PUNJAB NATIONAL BANK LIMITED VS BIKRAM COTTON MILLS & ANR. (1970 AIR 1973, 1970 SCR (2) 462)

Difference between guarantee and indemnity

The case is based on a contractual clause of assurance – as with regard to clause (2) of the bond agreement between Ranjit Singh and Punjab National Bank Ltd. Therefore, the legal relationships between the parties correspond to that of the events in a contract of guarantee. Clause (2) (of the bond agreement between Ranjit Singh and Punjab National Bank Ltd.) states that;  

(2) I declare that this guarantee shall be continuing guarantee and shall not be considered as cancelled or in any way affected by the fact that at any time the said cash- credit and D/D account may show no liability against the borrower, or may even show a credit in favour of the borrower, but shall continue in operation in respect of subsequent transactions.

The parties and the stake holders in this case are as follows;

  1. Ranjit Singh, the director of the company – surety 
  2. Bikram Cotton Mills – Principal Debtor 
  3. Punjab National Bank – Creditor 

This is a case of Guarantee as there is no question of whether the bank has suffered any losses brought about via the conduct of the enterprise or by using the conduct of any different man or woman (in accordance with Sec 124, of Indian Contract Act, 1872) but, the whole case revolves around whether the organisation has failed to discharge it’s duties towards the financial institution and solely if the bank has failed to discharge the duties, as solely then can Ranjit Singh be held dependable towards the financial institution to complete the payment of the ultimate stability (in accordance with Sec 126, of Indian Contract Act, 1872).

The argument that the bond executed via Ranjit Singh in favour of the Bank was of the nature of a ‘contract of indemnity’ and ‘not a contract of guarantee’, is brushed aside by the Supreme Court (though this used to be an established principle via the High Court of Allahabad). Had this argument have been favoured by means of the judges then the case would have been dismissed as then there would have been no cause of motion towards Ranjit Singh until and unless ‘the closing balance’ had been decided and the business enterprise would have in reality failed to provide this price to the bank, as only then would there have been real loses as required by means of section 124 of Indian Contracts Act which offers with the cases of indemnity. Therefore, this case would have been pushed aside. 

The Judgement sincerely discusses the notion of guarantees. The applicable component here is – “A contract of assurance requires concurrence of three persons; the foremost debtor, the surety and the creditor. The surety assignment and responsibility at the request specific or implied of the essential debtor. The responsibility of the surety relies considerably on the predominant debtor’s default; beneath a contract of indemnity liability arises from loss triggered to the promise via the conduct of the promisor himself or by means of the behaviour of any other person”
The case additionally cites a few lines located in Halsbury’s Laws of England, Vol. 6, third Edn., Art. 1555 at p. 771, to supply significance to apprehend how to go with the instances of assurance – 
A scheme need no longer expressly reserve the rights of any creditors in opposition to sureties for debts; of the company, as such rights are unaffected by a scheme”.

S.124 of Contract Act defines “indemnity” as a contract between two parties that prevents incurring losses. Such a contract sets a promise to save the other party from losses incurred due to promisor’s course of actions. Whereas, S.126 of the Act defines “guarantee” as a contract to discharge the liability by the third party in case of default. The difference thus lies in the number of parties in bound by the contract where being; indemnity contract has two parties (indemnifier and indemnified) and guarantee contract has three parties (principal debtor, surety and debtor). Indemnity provides compensation whereas guarantee works as an assurance. This case thus clarifies this difference between guarantee and indemnity. In this case the bank was a debtor and therefore the primary liability lies on the bank where as the secondary party to hold liability is of the surety being Ranjit Singh. Here though there stands no risk involved on the bank, however the sections governing guarantee, there exists a duty to pay off debts thereby it is established that whether there exists risk, the principle debtor and surety are legally liable. 

Aishwarya Says:

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