Indemnity and Guarantee
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Contract of Indemnity and Contract of Guarantee are two kinds of special contracts. Placed next to each other in the bare act, these contracts have a similar semblance. While Sec 124 defines Indemnity, Guarantee is defined under Sec 126 of the Indian Contract Act, 1872. ]
Ques: What is the difference between contract of indemnity and contract of guarantee?
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Section 124 of the Indian Contract Act, 1872 defines
indemnity and Section 126 define Guarantee.
Below I have given 6 points that differentiate Contract
of Indemnity and Contract of Guarantee
(1) Number of Parties:
. There are two parties in a contract of
indemnity ( Indemnity holder and Identifier)
. There are three parties in a contract of
Guarantee ( Creditor, Principle debtor, and
surety)
(2) Number of Contracts:
Indemnity: One contract between the indemnifiednd
indemnity holder
Guarantee: tri-party contract
. one contract between principal debtor and
creditor. (PD promise to pay) (actual
contract)
. second Contact: between surety and
creditor( conditional promise , promise to pay
on default of Principle debtor)
. Third Contact: between the surety and
principal debtor ( implied contract)
(3) Object :
The object of a contract of guarantee is the security of
the creditor.
A contract of indemnity is made to protect the promise
against some loss.
(4) Type of Liability:
In a contract of guarantee, the liability of the surety is
only a secondary one. Surety’s liability arises only when
the Principal debtor makes default
The liability of the indemnified in a contract of
indemnity is a primary one
(5) In a contract of guarantee, after the surety had
discharged his liability and paid the creditor, he steps
into the shoe of the creditor and he can take the
payment made by him from the principal debtor
in the contract of indemnity, the loss falls on the
indemnified and therefore after the indemnified had
indemnified the indemnity holder, he cannot recover
the amount from anybody
(6) In England : a contract of guarantee should be in
writing, whereas the contract of indemnity may be
either oral or written in India.
In India, whether it is a contract of indemnity or guarantee, the same may be either oral or in writing.
~ Anushka TripathiQues: What is the difference between contract of indemnity and contract of guarantee?
Though possibly similar in their constructions, the Section pertaining to Contracts of Indemnity and Guarantee are distinctively different and apply to different instances. A Contract of Indemnity as in Section 124 of the Indian Contract Act, 1872, provides the party protection against loss caused by the promisor or by any other party. Whereas, as in Section 126 of the Indian Contract Act, 1872, which deals with the Contract of Guarantee, provides for the discharge of liability of a party or for the performance of the promise of a third person if they default. There are two parties and a single agreement in a Contract of Indemnity and in case of the Contract of Guarantee there are three parties and three separate agreements. The two parties in a Contract of Indemnity are the ‘Indemnity Holder’ and the ‘Indemnifier’. Both of these parties have a specific and express contract between them. Whereas, in the case of the Contract of Guarantee, the three parties are the ‘Principal Debtor’, ‘Surety’ and ‘Creditor’ each of the parties have in essence an agreement with the other two parties. In essence, the Contract of Indemnity provides just a protection from the loss for the promise. In case of Guarantee, it is provided for the surety of the Creditor.
~ Kaushik Das1. Contract of Indemnity is mentioned under Section 124 and 125 of the Indian Contract Act. Whereas, section 126 of the Indian Contract Act mentions the Contract of Guarantee.
2. According to the sections, Contract of Indemnity is a contract wherein one party assures the other to Indemnify (compensate) him from loss caused by the conduct of the promisor or any other third party and Contract of guarantee is a contract in which one party (surety) assures to fulfil the obligation is case the other party (Principal debtor) is in default.
3. There are two parties in the Contract of Indemnity- Indemnifier (promisor) and Indemnity holder (promisee) on the other hand, there are three parties in a Contract of guarantee- the creditor, principal debtor and the surety.
4. There is only one contract in Contract of Indemnity that is between the Indemnifier and the indemnity holder and there are three contracts in the contract of guarantee- Contract between the principal debtor and creditor (PD has to payback loan to C); between Creditor and Surety (C has to payback loan in case PD fails): between Principal debtor and surety (after S pays C the default payment of PD)
5. Contract of Indemnity is a contingent contract whereas contract of guarantee usually depends on an existing debt or duty, which the surety guarantees to perform.
6. An example explaining the two contracts:
Contract of Indemnity: A contracts to Indemnify B against the consequences of any proceedings which C will take against B in respect of certain sum on rupees.
Contract of guarantee: <Taking loan from bank> Principal debtor is the person who is taking the loan, creditor is the person who is giving the loan in this case, bank and surety is the third person who is the guarantor.~ Aribba Siddique
Section 124 talks about “Contract of indemnity” defined.—A contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a “contract of indemnity”
Section 126 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 “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.
The basic difference between both the Contracts is the purpose of liability and the way it arises
Section 124 talks or comes in picture when one party promises to save another from loss caused by himself or any other person, in this all the circumstances are covered
while Section 126 comes in the picture only in conditional liability~ Nikita Soni
Contract of indemnity:-
1. Meaning- A contract in which one party promises to another that he will compensate him for any loss suffered by him by the act of the promisor or third party.
2. Defined in – Section 124 of Indian Contract Act ,1872.
3. Parties-There are two parties to the conduct i.e the Indemnifier or the Indemnified.
4. Degree of liability of the promisor-The liability of the Indemnifier to the Indemnified is Primary and independent.
5. Maturity of liability -The liability of the indemnifier rises only on the happening of a contigency.
6. Purpose – To compensate for the loss.
Example :-X, a shareholder of a company lost his share certificate. He applied for the duplicate. The company agreed to issue the Same on the term that X will compensate the company against the loss where any holder produces the original certificate. Here, there is contract of indemnity X and the company.Contract of guarantee :-
1.Meaning- A contract in which a party promises to another party that he will perform the contract or compensate the loss, in case of default of a their person, it is the contract of guarantee.
2. Defined in- Section 126 of Indian Contract Act, 1872.
3. Parties- There are three parties to conduct i.e Creditor, Principal debtor and Surety.
4. Degree of liability of the Promisor-The liability of the surety to the creditor is collateral or secondary. Primary liability is upon principal debtor.
5. Maturity of liability – There is only an existing debt or duty to perform on the default of the principal debtor.
6.Purpose- To give assurance to the promisee.Example :-when A requests B to lend Rs 10,000 to C and guarantee that C will repay the amount within the agreed time and that on C falling to do so, he will himself pay to B, there is a contract of guarantee.
Here, B is the creditor, C, the principle debtor and A the surety.
~ Prachi-Section 124 of the Indian Contract Act 1872, defines Indemnity.
– Section 126 of the Indian Contract Act 1872, defines Guarantee.-The key difference between guarantee and indemnity is that, a guarantee is a secondary liability, which means that there will be another person who is primarily liable for the obligation; whereas, an indemnity imposes a primary liability.
-In contract of guarantee there are three parties; they are, the creditor, the principal debtor and the surety; whereas a contract of indemnity has two parties, the indemnifier and the indemnity holder.
-An indemnifier might act without the debtor’s behest, while a surety always waits for the principal debtor’s request.
~ Isha Aggarwal
The term indemnity means a promise to save a person harmless from the consequences of an act. For example; in a contract of employment the employee signed up for minimum period of three years and if the employee leaves the establishment earlier, three months’ remuneration will be recovered. So, the employer protected himself from any future financial risks by entering into a contact of indemnity. The definition of indemnity is given under section 124 of Indian Contract Act,1872 which explains it as a contract where one person undertakes to save another person from any loss. The loss may be caused by the same person or a third party. The contract of guarantee, on the other hand, is to perform the promise of a third party in case of his default. For example; A and B enters into a contact where A promises to pay 10,000/- to B and within 3 months B will repay. C acts as a surety and promises to pay the debt in case B fails to repay. Section 126 of Indian Contract Act,1872 explains it as a contract where one party promises another to compensate and perform the liability of a person entered into the same contract.
The contract of indemnity does not cover the loss caused by natural occurrence such as accident or act of God. Every contact of insurance other than life insurance is a contract of indemnity. But in a contract of guarantee, the surety has to pay the creditor even if the principal debtor dies.
There are two parties to the contract of indemnity; one called indemnifier who promises to compensate the loss and; second called indemnity-holder who suffered the loss. There are three people involved in such contracts namely; surety who gives the guarantee to pay, the principal-debtor who may commit the default and, the creditor to whom guarantee is given.
The contract of indemnity there is only one contract. On the other hand, the contract of guarantee contains three contracts where the secondary contract will only arise after the failure of the primary contract between creditor and principal debtor.~ Subhashree Das
A contract of indemnity is a contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, while contract of guarantee means a contract to perform the promises made or discharge the liabilities of the third person in case of his failure to discharge such liabilities. Thus, a contract of indemnity can be called as a contract of guarantee as there is liability in both the cases, in indemnity, there liability of indemnifier is primary whereas in guarantee, the liability of surety is secondary and that of principal debtor is primary.
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.
According to section 124 of Indian Contract Act, 1872 contract of indemnity means, “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 conduct of other person.”
Section 126 defines contract of guarantee as, “a “contract of guarantee” is a contract to perform the promise or discharge the liability of third person in case of his default”
Basic difference between the two are as follows-
1. Contract of indemnity includes only two party’s indemnifier and indemnity holder where as there are three parties in contract of guarantee, the creditor, the principal debtor and the surety.
2. There is only one contract that is between indemnifier and indemnity holder in contract of indemnity where as there are three contracts under contract of guarantee that is one between principal debtor and creditor, second between creditor and surety and third between surety and principal debtor.
3. A contract of indemnity is made to protect promise where as contract of guarantee is made for the security of the creditor.
4. In contract of indemnity the liability of indemnifier is primary whereas liability of surety in contract of guarantee is secondary.
5. Indemnifier cannot recover his loss from anyone but the surety after had paid to creditor can recover his loss from principal debtor.Definition:-
Contract of Indemnity- Section 124 of the Indian Contract Act defines Contract of Indemnity as a contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person
Contract of Guarantee- Section 124 of the Indian Contract Act defines Contract of Indemnity as a contract to perform the promise, or discharge the liability, of a third person in case of his default.
Purpose:-
The purpose of the contract of indemnity is to compensate for the loss caused
The purpose of the contract of guarantee is to give assurance to the promisorNo. of Parties:-
In a contract of indemnity there are two parties- the indemnifier who promises to indemnify for a loss and the indemnified, whose loss the indemnifier indemnifies.
In a contract of guarantee there are three parties, namely, surety, who gives the guarantee, creditor, to whom the guarantee is given and principal debtor, in respect of whose default the guarantee is given.Examples:-
Contract of Indemnity
A contracts to indemnify B against the consequences of any proceedings which C may take against B in respect of certain sum of 200. A is the indemnifier and B is the indemnity holder. When A pays B to cover damages that B had to pay C, and then a has indemnified B.
Contract of Guarantee
B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment in consideration of A’s promise to deliver the goods. This deemed sufficient consideration for C’s promise.
In this case, C is the surety, B is the creditor and A is the principal debtor.The difference between a contract of indemnity and a contract of guarantee is as follow:
Contact of indemnity
1. A contract of indemnification is one in which one party promises to compensate another for any loss incurred as a result of the promisor’s or a third party’s actions.
2. Section 124 of the Indian Contract Act of 1872 defines Contact of indemnity
3. The goal of an indemnity contract is to compensate for a loss.
4. The promisor’s liability is primary under an indemnification contract.
5. There are two parties in an indemnity contract: the indemnifier and the indemnification holder.
6. The promisor cannot sue a third party in the case of an indemnification contract until the promisee relinquishes his right in favour of the promisor.
Contract of guarantee
1. A contract of guarantee is one in which one party guarantees to another that he will complete the contract or compensate the loss if one of their people fails to do so.
2. Section 126 of the Indian Contract Act of 1872 Contract of guarantee
3. The goal of a guaranteed contract is to provide certainty to the promisee.
4. In a guaranteed contract, the principal debtor’s liability is primary, while the surety’s liability is secondary.
5. There are three parties in a guaranteed contract: the creditor, the major debtor, and the surety.Contract Of Indemnity has been defined under Section 124, whereas the contract of guarantee has been defined under Section 126, the Indian Contract Act 1872.
Following are the main differences between the two:
Contract of indemnity consists of two parties, namely Indemnifier and Indemnity holder. Contract of guarantee consists of three parties, Principal debtor, creditor, and surety. In a contract of indemnity, there is only one contract between indemnifier and indemnity holder, but in a contract of guarantee, there are three contracts: principal debtor & creditor, surety & principal debtor, and finally the surety & creditor. The object of a contract of indemnity is to reimburse the loss. A contract of guarantee is to give security to the creditor. The liability in a contract of indemnity is primary and independent, whereas it is secondary in a contract of guarantee. In Common Law, a contract of indemnity may either in oral or written, but a contract of guarantee should be in writing. But when it comes to Indian Law, there is no such difference; both can be either oral or written. In a contract of indemnity, the indemnifier should always bring the suit in the name of indemnified, and they cannot sue a third party in his own name, but in a contract of guarantee, if surety discharges the debt payable by the principal debtor, he steps into the shoes of the creditor and becomes entitled to realize the money paid in this own right.Firstly, Contract of Indemnity mentions that one party promises to save the other from the loss caused by the conduct of the promisor or any other person. Whereas, Contract of Guarantee assures the performance of the promise or the discharge of liability of a third person in case of his default.
2) Secondly, under contract of Indemnity the main Liability rests on the promisor himself whereas in contract of guarantee the primary Liability rests with the principal debtor and the liability of the surety arises only when the principal debtor defaults i.e secondary.
3) Thirdly, the contract of Indemnity between the indemnifier and the indemnity holder is specific and express whereas in contract of guarantee the contract between the principal debtor and surety is implied while the contract between creditor and principal debtor is express
4) Fourthly, Indemnity contract has two parties, namely:- a) Indemnity Holder b) Indemnifier whereas a contract of guarantee has three parties:- a) Creditor b) Surety c) Principal Debtor
5) Fifthly, there is only one agreement, in case of Indemnity contract that is between the indemnifier and indemnity holder whereas three agreements take place in a contract of Guarantee like : Agreement between the surety and principal debtor, agreement between the creditor and surety and agreement between the creditor and principal debtor
6) Sixthly, Indemnity contract protects the promise from loss whereas Contract of Guarantee is for the surety of the creditor
7) Lastly, promisor cannot file suit against any third party, in case of Indemnity contract, unless and until the promisee relinquishes his right in favour of the promisor whereas the surety gets the right to file a suit against the principal debtor as and when the debt is paid off, in case of a contract of guarantee.
These are the basic differences between Contract of Guarantee and Contract of Indemnity.A contract of indemnity is a direct engagement between two parties whereby one promises to save another from harm. According to section 124 of the Indian Contract Act 1872 says that, “whenever one party promises to save the other from the 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”.
Contract of Indemnity :
1. In indemnity there are two parties, one who is a indemnified and the other indemnifier.
2. It consists of only one contract under which indemnifier promises to pay in the event of certain loss.
3. The contract of indemnity is made to protect the promise against some likely loss.
4. The liability of the indemnifier in a contract of indemnity is a primary one.Contract of Guarantee :
1. There are three parties, principal debtor, surety and creditor.
2. There are three contracts between surety, principal debtor and creditor.
3. The objective of contract of guarantee is the security of the creditor.
4. In guarantee the liability of surety is only a secondary, when principal debtor default.
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