to the bailee directly from such faults. (Section 150, Para 1) CASE LAW Lyell vs. Ganga Dut, ILR 1875 (1) All. 60 Brief Facts :—A sent a parcel containing combustible and dangerous substances to B. A did not tell anything about the dangerous nature of the parcel to B. In the journey, the parcel exploded and B died. B’s wife sued A. Judgment :—The court held liable to A to pay damages to B’s wife. CASE LAW Moffat vs. Bateman, (1869) Brici Facts ‘The defendant had a carriage. The plainti!! was a traveller, The defendant did not checkup the bolts 0! the carriage. The bolds were damaged, as a result the plaintit! was thrown from the carriage and was sustained injuries- J : ‘udgment :—The court held the defendant was liable to P® damages to the plaintiff.