Define and distinguish between a Contract of Indemnity and Contract of Guaranty.

Contract of Indemnity: 

A contract by which one party promises to save the other from a loss caused to him by the conduct of the promisor himself or any other person, is called a contract of indemnity. (Section 124). In other words, a contract of indemnity is a contract in which one person promises to protect or compensate the other for the loss suffered by him due to the conduct of the promisor or any other person.

The person who promises to compensate is the indemnifier and the person who is protected against the loss is known as indemnity-holder or indemnified. Example : A contracts to indemnify B against consequences of any proceedings which C may take against B in respect of a certain sum of 200. This is a contract of indemnity.

Essentials of a Contract of Indemnity :

  1. There must be two parties-the Indemnifier and the Indemnified.
  2. A contract of indemnity must have all the essentials of a valid contract like free consent, competence of parties, consideration, etc.
  3. There must be a promise to save the other party from some loss.
  4. The loss may be due to the promisor himself or any other person.
  5. The contract of indemnity may be express or implied. For example, in a contract of agency there is an implied promise by the principal to indemnify the agent.

Contract of Guarantee:

According to Section 126 of the Indian Contract Act, A contract of guarantee is a contract to perform the promise, or discharge the liability, of a third person in case of his default.

In a contract of guarantee, there are three parties:

  1. The person who gives the guarantee is called surety.
  2. The party in respect of whose default the guarantee is given is called principal debtor.
  3. The person to whom the guarantee is given is called the creditor.

Essentials of a contract of Guarantee:

Requirements of a valid contract : The essentials of a valid contract like competence of parties, free consent, consideration, etc., must be present to make the contract of guarantee enforceable by law.

The contract must be supported by consideration : A contract of guarantee must be supported by consideration. However, law presumes that consideration received by the principal debtor is sufficient consideration for the surety.

There must be someone primarily liable : There must be a primary liability on someone other than the surety. There must be someone liable as a principal debtor and the surety undertakes to be liable on his default.

There should be no misrepresentation : The contract of guarantee is a contract of absolute good faith. It is the duty of the party taking a guarantee to put the surety in possession of all the facts likely to affect the degree of his responsibility.A contract of guarantee may be oral or in writing.

Concurrence : Such contract requires concurrence of all the three parties to it, i.e., the principal debtor, the creditor and the surety.

Difference between a Contract of Indemnity and a Contract Guarantee :

Parties : In a contract of indemnity, there are two parties-indemnifier and indemnity-holder. In a contract of guarantee, there are three parties-the principal debtor, the creditor and the surety

Number of contracts : In case of indemnity, there is one contract only, i.e. between indemnifier and indemnity-holder but in guarantee, there are three contracts-one between the principal debtor and the creditor, second between the surety and the creditor and the third between the surety and the principal debtor.

Liability : The nature of liability of the indemnifier is primary and independent. The liability of the surety is collateral or secondary, the primary liability is of the principal debtor.

Purpose : The purpose of a contract of indemity is the reimbursement of the loss. A contract of guarantee is made for the security of a debt.

Existing liability : In case of indemnity, there is no existing liability. It is only a contingency. But in a contract of guarantee, the liability already subsists. There is an existing debt which is guaranteed by the surety.

Interest : In case of indemnity, the promisor has some interest in the transaction. But in a guarantee, the surety has no other interest.

Right to sue : In indemnity, the indemnifier can not sue the third party for loss in his own name. He can sue in the name of the indemnity-holder. But in case of guarantee, the surety can sue the principal debtor in his own name after discharging debtor’s liabilities.

Request : It is not necessary for indemnifier to act on request by indemnity-holder. But the surety should give guarantee at the request of the debtor.

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