Introduction
Indemnity means a promise to save another harmless from loss caused as a result of a transaction entered into the instance of the promisor. On the other hand, a contract of Guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default. Both terms are explained in detail with their distinction.
INDEMNITY
Relevant Provisions
Section 126 of the Contract Act, of 1872 deals with indemnity.
Definition of Contract of Indemnity
Section 126 of the Contract Act defines a contract of indemnity as follows
“A contract of indemnity is a contract by which one party promises to save another from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person.”
Explanation
There are two parties in a contract of indemnity.
Indemnifier: A person who promises to make good the loss.
Indemnified or Indemnity holder: A person whose loss is made good.
Example
Where A contracts to indemnify B against the consequences of any proceedings that C may take against B in respect of a certain sum of Rs. 2,000. There is a contract of indemnity.
Types of Contract of Indemnity
The contract of indemnity is of two kinds.
- Expressed contract of Indemnity
- Implied contract of Indemnity
Rights of Indemnity-Holder
According to Section 125 of the Contract Act, an indemnity-holder has the following three rights by which he is entitled to recover from the promisor.
1) Payment of Damages
All damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnity applies.
2) Costs of Suit
All costs which he may be compelled to pay to bring or defend such suit will be paid to the indemnity holder.
3) Compromised payment
All sums which he may have paid under the terms of any compromise of any such suit.
Rights of Indemnifier
Contract Act is silent about the rights of an indemnified. It is important to note that the Contract Act is silent regarding the rights of the indemnifier. However, the rights of the indemnifier are analogous to the rights of a surety under section 141 of the Contract Act.
Indemnity against Liability
Where the indemnity is against liability, the cause of action is complete and the indemnity may recover on the contract as soon as his liability has become fixed and established even though he has sustained no actual loss or damage at the time he seeks to recover.
Thus, under such a contract, a cause of action accrues to the indemnity on the recovery of a judgment against him, and he may recover from the indemnifier without proof of payment of the judgment.
B) GUARANTEE
Relevant Provisions
Section 126 of the Contract Act, of 1872 deals with guarantee.
Definition of contract of Guarantee
Section 126 defines a Contract of Guarantee as follows
A contract of guarantee is a contract to perform the promise or discharge the liability of a third person in case of his default.
Explanation
If a person guarantees for another person, he is taking responsibility for his acts. If the other person fails to perform his duty, the person who has guaranteed will do that particular task.
Example
Where A requests B to lend Rs. 8,000 to C and guarantees that C will pay the amount within a stated time, and failing to pay, he will himself pay to B, there is a contract of guarantee.
Number of Parties
There are three parties in a contract of guarantee.
- Creditor
- Principal debtor
- Surety/Guarantor
Number of Contracts
The number of contracts in a contract of guarantee is three.
- B/w creditor and principal debtor
- B/w the principal debtor and surety
- B/w creditor and surety
Distinction between Indemnity & Guarantee
Both the Indemnity and the Guarantee are differentiated below.
1. Number of Parties
In Indemnity: There are only two parties. i.e. indemnifier and indemnified.
In Guarantee: There are three parties. i.e. creditor, surety, and principal.
2. Number of Contracts
In Indemnity: There is only one contract, i.e. between the indemnifier and indemnified.
In Guarantee: There are three contracts i.e. between the creditor and the principal debtor, between surety and creditor, and between surety and principal.
3. Nature of Liability
In Indemnity: The liability of the indemnifier is primary and independent. There is no secondary liability.
In Guarantee: The primary liability is of the principal debtor. The surety is liable only secondarily, i.e. if the debtor does not pay.
4. Aim of Contract
Indemnity: It aims at the reimbursement of loss.
Guarantee: It is for the surety of the creditor.
5. Cause of Action
In Indemnity: Cause of action for a claim against the promisor accrues to the promisee when the latter is actually indemnified.
In Guarantee: Cause of action accrues as soon as the latter commits a default.
6. Requested action
In Indemnity: It is not necessary for the indemnifier to act at the request of indemnified.
In Guarantee: It is necessary that the surety should give a guarantee at the request of the principal debtor.
7. Liability arises
In Indemnity: The liability of the indemnifier arises only on the happening of a contingency.
In Guarantee: There is an existing debt or duty, the performance of which is guaranteed by the surety.
8. Right to Sue
In Indemnity: The indemnifier cannot sue a third party for loss in his own name.
In Guarantee: The surety, on discharging the debt steps into the shoes of the creditor.
Final Note
Indemnity is a promise to save another from loss caused as a result of a transaction entered by the promisor. A contract of Guarantee is to perform the promise or discharge the liability of a third person in case of his default. Both are different terms from each other.
FREQUENTLY ASKED QUESTIONS
Define Indemnity and Guarantee and distinguish between the two.
(2018-A, 2017-5, 2015-5)
Define indemnity and guarantee. When surety is discharged from liability?
(2017-A, 2016-A, 2014-8, 2012-8, 2012-A)
What is a contract of guarantee? Distinguish it from a contract of indemnity.
(2007-A)
Define and explain a contract of indemnity and a contract of Guarantee.
REFERENCES
- The Contract Act, 1872
- N-Series by M.A. Chaudhary
- Law of Contract by Avtar Singh
