Contact of Indemnity
According to section 124 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.” There are two parties in this form of contract. The party who promises to indemnify/ save the other party from loss is known as ‘indemnifier’, whereas the party who is promised to be saved against the loss is known as ‘indemnified’ or indemnity holder. To indemnify means to compensate or make good the loss. Thus, under a contract of indemnity the “existence of loss” is essential. Unless the promisee has suffered a loss, he cannot hold the promisor liable on the contract of indemnity. However, the above definition of indemnity restricts the scope of contracts of indemnity in as much as it covers only the loss caused:
• By the conduct of the promisor himself, or
• By the conduct of any other person.
Thus, loss occasioned by the conduct of the promise, or accident, or an act of God is not covered. A contract of indemnity like any other contract may be express or implied. A contract of indemnity is like any other contract and must fulfill all the essentials of a valid contract like consideration, free consent, competency of contract, lawful object etc.
For instance, A may contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a sum of ` 5000/-advanced by C to B. In consequence, when B who is called upon to pay the sum of money to C fails to do so, C would be able to recover the amount from A as provided in Section 124.
A Contract of Guarantee
A contract of guarantee is a contract to perform the promise made or discharge the liability, of a third person in case of his default. Guarantee is a promise to pay a debt owed by a third person in case the latter does not pay. Any guarantee given may be oral or written. From the above definition, it is clear that in a contract of guarantee there are, in effect three contracts :
• A principal contract between the principal debtor and the creditor
• A secondary contract between the creditor ad the surety.
A implied contract between the surety and the principal debtor whereby principal debtor is under an obligation to indemnify the surety; if the surety is made to pay or perform.
The right of surety is not affected by the fact that the creditor has refused to sue the principal debtor or that he has not demanded the sum due from him.For instance, When A requests B to lend `10,000 to C and guarantees that C will repay the amount within the agreed time and that on C falling to do so,he will himself pay to B, there is a contract of guarantee. Here, B is the creditor, C the principal debtor and A the surety.
❖ Key Differences Between Indemnity and Guarantee
A form of contingent contract, whereby one party promises to the other party that he will compensate the loss or damages occurred to him by the conduct of the first party or any other person, it is known as the contract of indemnity.The number of parties in the contract is two, one who promises to indemnify the other party is indemnifier while the other one whose loss is compensated is known as indemnified.
When one person signifies to perform the contract or discharge the liability incurred by the third party, on behalf of the second party, in case he fails,then there is a contract of guarantee. In this type of contract, there are three parties, i.e. The person to whom the guarantee is given is Creditor, Principal Debtor is the person on whose default the guarantee is given, and the person who gives a guarantee is Surety.
The following are the major differences between indemnity and guarantee:
1. Meaning:
In the contract of indemnity, one party makes a promise to the other that he will compensate for any loss occurred to the other party because of the act of the promisor or any other person. In the contract of guarantee, one party makes a promise to the other party that he will perform the obligation or pay for the liability, in the case of default by a third party.
2. Defined in:
Indemnity is defined in Section 124 of Indian Contract Act, 1872, while in Section 126, Guarantee is defined.
3. Degree of liability of the promisor :
The liability of the indemnifier in the contract of indemnity is primary whereas if we talk about guarantee the liability of the surety is secondary because the primary liability is of the debtor.
4. Parties:
In contract of indemnity there are two parties The party who promises to indemnify/ save the other party from loss is known as ‘indemnifier’, whereas the party who is promised to be saved against the loss is known as‘indemnified’ or indemnity holder. Three contracts will be there, first between the principal debtor and creditor, second between principal debtor and surety, third between the surety and the creditor.
5. Purpose:
The purpose of the contract of indemnity is to save the other party from suffering loss. However, in the case of a contract of guarantee, the aim is to assure the creditor that either the contract will be performed, or liability will be discharged.
6. Maturity of Liability:
In the contract of indemnity, the liability arises when the contingency occurs while in the contract of guarantee, the liability already exists.
7. Example:
Indemnity: Mr. Joe is a shareholder of Alpha Ltd. lost his share certificate.Joe applies for a duplicate one. The company agrees, but on the condition that Joe compensates for the loss or damage to the company if a third person brings the original certificate.
Guarantee: Mr. Harry takes a loan from the bank for which Mr. Joesph has given the guarantee that if Harry default in the payment of the said amount he will discharge the liability. Here Joseph plays the role of surety, Harry is the principal debtor and Bank is the creditor.
After having a deep discussion on the two, now we can say that these two types of contracts are different in many respects. In indemnity, the promisor cannot sue the third party, but in the case of guarantee, the promisor can do so because after discharging the creditor’s debts he gets the position of the creditor.
*This Article Collect from VOCULSHELPDESK .
