The Indian Contract Act, 1872, under the category of special contracts, deals with specific types of agreements beyond general contracts. Two important types are Contracts of Indemnity and Contracts of Guarantee.
This article explains their meaning, features, differences, and examples in a simple, clear manner.
Contract of Indemnity
Meaning
According to Section 124 of the Indian Contract Act, a Contract of Indemnity is a contract in which one party promises to save the other from loss caused by the conduct of the promisor or any other person.
Key Idea: Indemnity means protection against loss.
Example:
A contracts to indemnify B against the consequences of any legal action taken by C. If C sues B, A must compensate B for the loss.
Essential Features
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Parties: There are two parties — the indemnifier (the one promising) and the indemnified (the one protected).
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Promise to compensate: The main purpose is to cover losses.
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Loss: The loss may arise from the actions of the indemnifier or a third party.
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Legal enforceability: The contract must fulfill the general requirements of a valid contract.
Rights of Indemnity Holder (Indemnified)
(As per Section 125)
The indemnity holder can recover from the indemnifier:
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All damages he is compelled to pay in a suit,
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All costs incurred in defending the suit,
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All sums paid under a compromise, if made with the indemnifier’s authority.
Contract of Guarantee
Meaning
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 party in case of their default.
Key Idea: Guarantee is a promise to ensure that another person fulfills an obligation.
Example:
A lends money to B. C promises A that if B fails to repay, C will repay. This is a contract of guarantee.
Essential Features
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Parties: Three parties are involved:
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Creditor: To whom the guarantee is given,
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Principal Debtor: Whose obligation is guaranteed,
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Surety: The person giving the guarantee.
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Promise to be liable: Liability arises only if the principal debtor defaults.
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Consideration: Consideration received by the principal debtor is sufficient for the surety.
Types of Guarantee
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Specific Guarantee:
Guarantee for a single transaction or debt. It ends once the transaction is completed. -
Continuing Guarantee:
Guarantee for a series of transactions. It continues until revoked.
Example:
Guaranteeing monthly purchases on credit is a continuing guarantee.
Rights of Surety
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Against Principal Debtor:
After paying the debt, the surety can recover the amount from the principal debtor. -
Against Creditor:
The surety can ask the creditor to first sue the principal debtor. -
Against Co-sureties:
If multiple sureties exist, the surety who pays can recover proportionate amounts from co-sureties.
Differences between Indemnity and Guarantee
| Basis | Contract of Indemnity | Contract of Guarantee |
|---|---|---|
| Number of Parties | Two (Indemnifier and Indemnified) | Three (Creditor, Principal Debtor, Surety) |
| Purpose | Protection against loss | Assurance of performance or repayment |
| Liability | Primary liability on indemnifier | Secondary liability on surety |
| Existence of Debt | No prior debt necessary | Exists due to a debt or duty |
| Example | Insurance policy | Bank loan guarantee |
Short Examples Recap
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Indemnity Example:
A contracts to protect B against losses from a lawsuit. -
Guarantee Example:
C guarantees A that B will repay a loan, else C will pay.
Conclusion
In conclusion, Contracts of Indemnity and Contracts of Guarantee are special contracts that ensure protection against losses and assurance of debt repayment respectively. Understanding the differences between them and their legal implications is important for mastering the Indian Contract Act, 1872, especially for UGC NET Commerce preparation.