Characteristics or essentials of contract of guarantee:
Following
are the characteristics or essentials of contract of guarantee:
i. Tripartite agreement: In a contract of guarantee, there are three parties
namely: principal creditor, creditor and surety. Under this contract, three
separate contracts are made among them and consent of all the three parties is
necessary. The contracts connecting each-other as contract between:
a. The principal debtor and creditor,
b. The creditor and surety, and
c. The surety and principal debtor,
ii. Liability: Under such contract the primary liability is of the principal
debtor and only secondary liability is of the surety. As a conditional
contract, liability of the surety arises only when the principal debtor
(primarily liable) defaults.
iii. Essentials of valid contract: It is also as same as other general contract
in respect of essentials. All the requirements for valid contract, i.e. free
consent, consideration, lawful object, competency of the parties etc. are
necessary to form this kind of contract. But, in respect of consideration, no
direct consideration in the contract between the surety and creditor.
Consideration of principal debtor is considered to be adequate for the surety.
iv. Written form: A contract relating to guarantee must be concluded in writing
in Nepal and England. But, the Indian legal framework does not compel to form
such contract in written form. Both written and oral is valid in India.
Meaning
and definition:
A guarantee means a contract of a promise to be responsible for something, to
perform the promise or to discharge the liability of a third person, in case of
his default. Such a contract involves three parties. They are:
i. Creditor: The person to whom the guarantee is given;
ii. Surety: The person who gives the guarantee.
iii. Principal debtor: The person, in respect of whose default, the guarantee
is given.
Section 15(1) of NCA, 'A contract relating to a guarantee shall be deemed to
have been concluded if it provides that, if any person in the repayment of loan
obtained by him or fulfillment of the obligation accepted by him, it will be
repaid or fulfilled by a third person.'
Section 126 of ICA, A contract of guarantee is a contract to perform the
promise to discharge the liability of a third person in case of his default.
A clear definition was made regarding a guarantee by English Court in the case
of Bricknyrs v. Darmell (1704), 'A contract of guarantee is a contract by one
person to discharge the debt, fault or miscarriage of another.'
A contract of guarantee is entered into with the object of enabling a person to
get a loan or goods on credit or an employment.
Example: If 'A' advances a loan of Rs. 5000/- to 'B' and 'C' promises to 'A'
that if 'B' does not repay the loan, 'C' will do so. Here, this is a contract
of guarantee.
It will be noticed that in a contract of guarantee there are three separate
contracts, i.e.- i. between the principal debtor and creditor, ii. between the
creditor and surety, and iii. between the surety and principal debtor, wherein
the principal debtor requests the surety to act as surety and implicitly to
indemnify the surety in case the surety incurs liability. Thus, the contract of
guarantee is of tripartite nature. The primary liability is of the principal
debtor. The secondary liability is of the surety which arises only when the
principal debtor defaults. The surety must have to know all the facts regarding
the contract. If any alteration regarding the terms of the contract are made
without the consent of the surety, it terminates automatically.
Sec. 15(3) of NCA states that such a contract must be made in written form. The
English law also accepts this rule but the Indian law accepts both written and
oral contract of guarantee.
The Muluki Ain, 1963, Chapter on 'Jamani garneko', Chapter on 'Court
Management', Chapter on 'Punishment' and Government Contract Arrangement Act,
have made some legal provisions in this regard.
Rights
of the indemnifier:
The rights of the indemnity-holder are the duties of indemnifier, and duties of
the indemnity-holder are the rights of the indemnifier. There are not
prescribed any specific rights of the indemnifier either in Nepalese law or in
Indian law. However, he is not liable for indemnity.
i. If indemnity-holder acts negligently.
ii. If indemnity-holder is acting with the intention of causing any loss or
damage.
iii. If he is acting against the instructions of the other party (promisor).
Duties of indemnifier:
The duties of an indemnifier arise in the following circumstances:
i. There must be a loss in accordance with the contract to make the indemnifier
liable.
ii. There must be an occurrence of the anticipated event. Without any
occurrence of the prescribed event, there is no indemnity by the indemnifier.
iii. Where the right of indemnity is used by the indemnity-holder prudently and
the instruction of the indemnifier is not contravened or when there is no
breach of contract.
iv. If the costs demanded by the indemnifier are not caused by negligence,
haphazard behaviour.
Rights
of indemnity-holder [Sec. 22(1) of NCA]
A person whose loss is to be made good is called the indemnity-holder. He has
some rights against the indemnifier in accordance with the legal provisions
incorporated under the Nepalese and Indian Contract Acts. But, the duties of
the indemnity-holder have not been mentioned under the Acts. The
indemnity-holder is entitled to recover any or all of the amounts of
compensation under the contract. They are as follows:
i. All the indemnity amount (damage) prescribed in the contract.
ii. All the damages he may be compelled to pay a third party for the loss.
iii. All the costs spent on the case filed or defended by him in connection
with the contract relating to indemnity.
iv. All the costs of legal actions, if it becomes necessary to initiate such an
action for a failure to pay the amount mentioned in all the above clauses.
Duties of indemnity-holder:
Except otherwise is mentioned in the contract, the indemnifier will not liable
for the loss in the following circumstances. They are called duties of
indemnity-holder too.
i. Duty to work prudently: Except otherwise is mentioned in the contract, the
indemnifier will not liable for the loss caused by the negligence work of the
indemnity-holder. In other words, it is the duty of indemnity-holder to work
prudently.
ii. Duty not to act to cause harm or loss: If the indemnity-holder acting with
the intention of causing any loss or damage, the indemnifier will not liable
for such loss. In other words, it is the duty of indemnity-holder not to act to
cause harm or loss.
iii. Duty to comply with the intention of promisor: If the indemnity-holder
acting against the instruction of the other party or promisor, the indemnifier
will not liable for the loss caused by such against act to his instruction. In
other words, it is the duty of indemnity-holder to comply with the intention of
promisor.
A
contract of indemnity can be classified into two categories on the basis of
expression of the parties at time of its formulation as express and implied.
i. Express contract of indemnity: When the parties to contract expressly enter
into a contract of indemnity. A party expressly promises to indemnify the other
party from loss.
Example: A promise to compensate B if B’s goods are damaged due to the conduct of
C.
ii. Implied contract of indemnity: When the contract of indemnity deemed to
have concluded by the conduct of the parties or from the circumstances of the
particular case, it is known as implied contract of indemnity.
Example: A hires a motorcycle from the B’s shop to use for one day. The
motorcycle gets damaged due to the accident. Here, A has to compensate for
damage to B, although he has not agreed expressly to do so.
Essentials or features of a
contract of indemnity:
A
valid contract of indemnity should fulfill the following conditions:
i. Anticipated loss: A contract of indemnity is a security for an anticipated
loss.
ii. Requirements of valid contract: Contract of indemnity being a species of
contract must have all essentials of a valid contract like free consent,
competence of the parties, consideration, etc.
iii. To save other party: There must be a promise to save the other party from
some loss.
iv. Covers only the actual loss: It covers only the actual loss may be due to
the promisor himself or any other person and it covers only the loss caused by
an event mentioned in the contract. The event mentioned in the contract must
happen.
v. May be express or implied: The contract of indemnity may be express or
implied. An express promise is one where a person promises to compensate the
other party in express term. Implied promise is one where the conduct of the
promisor shows his intention to indemnify the other party from loss.
vi. Depend on good faith: This contract depends on good faith.
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