Introduction
The Indian Contact Act, 1872 define the contract of Indemnity and Guarantee in a very wide and different manner from each other. The Contract of Indemnity is been defined in the section 124 and the Contract of Guarantee is been defined in the section 126 of Indian Contact Act, 1872. In the following research paper, definition of indemnity its scope This research paper will further focusses on the differentiation between The Contract of Indemnity and The Contract of Guarantee. Related case laws and illustrations will be given to understand the topic in depth.
Contract of Indemnity
The true meaning of Contract of Indemnity is saving someone from a loss. It is special kind of contract. ‘Indemnity’ actually means protection against loss in the form of a promise to pay or compensate. The rise of this kind of Contract help the parties to overcome against the loss suffered by him, for instance, A contract to indemnify B against the consequences of any proceedings which C may take against B in respect of a certain sum of 200 rupees.[1] This is contract of indemnity.
The contract of indemnity includes two parties , the indemnifier, the person who promises to indemnify and the ‘indemnified’ or the ‘ indemnity holder’ in whose favor such a promise is made.
According to section 124 of The Contract Act, 1872 defines contract of indemnity as “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.” [2]
This section defines that the promisor will save the promisee from loss which may be caused either.
- By the conduct of the promisor himself, or,
- By the conduct of any other person[3]
Parties to the contract of Indemnity
In contract of indemnity includes two parties:-
- The indemnifier or the promisor
The one which promises to protect the other party.
- The indemnified or indemnity holder or the promisee
The person in whose favor such a promise is made.
In the above stated example.
A is the indemnifier and B is the indemnity holder and C is the person to whom A has to compensate on behalf of B.
Contract of Guarantee
It is contract to perform, or promises to discharge someone from his liability is know as Contract of Guarantee.
According to section 126 of the Indian Contract Act, 1872 ‘ 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 surety the person in respect of whose default the guarantee is given is called the principal debtor and the person to whom the guarantee is given is called the creditor. A guarantee may be either oral or written.
This section can be divided into three parts for more clear understanding -:
‘A “Contract of Guarantee” is a contract to perform or discharge the liability, of a third person in case of his default’.
This section further provides that -:
The surety is the person who gives the guarantee, in respect to whom guarantee is given is the principal debtor and lastly the guarantee is given to the creditor.
“A guarantee may be either oral or written”.
Distinction between contracts of Indemnity and Guarantee
- In the contract of Indemnity there are only two parties i.e. the indemnifier and the indemnity holder. In the contract of Guarantee there are three parties, they are the surety, the principal debtor and the creditor.
- There is one contract in the contract of indemnity that is between the indemnifier and the indemnity holder under which the indemnifier promises to indemnify the indemnity holder. But there are three contract in the contract of guarantee i.e.one between the principal debtor and the creditor in respect of a certain promise or obligation to be perform by the principal debtor. The second contract is between the surety and the principal debtor that if he fails to perform a certain obligation then the surety will undertake the liability. The third contract is the implied one between the principal debtor and the surety that whatsoever sum the surety has paid in respect of principal debtor then he is bound to to indemnify the surety for the sum surety has rightfully paid under the guarantee. It means that after the surety discharge his obligation, he is invested with all the rights which the creditor had against the principal debtor.
- The object of contract of guarantee is the security of the creditor and the object of contract of indemnity is the promise that is given by surety to the principal debtor. It is for the protection of indemnity holder.
- In the contract of guarantee the liability of the surety is the secondary one. This is because it only arises only when the principal debtor fails to complete its obligation. The liability if the indemnifier in a contract of indemnity is a primary one. He undertakes to be liable when the contemplated situation is there.
- In the contract of guarantee the surety takes the place of the principal debtor and then discharge his liability and paid to the creditor. He then can recover the amount from the principal debtor that has paid to the creditor. But in the contract of indemnity the indemnifier cannot recover his amount from the indemnity holder.
- The contracts of indemnity and guarantee both stand different in England and India. In England the contract of guarantee should be in writing whereas contract of indemnity can either be oral or written but in India both the contacts od guarantee and indemnity can either be oral or in witting.
Conclusion
The contract of indemnity is the section 124 and the contract of guarantee is section 126 both of them of the Indian contract Act,1872. The rights of the indemnity holder and the contracts between the indemnity holder and the indemnifier are also discussed in this research paper and the contract between the surety, principal debtor and the creditor.
[1] Dr. R.K. Bangia – Indian Contact Act
[2] Bare Act- The Indian Contract Act, 1872
[3] Dr. R.K. Bangia – Indian Contact Act
Author: Sweksha Beniwal,
vivekananda institute of professional studies. 3rd year, BA LLB