Contract Law II DAVV LLB Sem 2 | Previous year solved questions and important topics

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  • distinguish between contract of indemnity and contract of guarantee and explain both [2019]
  • what is a contract of guarantee. in what events is surety discharged from his liability [2023]
  • what is a contract of indemnity. distinguish between contract of indemnity and guarantee [2023]
Contract of Guarantee
  • Sec 126, 127
  • A contract to perform the promise or discharge liability of a third person in case his default.
  • In English law it is defined as a promise to answer for the debt, default or miscarriage of another.
  • Surety - person who gives the guaratee
  • Primary debtholder - person in respect of whose default guarantee is given
  • Creditor - person to whom the guarantee is given
Essential features of a guarantee
  1. Tripartite privity - concurrence of 3 parties
    1. Ex: Birkmyr vs Darnell (1704)
  2. the principle debtor may be a party incompetent to contract (e.g. a minor), in this case surety is regarded as principle debtor
  3. Consideration - Sec 127 lays Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee, not necessary there should be some benefit to the surety himself
    1. Sicom Ltd vs Padamshri Mahipatrai J Shah (2005) a guarantee was executed after release of financial assistance to the borrower. Past consideration is valid consideration.
  4. Liability must be legally enforceable
  5. Collateral liability (liability conditional on the default of principle debtor)
    • Mountstephen v Lakeman (1871) - personal undertaking and not a guarantee. An undertaking to discharge liability of another without any request from him creates an independent liability and not collateral as that of a guarantor
    • Indian Overseas Bank vs SNG Castorete - where only an assurance for repayment of amount due from the loanee was given by means of a letter the court said it could not be construed as a deed of guarantee
    • United Breweries vs Karnataka State Industrial Investments & Dev Corpn - a letter of comfort was issued by a holding co in favour of its associate company stating the company had capabilities to meet its contractual and financial obligations. the court said that it was in the nature of recommendatory letter.
  6. Recoverable debt 
  7. writing not necessary - implied or express, sec 126

Contract of Indemnity 
  • Per Sec 124, Chapter VIII titled of Indemnity and Guarantee, Indian Contract Act 1872
  • A contract - by which one party promises - to save another from loss caused to him by the conduct of the promiser himself or by the conduct of any other person
  • kind of contingent contract, direct and original engagement between two parties
  • IMDEMNIFIER / PROMISOR  - the entity who gives indemnity
  • INDEMNIFIED / INDEMNITY HOLDER / PROMISEE - the entity who is given protection against the loss
  • the contract may be express or implied
Ex: P, an insurer, promises to cover losses arising from any bona-fide fire caused in warehouse of Q.
  1. P and Q are enter into a contract of indemnity.
  2. P is the indemnifier and Q is the indemnified
  3. this is a contract contingent upon Q incurring a loss to warehouse from a bona-fide fire
  4. direct contract between the two parties
Rights of indemnity-holder when sued (Sec 125)
  • the promisee in a contract of indemnity is entitled to recover from the promisor
(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;

(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized him to bring or defend the suit;

(3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorized him to compromise the suit.


 When does liability of indemnifier commence? / When can indemnifier be made liable?
  • the main contention and legal question of law is whether the indemnifier can be asked indemnify even before the indemnity-holder actually suffers the loss or whether his liability arises only after the loss is suffered by the indemnity-holder
Conventional view of the English courts
  • As per English common law, no action can be brought by the indemnity holder until he has suffered actual loss. This created great hardship for the indemnity holder as it meant paying out of one's own pocket first before they could be indemnified.
  • The legal maxim being, "you must be damnified before you can claim to be indemnified
Evolved contemporary view | Court of Equity / Chancery 
  • With time, the court of equity has evolved the law as per which an indemnity holder can claim compensation even before he has suffered actual loss.

  • He can compel the indemnifier to protect him from the loss which has been promised to be covered by the indemnifier
  • Sumitomo heavy industries ltd vs ongc ltd (air 2010) an agreement to compensate for the loss caused by change in law held to not be a contract of indemnity as the loss is neither by conduct of promisor nor promisee
 Case laws
  • Richardson Re, Ex Parte The Governors of St Thomas Hospitl (1911) held that indemnity is not necessarily given by repayment after payment. Indemnity requires that the party to be indemnified is never called upon to pay
  • Calcutta High Court followed similar principle in Osman Jamal & Sons vs Gopal Purshottam (1928) 
  • Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, courts acknowledged that waiting until the indemnity-holder had actually paid the loss before enforcing indemnity could be intolerable. if the liability is absolute, he is entitled to call upon the indemnifier to save himself from the 
  • Secy of State vs Bank of India1938 is an example of implied contract where when a forged endorsement was honoured by Bank 

Views of the Indian court 
  • In India High courts of Bombay, Calcutta, Madras, Patna and Allahabad have expressed in favour of the application of law similar to that recognized in England by the court of Equity.
  • However highcourts of Lahore and Nagpur have expressed the opposite view 

Indemnity vs Guarantee
  1. 2 parties vs 3 parties
  2. single contract vs tripartite privity
  3. reimbursement of loss vs security of the creditor
  4. promisor is primarily liable vs surety is only secondarily liable
  5. not necessary for the indemnifier to have acted upon request of the indemnity holder vs it is necessary that surety should give guarantee at the request of the debtor
  6. contingent liability vs existing liability 
  7. cant sue a third party for loss in his own name, he can bring such suit in name of  indemnified only vs a surety on discharging liability of principle debtor can bring a suit against him in his own right

Kinds of guarantee 
  • specific / simple
  • continuing guarantee - extends to a series of transactions over a period of time. liability of such surety extends to all the transactions contemplated until guarantee is revoked.

  • explain bailment and its essential requirements.
  • define pledge. when is  a pledge by a person other than owner valid?
  • differentiate b/w bailment and pledge? when is pledge by person other than true owner valid?
  • duties and liabilities of a bailee. when is a bailee not responsible for loss of good or their destruction when under bailment?
Bailment 
  • Chapter IX Of Bailment
  • sec 148

Pledge
  • sec 172 Bailment of pledges 
  • special type of bailment

Distinguish between Bailment and a pledge
  • bailor and bailee vs pawnor and pawnee
  • Sec 148 vs Sec 172
    • A 'bailment' is 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. The person delivering the goods is called the 'bailor'. The person to whom they are delivered is called the 'bailee'. vs The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”. The bailor is in this case called the “pawnor”. The bailee is called the “pawnee”.
  • default bailee can retain the good or sue bailor for charges, he usually cant sell the goods vs the pawnee may after giving notice to the pawnor sell goods pledged with him
  • the pawnee has not rights to use the good pledged with him where as the bailee may use the goods if the terms of bailment so provide

  • modes of dissolution of partnership
  • modes of termination of agency. effect of termination.