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Contracts Act 1950 [Act 136]

Part VIII

OF INDEMNITY AND GUARANTEE

77 "Contract of indemnity"

A contract by which one party promises to save the other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is called a "contract of indemnity".

ILLUSTRATION

A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of RM200. This is a contract of indemnity.

78 Rights of indemnity-holder when sued

The promisee in the contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor-

(a) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies;

(b) 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; and

(c) 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.

79 "Contract of guarantee", "surety", "principal debtor" and "creditor"

A "contract of guarantee" is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the "surety"; the person in respect of which default the guarantee is given is called the "principal debtor", and the person to whom the guarantee is given is called the "creditor". A guarantee may be either oral or written.

80 Consideration for guarantee

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.

ILLUSTRATIONS

(a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods, C promises to guarantee the payment in consideration of A's promise to deliver the goods. This is a sufficient consideration for C's promise.

(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year and promises that, if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested. This is a sufficient consideration for C's promise.

(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B. The agreement is void.


81 Surety's liability

The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.

ILLUSTRATION

A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by C. A is liable, not only for the amount of the bill, but also for any interest and charges which may have become due on it.

82 "Continuing guarantee"

A guarantee which extends to a series of transactions is called a "continuing guarantee".

ILLUSTRATIONS

(a) A, in consideration that B will employ C in collecting the rents of B's estate, promises B to be responsible to the amount of RM5,000, for the due collection and payment by C of those rents. This is a continuing guarantee.

(b) A guarantees payment to B, a tea-dealer, to the amount of RM1,000 for any tea he may from time to time supply to C. B supplies C with tea to above the value of RM1,000, and C pays B for it. Afterwards, B supplies C with tea to the value of RM2,000. C fails to pay. The guarantee given by A was a continuing guarantee, and he is accordingly liable to B to the extent of RM1,000.

(c) A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them. Afterwards B delivers four sacks to C, which C does not pay for. The guarantee given by A was not a continuing guarantee, and accordingly he is not liable for the price of the four sacks.


83 Revocation of continuing guarantee

A continuing guarantee may at any time be revoked by the surety, as to future transactions, by notice to the creditor.

ILLUSTRATIONS

(a) A, in consideration of B's discounting, at A's request, bills of exchange for C, guarantees to B, for twelve months, the due payment of all such bills to the extent of RM5,000. B discounts bills for C to the extent of RM2,000. Afterwards, at the end of three months, A revokes the guarantee. This revocation discharges A from all liability to B for any subsequent discount. But A is liable to B for the RM2,000 on default of C.

(b) A guarantees to B, to the extent of RM10,000, that C shall pay all the bills that B shall draw upon him. B draws upon C. C accepts the bill. A gives notice of revocation. C dishonours the bill at maturity. A is liable upon his guarantee.


84 Revocation of continuing guarantee by surety's death

The death of the surety operates, in the absence of any contract to the contrary, as a revocation of a continuing guarantee, so far as regards future transactions.

85 Liability of two persons, primarily liable, not affected by arrangement between them that one shall be surety on other's default

Where two persons contract with a third person to undertake a certain liability, and also contract with each other that one of them shall be liable only on the default of the other, the third person not being a party to the contract, the liability of each of the two persons to the third person under the first contract is not affected by the existence of the second contract, although the third person may have been aware of its existence.

ILLUSTRATION

A and B make a joint and several promissory note to C. A makes it, in fact, as surety for B, and C knows this at the time when the note is made. The fact that A, to the knowledge of C, made the note as surety for B, is no answer to a suit by C against A upon the note.

86 Discharge of surety by variance in terms of contract

Any variance, made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance.

ILLUSTRATIONS

(a) A becomes surety to C for B's conduct as a manager in C's bank. Afterwards, B and C contract, without A's consent, that B's salary shall be raised, and that he shall become liable for one-fourth of the losses on overdrafts. B allows a customer to overdraw, and the bank loses a sum of money. A is discharged from his suretyship by the variance made without his consent, and is not liable to make good this loss.

(b) A guarantees C against the misconduct of B in an office to which B is appointed by C, and of which the duties are defined by law. By a subsequent law, the nature of the office is materially altered. Afterwards, B misconducts himself, A is discharged by the change from future liability under his guarantee, though the misconduct of B is in respect of a duty not affected by the later law.

(c) C agrees to appoint B as his clerk to sell goods at a yearly salary, upon A's becoming surety to C for B's duly accounting for moneys received by him as such clerk. Afterwards, without A's knowledge or consent, C and B agree that B should be paid by a commission on the goods sold by him and not by a fixed salary, A is not liable for subsequent misconduct of B.

(d) A gives to C a continuing guarantee to the extent of RM3,000 for any oil supplied by C to B on credit. Afterwards, B becomes embarrassed, and, without the knowledge of A, B and C contract that C shall continue to supply B with oil for ready money, and that the payments shall be applied to the then existing debts between B and C. A is not liable on his guarantee for any goods
supplied after this new arrangement.

(e) C contract to lend B RM5,000 on the 1st of March. A guarantees repayment. C pays the RM5,000 to B on the 1st of January. A is discharged from his liability, as the contract has been varied, inasmuch as C might sue B for the money before the 1st of March.




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