Contract of Indemnity and Guarantee

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This post is written by Srishti Rajpoot, a 2nd year law student at Gautam Buddha University

This article tries to define Contract of indemnity and guarantee. Also lastly it differentiates between them.

Contract of Indemnity

The word indemnity means a protection against loss. Especially in the form of a promise to pay, or payment for loss of money, goods, etc.

Under Indian Contract Act 1872 the concept of contract of indemnity is covered under section 124.

As per this section contract of Indemnity means ‘A contract by which one party promises to save the other from the loss caused to him by the conduct of the promisor himself or by conduct of any other person’.

As per this provision loss may be caused, either-

  • By the conduct of the promisor himself or
  • By the conduct of any other person

 

Is insurance contract, Contract of indemnity?

In India-

In India insurance contract does not covered by definition of section 124.

In England-

Under English law indemnity carries a much wider meaning. It includes a contract to save the promise from a loss, whether it is caused by human agency or any other event like an accident and fire.

Contract of Guarantee-

Contract of Guarantee is defined under section 126 of India Contract Act.

It reads as-

“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 section further provides that-

The person who gives the guarantee is called the “surety”, the person in respect of those defaults the guarantee is given called “principal debtor”, and the person to whom guarantee is given is called the “creditor”.

The object of contract of guarantee is to provide additional security to the creditor in the form of a promise by the surety to fulfill a certain obligations, in case the principal debtor fails to do that.

In every contract of guarantee there are three parties, the principal creditor, the principal debtor and the surety.

There are three contracts in the contract of guarantee.

  • Firstly, principal debtor himself makes a promise in favor of creditor to perform a promise.
  • Secondly, the surety undertakes to be liable towards the creditor if the principal debtor makes a default.
  • Thirdly, an implied promise by the principal debtor in favor of surety that in case the surety has to discharge the liability of the default of the principal debtor, the principal debtor shall indemnify the surety for the same.
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Main features of Contract of Guarantee-

  1. The contract may either oral or written. However in English law contract of guarantee should be in writing only.
  2. The contract of guarantee presupposes a principal debt or an obligation to be discharged by the principal debtor. But if no such principal debt there is a promise by one party in favor of another for compensating in certain situation, and the performance of this promise is not dependent upon the default of somebody else, it is a contract of indemnity.
  3. Benefit to the principal debtor is sufficient consideration. It is not necessary that there should be direct consideration between the creditor and the surety it is enough that the creditor had does something for the benefit of the principal debtor.
  4. Consent of surety should not have been obtained by misrepresentation or concealment of any material facts concerning the transaction.

Difference between Contract of Indemnity and Guarantee-

  1. There are two parties in a contract of indemnity. However, there are three parties in contract of guarantee.
  2. Contract of indemnity consists of only one contract. In contract of guarantee there are three contracts.
  3. The object of contract of guarantee is the security of the creditor. The contract of indemnity is made to protect the promise against some likely loss.
  4. In contract of guarantee the liability of the surety is only a secondary one. But in contract of indemnity, indemnifier is a primary one. He undertakes to be liable when the contemplated situation is there.
  5. In a contract of guarantee after the surety had discharge his liability and paid to the creditor, he steps into shoes of the creditor and he realize the payment made by him, from the principal debtor. In a contract of indemnity the loss falls on the indemnifier and therefore after the indemnifier had indemnified the indemnity holder he cannot recover the amount from anybody.
  6. In England a contract of guarantee should be in written. Whereas a contract of indemnity may be either oral or in writing. There is no such distinction in India. Same may be either oral or written.

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