Indemnity and Guarantee
Indemnity and Guarantee are a type of contingent contracts, which are governed by Indian Contract Act, 1872. Indemnity is a contract in which one party promises the other that it will compensate him for any losses incurred to him, i.e., any loss incurred by the promoter or third party. Whereas guarantee is a contract when a person signs an agreement to execute a contract or discharge an obligation incurred by a third party, the guarantee is contracted, if he fails, on behalf of the other party.
What is contract of Indemnity?
Meaning of Indemnity: – A contract in which one party promises the other that it will compensate him for any losses incurred to him, i.e., any loss incurred by the promoter or third party it is known as the contract of ‘indemnity’. Section 124 of Indian Contract Act, 1872 defines the contract of Indemnity.
There are two parties to the contract of Indemnity: –
- Indemnifier: – Indemnifier is the one who promised to save the other party.
- Indemnity Holder: – Indemnity holder is the one who is saved from the loss.
The indemnity holder has the right to reimburse the following amount from the indemnifier: –
- Damage caused, for which he was compelled,
- The amount paid to defend the suit,
- The amount paid to compromise the suit.
Contract of Indemnity covers only the loss occurred: –
- By the conduct of promisor himself
- By the conduct of any other person.
- Loss caused by the conduct of the promisee, or an act of god is not covered.
For example: – Mr. Kumar who is a shareholder of Alpha Limited has lost his share certificate. For which he applies for a duplicate. The company agrees, but on the condition that Mr. Kumar will compensate for the loss or damage if the third person brings the original certificate.
What are the essentials of contract of Indemnity?
Contract of Indemnity should have all the essentials of the contract: –
- Consideration
- The existence of loss is essential.
- Free consent
- Competency
- Lawful Object
For Example: – ‘A’ goes to ‘B’ and said that if you beat ‘X’, I will compensate you for the consequences. ‘B’ goes and beats ‘X’ as a consequence he has to pay a fine of Rs. 5000. ‘A’ refuses to pay the amount to ‘B’. Afterwards ‘B’ cannot claim money from ‘A’ as it was a void contract because the object was unlawful.
Features of Contract of Indemnity
Features of Contract of Indemnity are as follows: –
- The contract is made for protecting the promise against anticipated or contingent loss.
- The liability of the indemnifier started as soon as the loss is occurred to the indemnified.
- Indemnification is made for actual loss.
- The event specified in the contract must be happen.
- The Indemnified himself responsible for the loss if the loss is caused by his own misconduct.
- Contract may be implied and expressed.
What is Guarantee?
Meaning of Guarantee: – A guarantee means a contract of a promise to be responsible for something to perform the promise or to discharge the liability of a third person, in case of default. Such a contract involves three parties; the creditor, the surety and the principal debtor. When a person signs an agreement to execute a contract or discharge an obligation incurred by a third party, the guarantee is contracted, if he fails, on behalf of the other party. Contract of Guarantee is defined in Section 126 of Indian Contract Act, 1872.
There are three parties to the contract of guarantee: –
- Creditor: – The person to whom the guarantee is given.
- Principal Debtor: – The person in respect of whose default, the guarantee is given.
- Surety: – The person who gives the guarantee.
There will be three contracts which are as follows: –
- Between the main debtor and the creditor,
- Between the main debtor and the surety,
- Between the surety and the creditor.
The contract may be oral or written. There is an implied promise in the contract that the principal debtor shall condemn the surety for the amounts paid by him, as they have been properly paid as an obligation of the contract. The surety is not empowered to recover the amount wrongly paid by him.
For example: – Mr. Harry takes a loan from the bank for which Mr. Joseph has guaranteed that he will discharge the liability if Harry defaults in paying the said amount. Here Joseph plays the role of surety, Harry is the principal Debtor and the bank creditor.
Features of Contract of Guarantee
- A tripartite agreement between creditor, surety and principal debtor.
- No misrepresentation or concealment of the facts regarding the contract.
- No direct consideration between the surety and the creditor. Consideration of the principal debtor is considered to be adequate for the surety.
- Primary liability is of the principal debtor and secondary liability is of the surety.
- The involvement of competent parties is a must along with the other essentials of a valid contract.
- As a conditional contract, liability of the surety arises only when the principal debtor (primarily liable) defaults.
- A contract relating to guarantee must be concluded in writing (In Nepal and England)
Difference between Contract of Indemnity and Contract of Gaurantee
| Basis | Contract of Indemnity | Contract of Gaurantee |
| Meaning | A contract in which one party promises the other that it will compensate him for any losses incurred to him, i.e., any loss incurred by the promoter or third party. | A contract in which one party promises another party to perform the contract or compensate for the loss, in the event of a person’s default, it is a contract of guarantee. |
| Defined in | Section 124 of Indian Contract Act, 1872 | Section 126 of Indian Contract Act, 1872 |
| Parties | Two, i.e. indemnifier and indemnified | Three, i.e. creditor, principal debtor and surety |
| Number of Contracts | One | Three |
| Purpose | To compensate for the loss. | To give assurance to the promisee. |
| Liability | In Indemnity liability occurs when loss occurred. | In Guarantee liability already exists. |