Indemnity and Guarantee

DIFFERENCE BETWEEN GUARANTEE AND INDEMNITY

INTRODUCTION

Indemnity and Guarantee are a type of contingent contracts, which are governed by Contract Law. Simply put indemnity implies protection against loss, in terms of money to be paid for loss. Indemnity is when one party promises to compensate the loss occurred to the other party, due to the act of the promisor or any other party. On the other hand, the guarantee is when a person assures the other party that he/she will perform the promise or fulfill the obligation of the third party, in case he/she default.

MEANING AND DEFINITION OF INDEMNITY

The term ‘indemnity’ literally means security against loss. Indemnification refers to the act of being held not liable or being protected from costs by shifting them to another party. If a person is promised by another that he will be protected or compensated in case of loss or damage, he is said to be indemnified.

A contract of indemnity is an express promise to compensate for defined loss or damage used to ensure that a contracting party has an express remedy to correct defects in goods or services delivered under the contract.

The indemnity holder has the right to reimburse the following sums from the indemnifier

  • Damages caused, for which he was compelled
  • The amount paid for defending the suit
  • The amount paid for compromising the suit

For example: Indemnity is the insurance contract where the insurance company promises to pay for the damages suffered by the policyholder, against the premiums.

SECTION 124

Section 124 of the Indian Contract Act, 1872 defines a contract of indemnity as the contract wherein one party promises to save the other from loss caused to him by the conduct of promisor himself or by the conduct of any other person. The person who promises to protect or compensate is called indemnifier. The person to whom the promise of indemnity is given is called the indemnity holder.

MEANING AND DEFINITION

Guarantee is constituted with the concurrence of the principle debtor, the creditor and the surety, but that does not mean that there must be evidence showing that the principle debtor undertook his obligation at the express request of the principle- debtor as implied request will be quiet sufficient to satisfy this requirement. The function of a contract of guarantee is to enable a person to get a loan on goods on credit, or an employment. A contract of guarantee is rendered void without valid consideration.

SECTION 126

Section 126 of the Indian Contract Act, 1872 talks about ‘Contract of guarantee’, ‘surety’, ‘principal debtor’ and ‘creditor’ – 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 person who gives the guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is called the ‘principle debtor’, and the person to whom guarantee is given is called the ‘creditor’. A guarantee may be either oral or written.

ESSENTIALS OF A CONTRACT OF GUARANTEE

Tripartite Agreement:

A contract of guarantee entails three parties, principal creditor, creditor and surety. In a successful contract of guarantee, there must be three separate contracts between the three parties and each and every contract must be consenting. First between the principal debtor and the creditor, second between principal debtor and surety, third between the surety and the creditor.

Liability:

 Here the main liability lies with the principal debtor. Secondary liability lies with the surety which can only be invoked once the principal debtor defaults on its payment.

Essentials of a Valid Contract:

Like any other general contract, it maintains free consent, consideration, lawful object and competency of contracting parties as the essentials of a valid contract.

Medium of Contract:

The Indian Contract Act, 1872, does not strictly mention the need for any written form of contract of guarantee. Both oral and written form will suffice.

KEY DIFFERENCES BETWEEN INDEMNITY AND GUARANTEE

The following are the major differences between indemnity and guarantee

  1. In a 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. Indemnity is defined in section 124 of the Indian Contract Act, 1872, while in Section 126 Guarantee is defined.
  3. In Indemnity, there are two parties, indemnifier and indemnified but in the contract of Guarantee, there are three parties i.e. debtor, creditor and surety.
  4. The liability of the indemnifier in the contract of indemnity is primary whereas in guarantee the liability of the surety is secondary because the primary liability is of the debtor.
  5. 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. In the contract of indemnity, the liability arises when the contingency occurs while in the contract of guarantee, the liability already exists.

In a case of, Punjab National Bank Ltd vs. Bikram Cotton Mills and Anr and Gajan Moreshwar vs.Moreshwar Madan, the difference between guarantee and indemnity is clearly visible. There are three parties here in the Punjab National Bank case where as only two parties in Gajan Moreshwar. Here Moreshwar Madan was the indemnifier and hence he was the only one liable to make good of the money, whereas in the Punjab National Bank case, the debtor, which is the first respondent company, is the primary liability holder and the secondary liability belongs to the surety which is the respondent. The Privy Council in Gajan Moreshwar case held that the indemnity holder has rights other than those mentioned in the sections mentioned. If the indemnity holder has incurred any liability, he can ask the indemnifier to do well of the liability and Moreshwar’s liability. In Public National Bank Case, there was no risk involved, but there is an existing duty to pay off debts as mentioned in the sections governing guarantee. Hence irrespective of the presence of risk, the principal debtor and surety has to do well of the debts of the creditor. In Ganjan Moreshwar case, Ganjan Moreshwar case, Ganjan Moreshwar can’t sue K.D Mohan, as it is a contract of indemnity. He can only sue Moreshwar Madan. But in Punjab National Bank case, along with the principal debtor, the surety can also be sued.

SIMILARITIES

Guarantees and indemnities have numerous similar attributes. By and large likewise, similar obligations and rights emerge between the parties. This will have impact particularly throughout the time of looking to authorize the agreement. Contracts of indemnity and contracts of guarantee impart certain central commonality in every contract, one party consents to pay in the interest of another. Also each of these categories of contracts is utilized as a safeguard against misfortunes by people and organizations. Also they cannot be used to make in just enrichments. In a comparative study between Punjab National Bank Ltd. v Bikram Cotton Mills and Anr and Ganjan Moreshwar vs. Moreshwar Madan, it can be seen that both guarantee and indemnity holder respectively and the principal debtor and surety in the Punjab National Bank case as well as the indemnifier had consented to pay to make good of the debt.

CONCLUSION

After studying both contract of Indemnity and Guarantee we can say that these two types od contract 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.

 

 

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