CONTRACT OF GUARANTEE AND CONTRACT OF INDEMNITY (CPA NOTES)

This is a contract wherea party referred to as the guarantor or surety undertakes to be secondarily or collaterally responsible for the monies or acts of anther known as the principle debtor. The undertaking is made to the creditor.
A contract of guarantee is a tripartite agreement. In a debtor – creditor relationship, the guarantor makes the undertaking to the creditor for the benefit of the principal debtor.

TYPES OF GUARANTEE
1. Sole Guarantee: This is a contract of guarantee wherethe guarantor’s liability is restricted to a single transaction.
2. Continuing Guarantee: It is a contract of guarantee under which the guarantors to a series of transactions. This type of guarantee terminates on the death of the guarantor provided the notice is made know to creditor as was the case in Bradbury V. Morgan. The guarantor is also free to revoke the guarantee at any time.
3. Fidelity Guarantee: It is a contract of guarantee wherea person guarantees the honesty good behaviour of another purpose of employment.

CHARACTERISTICS OF CONTRACT OF GURANTEE
1. It consists of 3 parties namely the guarantor, creditor and the principal debtor.
2. The guarantor’s liability is secondary or collateral
3. The guarantor has no interest in the transaction between the parties.
4. The contact must be evidenced some note or memorandum.
The guarantor is only liable if the principal debtor is unable to honour his obligation. If two or more persons guarantee the same transaction(s) they are referred to as co-guarantors and are jointly liable for any liability arising. However if a co-guarantor makes god the liability, he has a right of contribution against other co-guarantors.
If the creditor discharges a co-guarantor, all are discharged.

RIGHTS OF THE GUARANTOR
1. He is entitled to demand that the creditor sues the debtor for the amount due.
2. He is entitled to demand that the debtor pays the amount to relieve him from liability
3. If sued the creditor he is entitled to rely on any self-help of or counter claim available to the principal debtor.
4. In a fidelity guarantee he is entitled to demand the seeking of an employee in the event of dishonesty.
5. If he pays the amount due he becomes entitled to all the rights the creditor had against the debtor to recover the amounts (Subrogative rights)
6. If a co-guarantor makes good the liability he has the right of contribution against the co-guarantors.

DISCHARGE OF THE GUARANTOR
The guarantor may be discharged in any of the following ways:-
1) Payment of the amount due the debtor or fulfilment of the obligation arising.
2) If the creditors action against the debtor becomes statute barred.
3) If the transaction between the credit and the principal debtor becomes illegal reason of change of law or otherwise.
4) Revocation of the guarantee the guarantor
5) Death of guarantor
6) Variation of the terms of the contract without the guarantor’s consent
7) If it is established that the guarantee was obtained fraud, misrepresentation or concealment of material facts.
8) Failure the creditor to take steps that was necessary to protect his own interest.
9) Discharge of a co-guarantor discharges all.

CONTRACT OF INDEMNITY
This is a contract wherea party referred to as indemnifier undertakes primary responsibility for particular act. The undertaking is made to the party to be indemnified. The contracts of two parties and examples include: –
1) Contract of del credere agency
2) Property Insurance

A contract of indemnity differs from the contract of guarantee in that:-
1. It consists of two parties namely the indemnifier and the party to be indemnifiers.
2. The indemnifier’s responsibility is primary.
3. The indemnifier has a direct interest in the transaction.

 

KASNEB Revision kits and past papers with answers

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