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Indemnity and Guarantee Contract

Indemnity Contract: A contract where one party promises to save the


other from any loss caused to him by the conduct of promissor himself or
any other person is called contract of indemnity, (Section 124) Indian
Contract Act, 1872.
Indemnity contract includes two parties namely; Indemnifier and
Indemnity holder. The person who is promising to pay compensation is
called Indemnifier and the person who`s loss is compensated is called
Indemnity holder.

Example: There is a contract between X and Y according to which X


has to Sell a tape recorder (which is selected) to Y after three months. On
the next day of their contract Z has come to X and has insisted on selling
the same tape recorder to him (Z). Here Z is promising to compensate X for
any loss faced by X, due to selling the tape recorder to Z. X has agreed. Now
the contract which has got formed between X and Z is called indemnity
contract, where Z is indemnifier and X is indemnity holder.
Guarantee Contract: A contract to perform the obligation or to
discharge the liability of a third party in case of its default is called contract
of guarantee, (Section 126) Indian Contract Act, 1872.
Guarantee contract includes three parties namely; Creditor, Principal
Debtor and Surety. The person who is granting the loan, the person who is
utilizing the amount of loan is principal debtor and the person who is giving
guarantee is called surety or guarantor or favored debtor. In case of
guarantee contract there will be two types of liabilities namely; Primary
liability and secondary liability. Primary liability will be with principal
debtor and Secondary liability goes to surety.

Example: Y is in need of Rs. 10000/-. Upon guarantee by Z, Y has got


the amount from X. Here X, Y and Z are creditor, principal debtor and
surety respectively.
Difference between Indemnity Contract and Guarantee Contract
Number of Parties: Indemnity contract includes two parties namely,
indemnifier and indemnity holder. But guarantee contract includes three
parties namely creditor, Principal debtor and surety.

Number of Contracts: In case of indemnity contract, as there are only


two parties, there is possibility for existence of one contract only. But a
contract of guarantee includes three sub-contracts.
Nature: As indemnity contract includes two parties and one contract, it
can be said that indemnity contract is simple in nature. But guarantee
contract includes three parties and three sub-contracts and hence be said
that guarantee contract is complex in nature.
Liability: In contract of guarantee there will be two types of liabilities
namely; primary and secondary liabilities which will be with principal
debtor and surety respectively. But in contract of indemnity there is no
classification and sharing of liability where the absolute liability rests with
indemnifier.
Recovery: In case of indemnity contract the indemnifier, after
compensating indemnity holder`s loss, cannot recover that amount from
any person. But in contract of guarantee, if surety makes payment to
creditor, he (surety) can recover that amount from principal debtor.
Interest of parties: Indemnity contract gets formed upon indemnifier`s
interest and guarantee contract gets formed upon principal debtor`s
interest.

Difference Between Indemnity and Guarantee


September 24, 2015 By Surbhi S Leave a Comment

W
hen its about securing ones interest while entering into the
contract, people mostly go for a contract of indemnity or
guarantee. At first instance, these two will appear same, but there
are some differences between them. Indemnity is when one
party promises to compensate the loss occurred to the other party,
due to the act of the promisor or any other party.
The guarantee is when a person assures the other party that he
will fulfill the obligation in case of default by the third party.
So if you are also interested to know about the differences
between guarantee and indemnity then lets take a further read.
Content: Indemnity Vs Guarantee

1. Comparison Chart
2. Definition
3. Key Differences
4. Conclusion

Comparison Chart
BASIS FOR
COMPARISON

INDEMNITY

Meaning

A contract in which one party promises to another that he will compensat


him for any loss suffered by him by the act of the promisor or the third
party.

Defined in

Section 124 of Indian Contract Act, 1872

Parties

Two, i.e. indemnifier and indemnified

Number of Contracts

One

Degree of liability of
the promisor

Primary

Purpose

To compensate for the loss

Maturity of Liability

When the contingency occurs.

Definition of Indemnity

A form of contingent contract, whereby one party promises to the


other party that he will compensate the loss or damages occurred
to him by the conduct of the first party or any other person, it is
known as the contract of indemnity. The number of parties in the
contract is two, one who promises to indemnify the other party is
indemnifier while the other one whose loss is compensated is
known as indemnified.

The indemnity holder has the right to reimburse the following


sums from the indemnifier:
Damages caused, for which he was compelled.
The amount paid for defending the suit.
The amount paid for compromising the suit.
Lets understand this by an example; Mr. Joe is a shareholder of
Alpha Ltd. lost his share certificate. Joe applies for a duplicate
one. The company agrees, but on the condition that Joe
compensates for the loss or damage to the company if a third
person brings the original certificate.
One more common example of indemnity is the insurance
contract where the insurance company promises to pay for the
damages suffered by the policyholder, against the premiums.
Definition of Guarantee

When one person signifies to perform the contract or discharge


the liability incurred by the third party, on behalf of the second
party, in case he fails, then there is a contract of guarantee. In this
type of contract, there are three parties, i.e. The person to whom
the guarantee is given is Creditor, Principal Debtor is the person
on whose default the guarantee is given, and the person who gives
a guarantee is Surety.

Three contracts will be there, first between the principal debtor


and creditor, second between principal debtor and surety, third
between the surety and the creditor. The contract can be oral or
written. There is an implied promise in the contract that the
principal debtor will indemnify the surety for the sums paid by
him as an obligation of the contract provided they are rightfully
paid. The surety is not entitled to recover the amount paid by him
wrongfully.
Here we have an example of the contract of guarantee; Mr. Harry
takes a loan from the bank for which Mr. Joesph has given the
guarantee that if Harry default in the payment of the said amount
he will discharge the liability. Here Joseph plays the role of surety,
Harry is the principal debtor and Bank is the creditor.
Key Differences Between Indemnity and Guarantee

The following are the major differences between indemnity and


guarantee:
1. In the contract of indemnity, one party makes a promise to
the other that he will compensate for any loss occurred to the
other party because of the act of the promisor or any other
person. In the contract of guarantee, one party makes a
promise to the other party that he will perform the obligation
or pay for the liability, in the case of default by a third party.
2. Indemnity is defined in Section 124 of Indian Contract Act,
1872, while in Section 126, Guarantee is defined.

3. In indemnity, there are two parties, indemnifier and


indemnified but in the contract of guarantee, there are three
parties i.e. debtor, creditor, and surety.
4. The liability of the indemnifier in the contract of indemnity
is primary whereas if we talk about guarantee the liability of
the surety is secondary because the primary liability is of the
debtor.
5. The purpose of the contract of indemnity is to save the other
party from suffering loss. However, in the case of a contract
of guarantee, the aim is to assure the creditor that either the
contract will be performed, or liability will be discharged.
6. In the contract of indemnity, the liability arises when the
contingency occurs while in the contract of guarantee, the
liability already exists.
Conclusion

After having a deep discussion on the two, now we can say that
these two types of contract are different in many respects. In
indemnity, the promisor cannot sue the third party, but in the
case of guarantee, the promisor can do so because after
discharging the creditors debts he gets the position of the
creditor.

Read more: http://keydifferences.com/difference-betweenindemnity-and-guarantee.html#ixzz4FgfMNVlO


Comparison Chart

BASIS FOR

INDEMNITY

COMPARISON
Meaning

A contract in which one party promises to another t

he will compensate him for any loss suffered by him


the act of the promisor or the third party.
Defined in

Section 124 of Indian Contract Act, 1872

Parties

Two, i.e. indemnifier and indemnified

Number of Contracts

One

Degree of liability of

Primary

the promisor
Purpose

To compensate for the loss

Maturity of Liability

When the contingency occurs.

Read more: http://keydifferences.com/difference-betweenindemnity-and-guarantee.html#ixzz4FgfZoMD3