Contract Law Review Notes: Contract of Guarantee and Indemnity, Exams of Contract Law

Download Contract Law Review Notes: Contract of Guarantee and Indemnity and more Exams Contract Law in PDF only on Docsity! CONTRACT LAW REVIEW NOTES CONTRACT OF GUARANTEE By a contract of guarantee, one undertakes to be collaterally answerable for the debts, defaults or miscarriage (misdeeds) of another. It is a contract to perform the promise or discharge the liability of a third person in case of default. The person who gives the guarantee is called the surety or the guarantor; 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 called the creditor. According to English law, such an agreement is required to be in writing by section 4 of the statute of frauds. The section provides that no action can be brought in respect of a representation is in writing signed by the party to be charged. Consideration It is not necessary in the contract of guarantee to mention any consideration. But for the purpose of section 3(1) the contract must be in writing; and if such a contract is in writing, it does not matter whether it contains any mention of consideration or not. Anything done or any promise made for the benefit of the principal debtor may be sufficient consideration to the surety for giving a guarantee. CONTRACT OF INDEMNITY It is a contract whereby one party accepts complete responsibility to save another from loss caused to him by the conduct of another person. Distinguish between guarantee and indemnity A contract of guarantee to be actionable must be evidenced by a memorandum or note, while a contract of indemnity need not be in writing and an oral promise will be enforceable. In a contract of guarantee, there must be three parties The principal creditor, the principal debtor and the guarantor or surety, while in the contract of indemnity, there are only two parties: The indemnifier and the creditor In a guarantee, the liability of the guarantor is secondary, the primary liability being that of the principal debtor; the guarantor is not liable unless the principal debtor fails to pay e.g C and D go to a shop. C says to the shopkeeper: let him (D) have the goods, and if he does not pay you, I WILL”. This is a contract of guarantee, the primary liability being with D and secondary liability with C. In a contract of indemnity these are only two parties and the person it was the term of the guarantee to sue the debtor before the guarantor himself. If the surety pays the principal debt, he gets into the position of the creditor and is entitled to all the securities which the creditor may have against the principal debtor when the contract was made. On being sued by the creditor, he can plead any set off or counter claim which the principal debtor may have against the creditor in respect of the debt to which he is guarantor. In the case of fidelity guarantee, he can call upon the creditor or the employer to dismiss the employee whose honesty he has guaranteed in the event of proven dishonesty of such an employee. 3) Against co-guarantors: Sometimes it may happen that one had the same debt has been guaranteed by two or more sureties. All the sureties in this situation are required to contribute equally bound to pay with him. If one of the sureties becomes insolvent, the co-sureties shall have to contribute thewhole amount equally. DISCHARGE OF GUARANTORS/SURETY 1. VARATION OF TERMS In a contract of guarantee any material alteration in the terms of agreement between the principal creditor and debtor without guarantor’s knowledge and consent will have the effect of releasing him from liability under the guarantee. 2. Extensions of time If without the consent of the surety the creditor makes a binding contract to extend the agreed time of repayment of the loan. 3. Concealment Any guarantee which the creditor has obtained by means of keeping silence as to the material circumstance is invalid A contract of guarantee is not likely the contract of insurance, a contract of ubelima fidei , in the sense that there is an obligation on the creditor to disclose to the surety every circumstance within his knowledge, and non-disclosure of such a fact will avoid the contract. But disclosure of material fact is essential where a guarantee is taken for the good behavior of a servant. The employer must disclose any misconduct at or previous dishonesty of the employee of which he is aware, otherwise the contract is voidable at the option of the surety. 4. Fraud A guarantee which has been obtain by means of misrepresentation made by the creditor or with knowledge and assent concerning the material part of the transaction is invalid.