Contract of Indemnity and Guarantee Definition

Contract of Indemnity and Guarantee:

A contract of indemnity is a contract that is made to protect the promisee from anticipated loss. This contract depends upon a loss. Whereas a Guarantee is made to enable a person to get a loan or goods on credits or employment. It may be oral or expressed.

Indemnity Meaning:

Indemnity means a promise to save a person from the harmful consequences of an act.

Merriam-Webster Dictionary:

According to the Merriam-Webster Dictionary;

Indemnity means “security against hurt, loss, or damage”.

Relevant provisions:

Section 124 to 143 of the Contract Act 1872.

Contract of Indemnity Definition:

Section 124 of the Contract Act,1872:

“A contract of indemnity is 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.”

Parties to Indemnity:

There are two parties in a contract of indemnity.

1). Indemnifier:

An indemnifier is a person who promises to make good the loss.

2). Indemnified or Indemnity holder:

An indemnified or Indemnity holder is a person whose loss is made good.

Rights of Indemnity Holder:

Section 125 of the Contract Act,1872; an indemnity holder has the following three rights by which he is entitled to recover from the promisor.

1). Damages paid:

All damages which he could be compelled to pay in any suit in respect of any matter to which the promise to indemnity applies.

2). Costs of the suit:

All costs which he may be compelled to pay to bring or defend such suit.

3). Compromise payment:

All sums which he may have paid under the terms of any compromise of any such suit.

Guarantee Meaning:

According to Merriam-Webster Dictionary, the guarantee means, “an agreement by which one person undertakes to secure another in the possession or enjoyment of something”.

Guarantee Definition:

According to Section 126 of the Contract Act, 1872:

“A contract of guarantee is a contract to perform the promise or discharge the liability of a 3rd person just in case of his default.”

Parties to Guarantee:

1). Surety:

It is the person who gives the guarantee.

2). Creditor:

It is the person to whom the guarantee is given.

3). Principal debtor:

It is the person in respect of whose default the guarantee is given.

Surety’s Rights Against the Creditor:

1). Right to Securities:

On paying off the creditor, the surety steps into his shoes and is entitled to all the securities that the creditor may have against the principal debtor whether the surety is aware of the existence of such securities or not.

2). Right to set off:

If the creditor sues the surety, the surety may have the advantage of the set-off, if any, that the principal debtor had against the creditor. He is also entitled to use the defences of the debtor against the creditor.

Rights Against the Principal Debtor:

1). Right of Subrogation:

When the surety has paid the guaranteed debt on the default of the principal debtor, he steps into the shoes of the creditor, and the surety is subrogated to all the rights which the creditor had against the principal debtor.

2). Right of Indemnity:

In every contract of guarantee, there is an implied promise, the principal debtor to indemnify the surety, and therefore the surety is entitled to demand from the principal debtor whatever he had paid under the guarantee.

But if he pays any amount which the principal debtor is not liable to pay, he cannot demand indemnification from the principal debtor.

Difference Between Indemnity and Guarantee:

There are two parties, viz, indemnifier(promisor) and indemnified(promise). There are three parties, viz, creditor, surety, and principal debtor.
There is only one contract, i.e. between indemnifier and indemnified. There are three contracts, viz, between creditor and the principal debtor, between surety and creditor, and between surety and principal debtor.
Nature of liability:  
The liability of the indemnifier is primary and independent, there is no secondary liability. The primary liability is of the principal debtor, the surety is liable only secondarily, i.e. if the debtor does not pay.
Requested Action:  
It is not necessary for the indemnifier to act at the request of indemnified. It is necessary that the surety should give a guarantee at the request of the principal debtor.
Liability arises:  
The liability of the indemnifier arises only on the happening of a contingency or event. There is an existing debit or duty, the performance of which is guaranteed by the surety.
Right to Sue:  
The indemnifier cannot sue a third party for loss in his own name. The surety, on discharging the debt steps into the shoes of the creditor.

It is concluded that a contract of indemnity is a contract by which one party promises to save another from loss caused to him and a contract of guarantee is a contract to perform the promise, to discharge the liability of a 3rd person just in case of his default.

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