SECURITIES LAW

Contracts of guarantee
A contract to perform the obligation or to discharge the liability of a third party in
case of its default is called contract of guarantee. Guarantee contract includes three
parties namely; Creditor, Principal Debtor and Surety. The person who is granting
the loan, the person who is utilizing the amount of loan is principal debtor and the
person who is giving guarantee is called surety or guarantor or favored debtor. In
case of guarantee contract there will be two types of liabilities namely; Primary
liability and secondary liability. Primary liability will be with principal debtor and
Secondary liability goes to surety.
The characteristics of a contract of guarantee are:
(a). There must be three parties: the creditor, the debtor and the guarantor or surety.
(b) There must be a primary liability in some person other than the guarantor; the
guarantor must be liable only secondarily, to pay if the debtor does not pay. The
assumption of personal liability is not essential in a guarantee. The provision of
security is enough: Re Conley.
(c) The guarantor is totally unconnected with the contract except by means of his
promise to discharge the debtor's liability if he does not do so.
(d) Must be evidenced by some note or memorandum.
Contracts of Indemnity
Indemnity is the undertaking of primary responsibility to see that a certain act is
performed.
A contract where one party promises to save the other from any loss caused to him
by the conduct of promisor himself or any other person is called contract of
indemnity. Indemnity contract includes two parties namely; Indemnifier and
Indemnity holder. The person who is promising to pay compensation is called
Indemnifier and the person who`s loss is compensated is called Indemnity holder.
Example: There is a contract between X and Y according to which X has to Sell a
tape recorder (which is selected) to Y after three months. On the next day of their
contract Z has come to X and has insisted on selling the same tape recorder to him
(Z). Here Z is promising to compensate X for any loss faced by X, due to selling the
tape recorder to Z. X has agreed. Now the contract which has got formed between X
and Z is called indemnity contract, where Z is indemnifier and X is indemnity holder.
Rights of Indemnity Holder:
To claim damages o
To claim costs
Other payments

Right of the indemnity holder

An indemnity holder (i.e. indemnified) acting within the scope of his authority is
entitled to the following rights

1. Right to recover damages he is entitled to recover all damages which he

might have been compelled to pay in any suit in respect of any matter covered by the
contract.
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2. Right to recover costs He is entitled to recover all costs incidental to the
institution and defending of the suit.

3. Right to recover sums paid under compromise he is entitled 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 directions of the indemnifier. It
must be prudent and authorized by the indemnifier.

4. Right to sue for specific performance he is entitled to sue for specific

performance if he has incurred absolute liability and the contract covers such
liability. The promisee in a contract of indemnity, acting within the scope of his
authority, 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 ;

Difference between Indemnity Contract and Guarantee Contract

Number of Parties: Indemnity contract includes two parties namely,
indemnifier and indemnity holder. But guarantee contract includes three
parties namely creditor, Principal debtor and surety.
Number of Contracts: In case of indemnity contract, as there are only two
parties, there is possibility for existence of one contract only. But a contract of
guarantee includes three sub-contracts.
Nature: As indemnity contract includes two parties and one contract, it can be
said that indemnity contract is simple in nature. But guarantee contract
includes three parties and three sub-contracts and hence be said that
guarantee contract is complex in nature.
Liability: In contract of guarantee there will be two types of liabilities namely;
primary and secondary liabilities which will be with principal debtor and surety
respectively. But in contract of indemnity there is no classification and sharing
of liability where the absolute liability rests with indemnifier.
Recovery: In case of indemnity contract the indemnifier, after compensating
indemnity holder`s loss, cannot recover that amount from any person. But in
contract of guarantee, if surety makes payment to creditor, he (surety) can
recover that amount from principal debtor.
Interest of parties: Indemnity contract gets formed upon indemnifier`s
interest and guarantee contract gets formed upon principal debtor`s interest.

Liability of the guarantor

A guarantor's liability does not arise until the principal debtor has made default,
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although notice of the default need not be given to him unless it is expressly
agreed to be given. It is not necessary for the creditor to request the debtor to
pay or to sue the debtor, unless this is expressly stipulated for, before taking
proceedings against him.
If the transaction is void as between the principal debtor and the creditor, the
guarantor is not bound:
Similarly the guarantor is not bound if the principal debtor is discharged, e.g. by
statute:
Any conditions precedent to the guarantor's liability must be fulfilled before
recourse can be had to him.
If several guarantors have agreed to become co-sureties for definite amounts, and
the creditor allows the amounts to be altered by one guarantor without the
consents of the others, the guarantee will not be binding. This can be illustrated
by the case of Ellesmere Brewery Company v Cooper (1896) 1&.B.75, in which
the facts, briefly, were as follows: A firm of brewers employed C and required
him to execute a bond with sureties for the faithful discharge of his duties. The
bond was drawn up with four sureties, N. and E. being liable to the extent of 50
each, and P and B. to the extent of 50 each, and P and B to the extent of 25
each. P, B and E all signed, but N, who was the last to sign, added "25 only" to
his signature. The brewers accepted the bond so signed. It was held that none
of the guarantors was liable on the bond.
Continuing guarantees
A continuing guarantee is a guarantee which extends to a series of transactions,
and is not exhausted by or confined to a single credit or transaction. The liability
of the guarantor in such a case extends to all the transactions contemplated
until the revocation of the guarantee.
Whether a guarantee is continuing or not depends on the language of the
guarantee, the subject-matter and the surrounding circumstances. An example
would be the guarantee of a company's overdraft by the directors up to a
specified limit during a given period, e.g. 2nd January to 31st December.
Revocation of Continuing Guarantee
By notice
By Death of Surety
Alteration without consent
Novation
Discharge of Debtor

Guarantor's rights against the creditor

The rights of the guarantor are:
(a) At any time after the guaranteed debt has become due and before he has
been asked to pay it, to require the creditor to sue for and, collect the
guaranteed debt:
(b) On being sued by the creditor, to rely on any set-off or counterclaim which
the debtor possesses against the creditor.
(c) On payment of what is due under the guarantee, to be subrogated to all the
rights of the creditor in respect of the debt to which the guarantee relates:
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(d) On payment of what is due under the guarantee, to have assigned to him
every judgement or security held by the creditor in respect of the debt.
(e) On payment of what is due under the guarantee, to all equities which the
creditor could have enforced not only claiming through him:
Guarantors rights against the debtor
The guarantor's rights against the debtor are:
(a) Before the payment has been made, to compel the debtor to relieve him from
liability by paying of the debt. This right can be exercised by one of several co-sureties
without consulting the others.
(b) After payment has been made, to be indemnified by the principal debtor against
all payments properly made.
A right to indemnify arises immediately a payment has been made under the
guarantee, and on payment the guarantor becomes a simple contract creditor of the
principal debtor. He is entitled to recover the amount he has paid with interest, and if
he has sustained damage beyond that, he is entitled to recover that damage also in
Bradeley v Consolidated Bank (1887) 34 Ch. D., 556 Stirling, J. stated:
"If a surety could prove that by reason of non-payment of the debt he had suffered
beyond the principal and interest which he had been compelled to pay, he would be
entitled to recover that damage from the principal editor".
(c) When sued by the principal creditor, the guarantor can issue a third party notice
against the principal debtor and claim an indemnity.
Rights of co-guarantors among themselves
A guarantor who has paid more than his share under the guarantee is entitled to
contribution from his co-guarantors, whether they are bound by the same or
different instruments, and whether he knew or not of the existence of co-
guarantors at the time he became bound. This is because the doctrine of
contribution is not founded on contract, but is the result of general equity on the
ground of equality of burden and benefit.
To obtain contribution, all the guarantors must have guaranteed the same debt.
There is, therefore, no right of contribution.
1. When each guarantor has expressly agreed only to be liable for a given
portion of one sum of money.
2. When guarantors are bound by different documents for equal portions of a
debt due from the same principal, and the guarantee of each is a separate
and distinct transaction.
Discharge of the guarantor
The guarantor will be discharged in the following events:
(a) If the contract between the principal debtor and the principal creditor is
varied without the consent of the guarantor
(b) If the creditor makes a binding contract to give time to the principal debtor.
Mere omission to press the debtor or delay in suing him is not such conduct
as to release the guarantor. The contract, to have this effect, must be one
which is legally enforceable.
In Croydon Gas Company v Dickinson P and C guaranteed the
performance by D. of his contract with a gas company. Under that contract,
D. undertook to pay for each month's supply within 14 days. In July the
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company not being paid in 14 days took a promissory note from D. It was
held that this was binding agreement to give time and discharged P and C
from liability for the July account.
(c) If the creditor omits to do something which he is bound to do for the
protection of the surety, such as omitting to take up an award until the time
for its performance is past (Re Jones), or if he omits to register a deed giving
security so that the deed becomes inoperative and the creditor unsecured.
(d) If the creditor relinquishes any security held by him in respect of the
guaranteed debt. On payment of the debt the guarantor is entitled to have
handed over to him all the securities held by the creditor in respect of the
debt in the same condition as he received them. If the creditor, by any act or
neglect on his part, is unable to hand over the securities in their unimpaired
condition, the guarantor will be, to that extent, discharged. In Re Darwen
and Pearce (1927)1 Ch. 176, X and Y held partly paid shares in a company
and D and P guaranteed the payment of their unpaid calls to the company.
The company called upon X and Y to pay the calls and, on default being
made, forfeited the shares under a power given in the articles. It was held
that the company, by forfeiting the shares, had deprived D and P of lien on
shares to which they would have been entitled had they been compelled to
pay the calls, and they were therefore discharged from their liability as
sureties under the guarantee.
(e) If the creditor expressly or impliedly discharge the debtor.
(f) If the creditor discharges a co-guarantor or does any act whereby the right
of contribution between the co-guarantors is destroyed or prejudiced. The
discharge of one guarantor from whom his co-guarantors could have
obtained contribution is a discharge of those co-guarantors.
(g) If the guarantee is revoked.

When does the guarantee end?

Generally, a guarantee ends in the following situations:

The loan that was guaranteed comes to an end (for example, because the
borrower repaid the full amount of the loan). For more information on this
subject, see the question If the loan no longer exists, what happens to the
guarantee?
The guarantee termination date in the contract of guarantee has arrived. For
more information, see the question Can a guarantor terminate the contract of
guarantee?
The guarantor has repaid the full amount of the borrowers loan.
The guarantor dies.

But a guarantee can also end in the following situations:

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The lender agrees to terminate the guarantee and let the guarantor off the
hook.
The lender and the guarantor become the same person. (For example, the
company making the loan and the company guaranteeing the loan merge and
become the same company. The guarantee ends because a person cannot be
lender and guarantor at the same time.)

However, it is important to remember that the borrowers bankruptcy does not put
an end to a guarantee!