April 13, 2021 at 2:06 pm #2580InternParticipant
The common point between a contract of Indemnity and a contract of Guarantee is that both are contingent contracts.
Though they both are contingent contracts, these both types of contracts carry vast differences and they are as below –
Definition: Contract of indemnity is defined under section 124 of the Indian Contract act, 1872 and it states that “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.”
It means that one party promises to cover the losses caused to another party if the loss has occurred due to the misconduct of the party itself.
Contract of Guarantee is defined under section 126 of the Indian Contract act, 1872 and it states that “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 “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.”
It means that a third party promises to cover losses instead of the principal debtor towards the creditor.
1. No of parties –
A contract of Indemnity consists of two parties. The indemnifier and the indemnity holder.
The indemnifier is the one who promises to bear the losses whereas the indemnity holder is the one to whom indemnity is given.
A contract of Guarantee consists of a minimum of three parties. The party who promises to cover the loss is called ‘surety’, the party in respect to whom the guarantee is given is called ‘principle debtor’, and the party to whom the guarantee is given is called ‘creditor’
1. Examples –
Example for a contract of Indemnity –
A makes a bulk order of Oranges from B. B indemnifies saying that if the oranges received are not in proper condition, he will pay back the amount of loss caused to A.
The above is an example of Contract of Indemnity where B is the Indemnifier and A is the Indemnity Holder.
Example for Contract of guarantee –
A makes a bulk order of Oranges from B. The condition of the sale was that if B does not deliver the oranges, then C will perform the promise of B.
The above is an example of a contract of surety, where A is the creditor, B is the principal debtor and C is the surety.
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