ASSOCHAM Workshop on Drafting and Management of Commercial Contract and Agreements

11th January, 2008, New Delhi

INDEMNITIES, GUARANTEES AND WARRANTIES

Sumant Batra
Managing Partner Kesar Dass B. & Associates Corporate & Commercial Lawyers India

PRESENTATION OVERVIEW

o o o

Guarantee Indemnity Warranty

- Key Fundamentals, Forms and Enforcement Main difference between guarantee, indemnity and warranty

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GUARANTEE
A (contract) of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default default (Section 126, The Indian Contract Act) Key Fundamentals Promise to perform promise of a third party if the third party breaks the promise. Primary liability of third party must exist. 3 parties surety (guarantor), principal-debtor and creditor principalOften termed as a collateral which means parallel collateral parallel additional. It is secondary liability as principal-debtor must be additional principalliable and defaulted. It is co-extensive to principal-debtor. co- extensive principalKesar Dass.B & Associates 3

A guarantee can be continuing. It can also be conditional. Form Written or oral, express or implied. Same/similar contracts Performance Bond more like confirmed letter of credit Surety Bonds to Court Contract Act does not apply but principles are similar. Liability may be larger fraud, etc. Bank Guarantees Term does not exist in law. Coined by courts
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It can be contained in more than one document, which will have to be read together. A contract of guarantee may be made by a company under its common seal or by an authorized person. A public company is prohibited to give a guarantee on a loan to any person by a director,etc (Sec 295, Companies Act) There should be an explicit statement guarantee is absolute and unconditional. It should be enforceable. It should not contain representations which form basis of fraudulent inducement. It should be preferably negotiated.
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Enforcement A guarantee is a contract of Strictissima Juris. Rule of Equity laid in Craythorne vs. Swinburne applies Section 141 of Contract Act. It is to be enforced according to the terms of the contract. A creditors right under guarantee are assignable. Suretys liability is restricted to the liability of principal debtor. debtor. Suretys liability is not enforceable if original contract is unenforceable for want of registration. Surety may sue the principal debtor Kesar Dass.B & Associates
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INDEMNITY
A contract of indemnity is one where one party promises to save the other from loss or injury caused by the conduct of the promisor himself or of the third party (Section 124, Indian (Section 124, Contract Act) Key Fundamentals It is a promise to compensate for or security against damage, loss or injury. In wider sense it includes all contracts of insurance, guarantee. guarantee. It is not a collateral but an independent contract.
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It is a tool for allocating risks contingent liability. Form The obligation to indemnify may arise under contract express or implied, from relation of parties viz. employer & employee, principal & agent, under statutes viz. Companies Act, Partnership Act, etc. It should not be too broad or imprecise. It should provide for extended periods of claims but for justifiable reasons. Indemnity should survive period of agreement.
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Enforcement A contract of indemnity can be enforced according to its terms. Claim of Indemnity holder can include: damages, legal costs of adjudication, amount paid under the terms of compromise The measure of damages is the extent to which the promisee has been damnified. Indemnifier should ideally be informed of the legal proceedings or should be joined as third party There is no onus to show breach or actual loss.

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WARRANTY
A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not to a right to reject the goods and treat the contract as repudiated- Section 12, The Sale of Goods repudiatedAct, 1930. Key Fundamentals Warranty vary in the extent of coverage from case to case. Form A warranty has to be generally, express.
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But there are some implied warranties under Sale of Goods Act : Buyer shall have quiet possession of goods Goods shall be free from any charge or encumbrance Quality or fitness for particular purpose Merchantability of goods

A warranty should cover all the identified risks and include a disclaimer. The extent of liability and time limit for claiming losses should be set.

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It should be appropriate to the activities carried out It is common to have a warranty clause in sales agreements. Generally, warranty is included in the price itself however, separate service agreement containing warranty may also be entered into. It is generally detailed and backed by indemnities.

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Enforcement Claim for damages for personal injury or property damages can be made. However, there should be direct nexus between the claim and liability under warranty clause. Quantification of damages should be according to estimates, if not specifically provided. There is an onus to show breach of warranty and consequential loss. But the contract is not repudiated by breach of warranty.
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Breach of condition may also be treated as breach of warranty under certain circumstances.

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Distinction between Indemnity, Guarantee & Warranty

Indemnity It is a principle promise to reimburse a specific loss.

Bilateral contract (2 parties indemnifier & indemnified)

Guarantee It is a contract to perform the promise or discharge the liability of a third person Tripartite contract (3 parties-creditor, principal debtor surety)
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Warranty Statement about the state of the subject of contract.

Bilateral contract

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RemedyPayments specified in indemnity bond Express or implied.

Curing of defect or replacement

Claim damages

for

Express or implied, written or oral.

Express & written, unless not implied under Sale of Goods Act.

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Thank you

sumant.batra@kesardass.org

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